On June 23rd, British will decide about their future in the European Union. The Brexit vote stirs a lot of discussions and worth noting is the fact that the incoming referendum is not just a whim of a small group of politicians but rather a result of a change that happened in the British society. The UK Prime Minister – David Cameron – committed himself to let people decide whether to stay in the EU during his last campaign. He won also thanks to that promise and now it is time to deliver. The atmosphere is tense as there is no clear winner in the polls. The ‘Remain’ campaign scored higher until Barack Obama visited the UK and recommended UK public to vote for staying. Since then the ‘out’ option gained few percentage points and now polls suggest either deadlock or marginal differences.

Among those who advocate against the 'Leave' vote are mostly the British government officials. Cameron in recent debate tried to reaffirm how destructive for the country the decision of leaving would be. His finance right hand - George Osborne - warned that the economic fallout of leaving the EU could be felt by everyone. Countless celebrities joined the mainstream media in solidifying the view that the UK can play a big role on the world’s stage only if it is a part of the EU.

The ‘Leave’ campaign also has a lot of names behind it. Over 100 financial figures from the city of London signed a letter in which they doubt in the capability of the EU to innovate so needed in Europe. They highlighted that outside the EU, UK's economy can flourish. The former mayor of London, Boris Johnson – a big Brexit supporter – added that Britain would finally get the burden of the EU bureaucracy and high membership fees off their back of the economy and finally be able to sign sovereign trade deals and thrive.

The Brexit – a sign of time

Those who are still young cannot imagine the world around them without the EU. I would draw a parallel to millions having similar beliefs when it came to the collapse of the Soviet Union that fell in the ‘90s. The EU has different economic foundation than the USSR but flaws we can observe can bring it down.

One of the biggest problems in the EU is demographic. The demographic growth is very low when compared to Muslim countries. It was demographic coupled with democracy that resulted in solutions catering for gaining votes of ‘old’ generations and giving them stability at the expense of the young that are facing now terrible conditions of the job market. What is worse, in many European countries young people watch how welfare systems they have to pay for are exploited by illegal immigrants.

The EU became a symbol of bureaucracy and economic stagnation. The countless number of regulations was not seen as a problem when countries were recording decent GDP growth. Unfortunately, the financial crisis changed this perspective. The majority of Europe could not avoid the recession and while some are finally returning to the levels of prosperity from before the crisis, many countries are still rebuilding their economies without much success. The EU decided to spearhead policies of secondary importance and could not handle the key issues.

Die Welt is highlighting that the EU managed to regulate the size and shape of a cucumber but is unable to cope with the migrant crisis. Many Europeans now envy British as they have a chance to directly take part in answering the question of staying in the EU.

The European Union does not give any reason for optimism when it comes to many crises it experiences. Additionally, a statement of German finance minister Wolfgang Schauble is virally gaining more views. He said that an eventual crisis will be a good occasion to introduce changes he is the proponent of. In the video, he mentions that the concept of nation states is exhausted and a new form of central government should be implemented.

Under the weight of regulations, Europe lost its competitive edge against Asia and North America. It should be no surprise that the culmination of dissent ends up in ever stronger Eurosceptic movement – especially in the UK.

The Great Britain – a rebel with a cause

British always were perceived as farsighted people pushing for their own interest and security first. The treaty negotiations the UK participated in were always long and at the end of the day special opt-out rules always could be found in the annex.

The beginning of the end of the EU journey for the UK may have happened in 1950 when they refused to sign the Schuman Declaration and lose their national sovereignty. One year after they refused to join the European Coal and Steel Community. Ultimately, the Great Britain joined the European Economic Community in 1973. After solving their economic problems the UK flourished and established themselves as a member of the European community that vetoed the EU decisions proving a lot of common sense throughout the years. Already in 1984 Margaret Thatcher succeeded in negotiating the so-called ‘UK rebate’ thanks to which their membership fee was lowered by 1/3.

In 2007 during Lisbon Treaty negotiations, the UK and Poland were sceptical about ratifying the Charter of Fundamental Rights. Positively confirming their independence in areas mentioned in the Charter. In 2011 David Cameron was against more financial austerity imposed on members of the EU. Two years later he also protested against accepting new members unless conditions of immigration were renegotiated.

The UK vs the EU

Today the UK is deeply entrenched inside the EU organisation. British did not accept the Euro but according to the Office for National Statistics, the UK export more to the EU than to any other world destination. Data about imports tells a similar story.

A month before the referendum the UK Treasury shared an analysis of the consequences of possible Brexit. According to government’s data in just two years after leaving the EU, the UK’s GDP will shrink by 3.6% and over half a million people could lose their job while average salary is going to drop by 2.8%. On top of that, home prices are going to rise by 10% and the British Pound is going to lose 12% of its value. What is very important is that this report does not consider the UK making any trade deals. Of course, the pound can weaken but can anyone imagine politicians not trying to do anything about it? The UK is the second largest economy in the EU, this argument by itself is a sufficient reason to believe that other member states and by generalisation – the EU itself – would like to trade and have a robust cooperation with islanders. Most probable scenario is the trade-off between low customs in exchange for access to the European market for British products.

Consequences for the EU

Whole attention of media is captured by any possible detriment that can hurt the UK after leaving but it may mean way bigger problems for the Union itself. The situation of Europe is far from being economically and socially stable. Thousands of people are protesting each week in Greece, France or Germany. The case for Brexit can set the example for other countries to follow and the domino effect that can bring down the whole EU can be set to motion.

To understand how close this union got to the possible break up we can research reaction of the EU highest bureaucrats. Seemingly invisible Donald Tusk, the president or the European Council – the President of the EU – said something which contradicts with the opinion of Wolfgang Schauble mentioned before. The former Prime Minister of Poland is against the marginalisation of nation states in Europe as: “Europe without nation states is a utopia”. Brussels is “blind to citizens of some member states who hardly are euro enthusiasts”. Although Tusk is not chairing any position of real power he still has his political intuition working well. He sees that the Union is now closer to a collapse than to factual substitution of stigmatised nation states.

The European Commissioner for Economic and Financial Affairs, Taxation and Customs, Pierre Moscovici admitted that the “EU has no plan B” in case the UK leaves. This is a testimony to the weakness of this union. We can safely assume that when another country decides to vote to leave, the European Community unable to cope with its problems will be powerless also in this matter. It will not take much for other countries to question reasons behind staying in the entity that is in the evident state of decay. Especially when countries all over the globe are signing new trade deals everyday fuelling their economies.

The US and Brexit

The UK leaving the EU would not be good for Washington. The US economy is very weak and stays afloat thanks to printing the dollar and ZIRP. The interference with Brexit vote is another way to keep up the appearance of strength on the international stage. Another tool used is the TTIP – Transatlantic Trade and Investment Partnership, a trade deal between the US and the EU. Washington never offers deals against their interests and this one is no exception. As the content of this deal is confidential we have to assume that the US is getting the better side of the deal and signing it with all EU members is better than signing after Brexit.

Barack Obama shared his opinion about the EU referendum when he was recently in the UK. He made it obvious that in the case of Brexit, London will be put at the end of the queue while the negotiations with the European bloc will be prioritised. He strongly advised Britons to stay in the organisation that helped British economy. Polls after his visit showed a negative – 53% - perception of his words, while 59% said the special US-UK relation will not be hurt after Brexit. Maybe it will be Barack Obama who in just a few weeks will be named the person who tilted the vote in the direction of leaving?

Financial markets and Brexit

The vote to leave, at least in the short term, will negatively impact British currency. Also, EUR may be weakened as Brexit will mean that the EU as an institution cannot ‘hold onto’ it’s ‘assets’. Anxious investors may look for safe havens and this may drain capital from emerging markets.

The transitional period may be harsh for the British economy. Companies will question future direction of the Great Britain and in turn, hold investments for some time. In case Westminster will work towards unburdening the economy from bureaucracy this tough interlude is not going to take long.

Bond markets will also be affected and a capital flight is going to increase the yield of British bonds, increasing the costs of UK’s debt. The reaction of rating agencies is hard to forecast as they tend to take into consideration political factors more often.

Looking at capital markets, in the long run, the direction of the capital transfer may change. In case the situation on the continent is going to deteriorate (just like it did in recent months) and the UK is going to successfully deal with illegal immigrants the result will be clearly safer UK and torn apart Europe. The capital will recognise better opportunity very quickly.

What after Brexit

In September 2015 George Osborne visited China. The result is a detailed plan of Chinese investments in Britain called by Osborne the “golden decade” in Sino-UK relations. Before that visit, the UK became one of the founding members of the AAIB – a potential competition to the IMF. A month after Osborne returned, Xi Jinping came to London. Some estimate the value of planned Chinese investment at 30 bn GBP (all foreign investment in the UK is equal to 35 bn GBP per year). The key element of negotiations was building the first new generation nuclear power plant in Southern England.

Only 3-4 years ago relations between China and the UK were dismal and the 180-degree change may be the proof that British are searching for an alternative. Cooperation with China may be the priority in this regard.

Summary

Whether the UK will stay in the EU or not, we know two things. First, the life beyond the EU exists. Some examples of this life prove that its standard of living is very high. Secondly, leaving the community and experiencing temporary turbulence does not mean assuming a weaker position on the international stage. But it may mean the end for the EU.

 

Independent Trader Team