Today I asked my 14-year-old daughter if she knew what Brexit meant. She looked pensive for a moment, and then she guessed: "Is that when someone brags about a zit? Brag-zit?" Uh... no.
"Gee Dad, if it wasn't for me, your writing would be really boring."
Maybe.
The term Brexit refers to the potential outcome of Britain leaving or exiting the EU. The United Kingdom headed into a referendum today, the outcome of which will determine whether UK voters wish Britain to remain in or leave the European Union. By the time you read this, the results may already be decided.
What is the
European Union?
The EU is a political and economic union between 28 European countries, formed originally after World War II ended, and initially consisting of six countries. The idea was that countries which trade and rely on each other are more likely to avoid conflict. Initially designed as an economic union, the EU now also oversees climate, environment, health, external relations, security, migration and human rights.
What is the
single market?
The single market refers to the collection of countries that allow EU citizens to study, work, live and retire in any EU country, and shop all over Europe without additional tariffs. It allows companies to build factories, stores and head office locations outside of their primary country and provides them access to the entire EU - nearly 500 million individuals.
Differences between the EU and Eurozone
The Eurozone or euro area refers to the group of 19 European Union countries which share a single currency, the euro. As a result, economic policy is more closely coordinated, in the Eurozone. Several countries, including the UK, have opted out of participation in the Eurozone and thus still maintain their own currency and monetary policy.
The Vote Leave campaign
The lobby group sees the EU as an additional level of government which imposes unnecessary restrictions for little benefit.
The group argues it would:
Aim to strike new trade deals quickly.
Optimize UK regulations and deregulate businesses.
Save on fiscal transfers to the EU.
Benefit domestically-oriented firms and workers.
Escape dysfunction and crises in EU.
Achieve greater sovereignty for Britain.
Britain Stronger in Europe campaign
This group argues that no country has left the EU before, and it is difficult to handicap the length of time it may take for Britain to regain access to the single market, renegotiate free trade deals with the EU and other nations, and assess how many jobs would be at risk.
This campaign argues that remaining in the EU would:
Avoid uncertainty.
Allow businesses to maintain unfettered access to EU demand and workers.
Keep GDP stronger and grow financial markets.
Benefit exporters and consumers.
Lower the odds of a Scottish separation.
Avoid setting a problematic EU precedent.
Continue the positive influence the UK has on EU laws.
The potential
impacts of a Brexit
A vote to leave the EU would lead to greater uncertainty for the economy and could trigger another Scottish independence referendum. In April, Britain's Treasury Department determined that leaving the EU could reduce GDP by 6.2 per cent after 15 years through constrained economic activity and higher trade barriers.
Furthermore, multinational corporations might build their factories and develop head offices elsewhere in the EU.
The past few months has already shown a decrease in corporate investment in response to the uncertainty.
UK labour and product regulations are already among the lightest in the OECD, so there are limited gains to be extracted from escaping the control of the EU.
The amount Britain pays to the EU in net transfers is about 0.5 per cent of GDP, not all that large given the benefits it receives.
Uncertainty has already led to a decline in the British pound, and could lead government bond yields to increase.
A vote to leave could pressure the credit markets, leading to potential downgrades and declining equity valuations as investors take risk off the table.
Meanwhile, a vote to remain in the EU could be positive for bond and equity markets alike.
What could happen if the UK were to leave?
Markets could be quite weak for a time. The EU itself would remain intact but a post-Brexit UK would need to negotiate new trading relationships with the EU and all its trading partners. These negotiations could prove difficult.
As a Brexit would set a very bad precedent, the EU has strong incentive to show other countries they will do badly on their own.
In addition, the UK is much less important to the EU than the EU is to Britain, so the UK will be in a subordinate negotiating position.
What appears to be the likely outcome?
Pundits put the odds at close to 60 per cent in favour of "remain." We agree, although it's a potentially volatile outcome.
Arguably, Britain is already in an enviable position, having access to the single market but not participating in the Eurozone where it would be liable for Greece's bailout. In addition, it enjoys the free movement of labour, but is not in the Schengen passport-free zone where the refugee crisis is a concern.
At the end of the day, the vote is, of course, up to the British public.
This document is adapted from an article by RBC Global Asset Management, and contains forward-looking statements. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied.
Mark Ryan is an advisor with RBC Wealth Management, Dominion Securities (member CIPF) and can be reached at [email protected] or 250-960-4927.
