June 2016

On June 23rd, Britons go to the polls on the issue of whether to remain in the European Union (EU) or dissolve the relationship over the ensuing two years. A vote to remain in the EU may well leave little changed and a return to the current status quo. A vote to leave opens a flood of unknowns that is likely to lead to greater uncertainty and higher volatility in the capital markets. The EU was established to create a more powerful, united region for economic and security reasons. It's difficult to believe that the separation of one of the largest members makes either the UK or the EU stronger. Some signs that the capital markets would be unhappy with a "Brexit" are already emerging. The value of the British pound has dropped versus the U.S. dollar since the referendum was announced in February. Pronouncements by the International Monetary Fund ("IMF"), Organization for Economic Cooperation ("OECD") and the British Treasury cast a shadow of economic despair that would follow a vote to leave the EU. Still, current polls remain too close to call with just a couple weeks before the vote.

Leaving the EU

The chief claims made by proponents of leaving the EU have been the desire to recover Britain's sovereignty, control of immigration and to establish it's own trade agreements with other nations. It seems difficult to make the assumption that Britain's ability to negotiate trade agreements outside of the EU would be improved. Particularly since nearly 45 percent of exports from the UK are imported by EU member nations. Additionally, about 12 percent of economic activity in the UK is a result of trade with the EU. It seems rather certain that the initial impact would be a negative one for the British economy with the longer-term prospects of a stronger economy being still anything but certain.

Why Immigration is a Concern

Immigration is a perennial concern for nations with stable governments and enforceable laws. At times, concerns over immigration will flare and may easily lead to a populist sense of protectionism among citizens. The migrant crisis in Europe is unprecedented in its scale. In 2015 alone, 1.3 million refugees sought asylum in EU member nations, an all-time record. Turkey, not an EU member, has temporarily taken in nearly 3 million Syrians. It is not surprising that those advocating leaving the EU are appealing to the risk that an open border to other EU nations poses from a national security perspective amid the flood of refugees. In truth, immigrants are overwhelmingly ending up elsewhere in Europe. Britain and Denmark are the only two EU member nations to not participate in a relocation program of immigrants holed up in Greece and Italy, proving that there are likely other measures that could be taken to assuage the fears of citizens over immigration rather than extricating itself from the EU.

While the vote on Brexit may amount to a Y2K-like false alarm, it's nonetheless worth paying close attention to the sentiment of voters in the developed world as politics continue to gravitate toward extremes. Tommie Lee Jones claims in the sci-fi comedy Men In Black that, "a person is smart, people are dumb". Let's hope he was wrong.