At this writing, citizens of the United Kingdom (U.K.) are mulling over their June 23rd vote on
continuing as part of the European Union (EU) or exiting that integral association. The EU is
one of the largest economic unions in history. It joins 28 member nations in a landmark effort
to facilitate freer cross-border movement of people as well as goods and services, and by
implication, boost business’ confidence to hire, invest, and expand.
Nevertheless, recent polls indicate that the referendum question remains a pretty close
call. So, what are the key issues, and what would “Brexit” mean to the U.K. and to financial
Key issues cited by those who favor leaving the EU (“Brexit”) revolve around sovereignty,
trade, the costs of EU member obligations, the slow pace of integrating the market in
services, and the hot button of unrestrained immigration. Brexit proponents contend that
EU membership has negative implications for trade with nations that are not part of the EU.
They see many of its regulations as impinging on the U.K. economy’s competitiveness.
Specifically on immigration, the Single European Labor Market allows free cross-border
movement of the 28 EU members’ citizens. The Brexit side tends to believe that the inflow
of immigrants, attracted by the U.K.’s stronger economy, has taxed the nation’s public
Counters to those arguments include the fact that the rest of the EU is actually the U.K.’s
main export market accounting for 45% of its exports. It is clear that other world class
competitors such as Germany and Sweden also have seen their respective trade balances
improve over the course of 30 years as members of the EU.
Post-exit, the U.K. would almost certainly need to negotiate comparable terms of trade
through bi-lateral agreements with key EU members. As for trade deals with the rest of the
world, it’s not clear that the U.K. could be expected to fare better on its own than as part of
the EU block of 445 million consumers.
As for the immigration argument, economists at BCA Research calculate that immigrants
from other EU countries have contributed 47% of the U.K.’s labor force growth since 2010.
And the U.K.’s native-born workers are actually much more likely to claim public benefits than
are those immigrants from other EU nations.
Markets dislike uncertainty, so investors might expect a relief rally if the Brits vote to
“Bremain” in the EU. If the referendum favors “Brexit,” a reflexive selloff in the FTSE 100 stock
index may ensue. But the FTSE is a global index heavily influenced by prospects for the energy,
metals, and mining sectors. The FTSE 250 actually has more substantial exposure to the
domestic U.K. economy, which would be the focus of Brexit-related concerns.
Under either outcome, the effects will be multi-faceted, ambiguous, and spread over time.
And soon enough, those Brexit headlines in the financial news will be replaced by other