This summer the United Kingdom will vote on whether to stay in the European Union. It’s going to be a close vote with the “leave” camp consistently ahead in the early polls but, in the end, it might not matter much either way. Whether the U.K. stays or goes, the vote itself is pointing out a large number of cracks in the grand experiment we call the European Union. Those cracks are being exposed by the EU dictating how many refugees each country must accept and the scale of benefits they receive. Britain is threatening to leave the EU rather than take any more people flooding in from the Middle East. If the EU gives in, there’s no doubt other countries will demand the same concession.
The interesting story in the possibility of what’s being called the “Brexit” is the effect just talking about it is having on the British economy. Early on, markets just assumed Britain would stay in the EU but recent polls, pointing to a much closer vote, have thrown markets into turmoil. Just the discussion of leaving is enough to add huge volatility to European markets.
Gloom, Now with Extra Doom
If you listen to opponents of the Brexit you’d think the U.K. leaving the European Union will trigger an economic collapse and a descent into a Mad Max-style social order. But the dire predictions of the U.K. descending into madness if they leave the EU are likely a bit overblown. Once separated from the EU, Britain would be free to negotiate trade deals on its own with China, India, the United States and, perhaps ironically, the remaining fragments of the EU itself. Britain would also be free to cast off the rules and regulations imposed by the EU and, on the flip side of that coin, would also be able to reinstate rules of its own that were prevented by membership in the union.
Using the Vote as a Club
The vote may have started out as a way to gain leverage with the EU as Britain started a new round of negotiations aimed at getting itself a better deal if it stays. Not all countries agree to the exact same terms to be part of the European Union and countries like Poland and the Czech Republic would never agree to the single currency provisions. If the U.K. stays, the fact it’s gaining concessions to remain, including a “brake” on payments to immigrants and refugees streaming into Britain from eastern Europe and the Middle East, would certainly see other countries demanding the same deal. The Brexit is already changing the grand experiment of a single, unified European government into a less-centralized entity that’s little more than a trade pact.
Devaluing the Pound Sterling
Britain is getting one benefit from just talking about leaving the EU and that is the pound is falling relative to other currencies. In our crazy, mixed-up, connected global economy where traditional value relationships are turned upside down, a weak currency is actually a good thing. It makes Britain’s goods and services more competitive in world markets, acting like a built-in discount for anything made in the U.K. Japan dreams about being able to get the kind of currency devaluation that Britain is getting just for talking about leaving the EU.
Rough Spots Ahead
There could be a massive economic adjustment to the U.K. leaving the union. Britain could see capital outflows large enough to create some rough times. Just the weakening of the EU would likely be enough to create instability and, in the modern economic world, instability breeds more instability. It’s getting increasingly easy to find scenarios where market turbulence somewhere in the world ends up dragging down the U.S. stock market and the Brexit is simply the latest example.
Until Europe sorts itself out it should remain on the radar of small investors as another reason to remain defensive in their personal investment mixes. The volatility and instability we see today are likely to be the investor’s permanent companions going forward.
Will Granderson is a regular columnist for Goldco Precious Metals writing on finance, precious metals, and gold as an investment and in popular culture.