This month the great experiment called the European Union is being tested as never before. A scant two weeks remain before the United Kingdom votes on whether to stay in the EU or pack up their tea and biscuits and exit or, as it’s been termed, “Brexit.”
Since the outcome of this decision will likely have worldwide financial impacts, it would be nice to be able to consult polls that tell us which way the UK is leaning, but such an effort turns out to be useless. Brexit poll results are all over the map; one might show the “stay” camp leading, while other, more recent polls show the “leave” camp surging ahead. The truth is no one knows exactly how the vote is going to go till the ballots are counted on June 23rd. Both sides have painted dire predictions of what might happen if the vote doesn’t go their way, with some arguments taking on an air of desperation recently. But as for how the EU itself is handling this insurrection, Brussels seems to be doing everything in its power to complicate the situation.
Immigration, Refugees, and Who Owns Your Front Door
Discontent with, and talk of leaving, the EU has been building for years, but what brought it to a head was the Syrian refugee crisis. The UK discovered that the EU could tell them how many refugees they were going to take, which didn’t sit well with the Brits. Despite negotiating some concessions on how many refugees Britain would finally accept, the refugee issue is the prime driver behind the Brexit vote. Recently, in a masterful stroke of bad timing, the European Union’s top court threw gasoline on the fire by ruling that asylum seekers could challenge their relocation to other countries and sue for damages on top of that. The ruling was invigorating for Brits in the “leave” camp, coming just as polls were tipping back in their favor.
If the UK Goes, Germany Could Be Next
If Britain does vote to leave the EU it will largely leave Germany holding the bag. Britain’s the second-largest financial contributor to the EU, paying in significantly more than they get back. That’s been another sore spot for the “leave” camp, though they tend to exaggerate the numbers (paywall) a bit. If Britain leaves, it will put pressure on Germany to cough up more to make up for the loss. It’s not clear how one says “up yours” in German, but it’s a good guess that will be Germany’s response to any EU attempts to squeeze them for more cash. It’s also possible the Germans would decide to follow the UK out the door. If the richest countries exit the union, that’s going to severely limit the financial advantages to other member countries and reduce the EU to a collection of the poorest economies in Europe.
Tepid U.S. Support
Both President Obama and Federal Reserve chairman Janet Yellen have suggested the UK should stay in the EU, but their remarks have been both insipid and self-serving. Yellen suggested that U.S. markets could react badly and the Brits leaving the EU could upset the Fed’s plans for an interest rate hike. But it’s not clear why Brits, eyeing their new forcibly integrated refugee neighbors, would be likely to give a fig about U.S. interest rates.
Expect a Big Shake-up in World Markets
Britain leaving the EU will positively reorder world markets. Measured collectively, the EU is the largest economy on earth. If the UK leaves, the EU would drop to number two, between the U.S. and China. If the UK and Germany leave, what’s left of the EU would sink to third place, provided no other countries throw in the towel and bolt. Germany and the UK would still be the fourth- and fifth-largest economies respectively.
The Only Real Winner: Gold
If the UK does vote to leave the EU, gold is going to be the big winner as Brits will dash to preserve the buying power of their currency. On top of that, Britain leaving the EU will generate uncertainty, and uncertainty and volatility are also good for gold prices. With markets already nervous, there will be a sudden and immediate flight to safe harbor investments.
The bottom line: whether Great Britain decides to Brexit in the next two weeks, or the powerful “stay” crowd manages to eke out a win, the seed of discontent has been sown. It’s unlikely the EU will stop strong-arming member nations to provide harbor for refugees of seemingly never-ending wars; thus it’s equally unlikely this issue, even if it naps, will die away for good.