Brexit is the New Grexit

The Brit’s like to be a little bit different when it comes to the rest of Europe. They don’t have the same time, for example, opting to be an hour behind Central Europe. They also don’t have mixer taps, instead choosing to alternate between blistering heat and freezing cold streams of water whenever they wash their hands, much to the bemusement of the rest of Europe. Finally, and more significantly, Britain never opted into the Euro, choosing to keep their own currency when they signed up to the European Union. That final decision might help them, if on the 23rd June, they decide they are leaving the EU.

On 20th February, David Cameron, Britain’s Prime Minister, set the date for the EU referendum. Immediately high-profile MPs began to pick their side, with the much maligned former Education Secretary and now much maligned Justice Secretary Michael Gove teaming up with the London Mayor Boris Johnson to pledge support for the ‘out’ campaign. Cameron is heading up the ‘in’ campaign.

In early 2015 the chances of ‘Brexit’ seemed remote. In fact, the majority of us were looking to Greece, and questioning whether the Eurozone would be able to keep them onboard. However, unlike Greece, the decision to stay or go will be in the hands of the people, and not of those economists quietly working together to find a solution.

Although the absence of the euro may make the process simpler, if it comes to that, there are a lot of other considerations that have to be made before the Brits go to the polls.

There are both advantages and disadvantages of remaining in the EU, and the same applied to leaving it. But here we’ll outline some of the pros and cons that the Brit’s will be considering, and how that’ll effect the markets going forward.

So what’s in it for the Brits?

One of the major advantages for Britain to remain in the EU is the avoidance of export tariffs, and bureaucracy associated with it. Currently Britain avoids a significant amount export tariffs and red tape, and this is integral to the argument because an estimated 45% of British exports end up in the EU.

As a member of the EU, Britain receives better trade terms because of both the size of the EU and the power that wields. In addition, most EU regulation collapse 28 national standards into one European standard, which greatly helps the ease at which Britain can export. If Great Britain remained in the EU, it would have a say in how these standards are created and applied.

In addition to export perks, Britain enjoys being one of the gateways to the EU, especially for US banks who use London’s financial hub as an entry point. Britain also enjoys the investment potential that comes from being part of the EU, and the security that places in the eyes of the investors.

Significantly, Britain also enjoys tax breaks which means, for example, that its car industry can operate. Without the tax free exporting rights, which is enjoyed by the sector, its likely companies such as Rolls-Royce and BMW-Mini may have to scale back or even stop their UK operations.

So why would they ever leave?

Well, it’s a grass is greener mentality that have many Brit’s questioning their involvement in the EU. Sure, they avoid export tariffs and red tape by being in the EU, but Britain exports 55% of its produce outside of that area. Without being bound with the EU regulations, they may be able to negotiate better terms with major consumers such as the US, China and India. That, in the long term, could be worth a significant amount of more than concentrating on EU exports only.

Immigration is also a significant reason as to why Brexit might happen. Under EU law, Britain cannot prevent people from any other member state coming to live in Britain. Although Britons have the same right to live and work anywhere in the EU, those moving to Britain outweigh those Brits leaving. The result has been a huge increase in immigration, particularly from eastern and southern Europe. Added to that, Britain may not have to face taking in refugees who are fleeing the war in Syria and making their way across Europe. Although the Dublin Regulation is in place, there are massive calls for it to be abandoned, meaning that more asylum seekers may wind up in Britain in the longer term.

And a drop in immigration would, with all things being equal,mean more jobs for the people who remained, but labour shortages could also hold back the economy, reducing its potential for growth. It’s a catch-22.

But what is the cost?

In order to get all these perks, Britain pays the EU £340 a year, per household. That’s compared to an estimated return of £3000 in yearly benefits per household. But that is also the equivalent of half of Britain’s annual school budget being sent to Brussels every week. Ultimately however, if Britain remains in the single market or not, they are still going to have to pay on some level to be involved, whether that is directly or through export duty.

And what about the workers?

The effect of leaving the EU on British jobs really comes down to a complex interplay of that factors we’ve outlined above. Some Pro-EU campaigners have suggested that up to 3million jobs could be lost if Britain leaves the EU, but Brexit campaigners are, you guessed it, stating that trade and investment will rise post Brexit (which is entirely possible), then new jobs would be created.

And what about the markets?

If a Brexit was to go ahead, the impact on the markets would be significant, and ultimately unknown. If Britain leaves it will pave the way for other countries who are getting antsy to follow suit, meaning that Denmark and Austria might be next out. Consequently, Britain may not be the final nail in the coffin, but they could be the first cause which ends with the effect of the collapse of the euro. That could be catastrophic.

If they don’t leave, the resentment for the pressure and uncertainty that the referendum has caused in Europe would also have repercussions. What those would be, remains to be seen.

In addition, the FTSE will almost certainly be rocked by the referendum, whether that leads to a Brexit or not. The fear that will also permeate the wider markets could also be cataclysmic.

But ultimately, as this is an unprecedented event, no one is really sure how it is going to play out in the long term, and that means another dangerous thing with drive the markets… fear.

Emotional Responses

We have attempted to be as balanced as possible here, and in the interest of fairness here are two links; one to Britain Stronger in Europe, the Pro-EU site, and one to Get Britain Out, the pro-Brexit campaign. Here you’ll find all the resources you’ll need to get a more in-depth look at the arguments that are on both sides.

But, going forward, regardless of whether the Brits find themselves in the EU or out on their own, one thing remains the same – our approach to the markets. At fractalerts, we pride ourselves on a non-emotional response to the markets, which will be why we are able to sustain a consistent performance record over the course of the year. We’ll be holding true to our algorithms regardless of what happens with Britain or how fear of the unknown manifests itself in the markets.

Don’t believe us? Well, watch this space or better still, join us for the ride.

Our alerts are used by banks, fund managers and traders all over the world.

Copyright © 2020 fractalerts. All Rights Reserved. fractalerts is a division of fractal, SA