Market Alert - UK Votes To Exit EU

We have been working through the night to monitor the UK exit vote in Europe and wanted to get this information out as soon as possible.Today is a historic day.  Last night the UK voted whether or not to leave the European Union.  The polls closed at 10 p.m. last night, the votes were counted, and at 2 a.m. this morning it was announced that the UK had voted 51.9% in favor of leaving the EU.  To put this situation in context, this would be similar to New York deciding to leave the United States to form its own country.

This was not the expected outcome and is largely an unprecedented event. Going into the vote yesterday most polls expected the UK “stay” vote to prevail given the economic headwinds that the UK would  face if the “leave” vote were to win.  David Cameron, the prime minister of the UK, was largely in favor of the UK staying in the EU.  Today at 3:30 a.m., Cameron announced that he would step down as the prime minister since new leadership, that is in favor of the exit, should be in place to negotiate Britain’s exit from the EU.

The European Union (EU) is made up of 28 countries.  It was originally formed back in 1957 with the goal of preventing wars and strengthening the economic bond between the European countries in its membership.  The UK joined the EU in 1973.  Members of the EU benefit from:

• Freedom of movement between countries

• Freedom of trade for goods, services, and capital

• EU human rights protection

• Euro currency (the UK does not participate in the euro currency)

The Argument To Stay In The EU

Supporters of the UK to stay in the EU believe that the Union is better for the British economy and that concerns about migration and other issues stemming from EU membership are not important enough to outweigh the economic consequences of leaving.  Many economists agree with this claim.  Europe is Britain’s most important export market and its greatest source of foreign direct investment.  An exit of the EU could jeopardize its financial status in the world and the high paying jobs that come with that status.

Those who voted to stay were not necessarily defending the EU but were basically arguing that the UK is stronger with the EU than without.

Argument To Leave The EU

Those in favor of the UK leaving the EU believe that leaving the European Union is necessary for the UK to restore the country’s identity.  Immigration has been one of the largest issue on the agenda with refugees entering the UK under the EU’s permission and “taking jobs” in the place of UK citizens.  Voters in the middle to lower income classes are viewed as more likely to support leaving the Union due to a feeling of being “abandoned by their country” in lieu of the EU policies.

In a way Britain feels like they used to matter to the world as an independent country but over the years have lost their identity now that they are lumped into the EU.  This group of individuals wants to be able to have full control over the country’s economic policy, culture, political system, and judicial system.

What Happens Next?

Now that the UK has voted to leave the EU, it has become clear that there needs to be new leadership in government that supports the UK exit since most of the current leaders, including the prime minister, were in favor of the UK staying in the EU.  We would expect this to happen in a fairly short period of time.

Once the new leadership is in place, the negotiation will begin between the UK and the EU for the exit.  There is not a precedence for this process which leaves a lot of unknowns.  Immediately, nothing changes.  Most likely while the negotiations are taking place over the course of next few months, or more likely years since the UK is still technically an EU member, UK citizens will still be able to move about the Eurozone countries freely, trade will continue, etc.

However, there will most likely be an immediate negative impact on the UK economy given the expectation of the exit.  The British pound (currency) will most likely drop significantly.  The profitability of the multinational companies and banks that are headquartered in the UK will come into question since they will eventually lose the benefits of free trade and capital movements with other EU countries.

Overall we are entering a period of increased uncertainty. Unfortunately, in our view, there is a larger issue at hand.  Yes, the UK exiting the EU is a significant event but the larger issue is for the first time they are laying the ground work that will allow a country to exit the EU.  There are other countries in the EU that may take up similar votes to leave the European Union since a precedence is now being set for the UK to exit.  If the entire EU were to further destabilize it would most likely cause further disruption across the global economy. 

Michael Ruger

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.