Many market participants seem to be quite cavalier about the potential impact if the United Kingdom votes to leave the European Union. The polls have been quite whimsical, with the “Leave” faction marginally ahead one day, and “Remain” leading the next. But the ramifications will truly be felt, not just on the Continent, but Worldwide.
The average Briton seems to be more focused on the emotional side of the issue: taking Britain back; removing the burdensome yoke of Brussels or reasserting its own Independence. Reputable economists, however—at the IMF, the London School of Economics, etc—have projected a potentially large decline in Gross Domestic Product, ranging from 2.2% to 9.5% for years to come, if Brexit wins. But those projections are falling on deaf ears. Considering that the UK GDP had only grown by 0.4% this past quarter, down from 0.6% in 4Q15, a decline of even 2.2% would be catastrophic!
Mid-afternoon today, I noticed a topic on CNBC, arguably America’s primary financial news network, with the title: “How to ‘Brexit’-proof your portfolio”. But, it’s just not that simple! Whether you invest mostly on the DAX, NYSE, NIKKEI, BOVESPA, global markets are very closely aligned. And that goes for foreign exchange and commodities, as well. The contagion will surely spread, just as it did eight years ago.
Back in 2008, there was literally nowhere to hide! We all felt the impact of those ”toxic assets”—sub-prime mortgages, credit default swaps, undercapitalized banks, etc. And we saw that the linkage was much more intricate than just among the banks. Leave vote would cause world trade to decline as global economies weaken. The pain would be felt everywhere!
The economies of countries that live on the export of commodities and low-end manufacturing, such as Brazil and China, would probably contract even further than they already have. Stronger economies, like the U.S, would find that their industrial exports would become more expensive, due to the stronger Dollar..
Unfortunately, monetary policy might be of a source of only minimal relief, since many countries have intra-bank lending rates that are already near zero percent, and some even below it. So, there would be little that central banks might do. The buy-buying (“qualitative easing”) might only work somewhat in countries that have deep. liquid debt markets.
In fact, the only hope for jump-starting some economies would be an infusion of Fiscal Stimulus, which is decifict-spending on the part of the respective National Treasuries. Most European countries have avoided Stimulus, insisting on Austerity, which is the opposite–contracting the economy. The UK certainly falls into the Austerity category; however, with a touch of Stimulus.
Thus, the Brits might be taking their hatred out on Brussels, whereas that should be directed at the conservative fiscal politics of the Tory Government. But, as Prime Minister David Cameron wrote in an Op-Ed on Sunday: If U. K. does vote to leave the E. U, it cannot go back?
NOTE: My prior post on the Brexit, dated June 10, is linked as follows for additional perspective: https://thetruthoncommonsense.com/2016/06/10/perhaps-the-brits-are-playing-with-fire-by-considering-a-brexit/.