On June 23, British voters will head to the polls to vote on a referendum, deciding whether or not to leave the European Union (EU). And they’ll do so without a clear idea of what might replace it.
Naturally, pro-EU forces are bombarding voters with horror stories of the recession that will inevitably follow the “Brexit.” This is shifting popular opinion against the Brexit – which is a pity, because Britain faces just as much danger remaining in the union.
Last year, I wrote a piece headlined Brexit Divorce Requires Good Lawyer, and a Hot New Girlfriend.
And that cynicism covers an unhappy truth: There has to be a clear incentive to go through the unhappy experience of a divorce, and the same applies to the difficulties of negotiating a British exit from the EU.
However, the Brexit campaigners have yet to find either.
No Clear Choice Ahead
Brexit campaigners have absolutely no control over exactly how the Brexit will be achieved. Negotiations will be carried out by a conservative government that’s largely pro-EU and a bureaucracy that’s almost unanimously pro-EU.
Brexit campaigners also haven’t found the “hot new girlfriend” for Britain – a country or group of countries outside the EU that wants to deepen trade relations and has a more attractive economy with faster growth.
Given the exit campaigners’ failure to reassure voters, it was always likely that the Brexit campaign would fail, albeit by a small margin.
Two factors could still push the result either way:
- Threats from EU leaders. Many can barely contain their rage at the idea that the British people and the relatively solid British economy might escape their clutches. Every time Francois Hollande of France, Angela Merkel of Germany, Matteo Renzi of Italy, or the EU leaders themselves open their mouths, the resulting threats and insults are eagerly reported by the anti-EU British tabloids, nudging the needle closer towards “Leave.”
- The cost of the Brexit. The statistics coming from British authorities on the cost aid the “Remain” camp. On behalf of the Treasury, Chancellor of the Exchequer George Osborne announced last week that 500,000 jobs would be lost if Britain exited the EU. At most, 800,000 jobs would be at risk. The Institute of Fiscal Studies, heavily funded by the EU, also produced a report saying the Brexit would have an economic cost of 20 to 40 billion pounds ($30 to $60 billion) annually. And the G7 leaders announced that the Brexit posed a “serious risk to global growth.”
That’s not to say the “Leave” crowd lacks spurious statistics of their own. They claim Britain would save 350 million pounds ($500 million) a week in contributions to the EU – and that doesn’t account for offsetting EU agricultural subsidies.
The Brexit campaigners have one final argument in their favor – the acceleration in net immigration to Britain to 333,000 in 2015, contrary to David Cameron’s promise that annual net immigration would be brought below 100,000.
Brexit campaigners argue – with some justification – that the combination of the EU’s rules on free migration, eccentric rulings by the European Court of Justice, and the EU’s lax enforcement of its own border controls make it impossible to reduce the immigrant level while Britain remains in the EU.
This could cause a last-minute swing in favor of a Brexit, but economic fears of the cold world outside the EU remain dominant.
The truth is, no one knows what a Brexit will bring. It’s likely that the uncertainty surrounding a Brexit would cause a downturn in the British economy, while a Brexit would certainly crash London house prices (an immensely good thing, in my view, except for those in my generation foolish enough to have held on to the London houses they bought in the 1980s).
It’s also likely that the negotiation process for a Brexit would be difficult – that’s where the Brexit needs a good lawyer – if only because so many EU officials are determined to make it as unpleasant as possible out of spite and to deter other countries from trying to exit.
On the other hand, it’s clear that EU officials are planning a further push towards unification, with an enlarged EU armed force and centralized security policy central to the effort.
Neither of those efforts are in British interests. Indeed, they’re likely to make EU security efforts even more ineffective. Individual countries will scale back their defense spending further, while deploying the centralized force will be impossible because of the myriad interests involved.
And it’s possible that if Britain closes the door on a Brexit, it’ll be hard-pressed to defend its financial business in the City of London against greedy EU regulators.
Unless some crisis blows up, Britain will probably narrowly vote to remain in the EU on June 23.
As investors, we shouldn’t be in a hurry to add to our British holdings in that event. The costs of continued British membership will only emerge over time, but they’re likely to be substantial.