In the words of famous English rock band The Clash, Britain has been asking itself “should I stay or should I go?” for the past ten months now – the relationship in question being its affair with the European Union. After a year-long campaign on both sides of the coin to determine the country’s political and economic future, the U.K. finally voted to call it quits.
But, as we all know, break-ups can be messy and cutting ties is easier said than done. The case of Britain and the EU is no different. Exit procedures outlined in Article 50 of the Lisbon Treaty state that a member must withdraw from the Union in accordance with its own constitutional requirements – meaning the final decision will likely be in the hands of parliament. Since the government is not legally required to act on the results of the referendum, Britain will remain a member of the European Union until its politicians decide otherwise (which may take a while from the sounds of Prime Minister David Cameron’s resignation announcement).
As far as markets go, uncertainty is plentiful. In the short-term, it is likely that there will be a slow-down in capital spending as companies are unsure of what the new rules will be. Likewise, foreign investors will need some assurance that the relationship between Britain and the rest of Europe won’t impair the future prospects of their investments.
From a long-term perspective, no one really knows what will happen. In the event that the British government stands behind its people and moves forward with an official Brexit, it will likely be a painful divorce intended to discourage other EU countries from following suit. Tariffs, quotas, and the flow of capital and labor will all be factors that impact trade worldwide and redefine the global economy.
Along with uncertainty and slower growth, higher inflation levels are a likely result for the U.K. as the pound has adjusted sharply downward in anticipation of both capital flight and a much more accommodative BOE.
If you are a U.S. business that imports/exports from the U.K., the trade terms and laws governing customs and tariffs could all be rewritten. Right now, foreign countries that do business with the U.K. are dealing with the EU’S laws. Presumably, Britain will have to renegotiate terms with the United States and other outside business partners once they are no longer a member of the Union.
Different tax structures may also result within the U.K. after the break-up is complete. Currently Britain is operating under the EU’S VAT system, but a Brexit will give the government flexibility to rework this arrangement. So, if you are a company with operational interests in the U.K., the taxation of your income could change as well.
With the imminent threat of other Euroskeptic countries lobbying to leave the EU, the very existence of the EU and the globalization-induced free trade policies that markets have enjoyed for the past seventy years are at risk of coming to an end. As evidenced by the increased volatility since the vote, what replaces that framework is now an issue that market participants are desperately trying to figure out.
For those with skin in the game, it will be beneficial to keep a close eye on changes in geopolitics that will redefine the way business is conducted.
“If I go there will be trouble and if I stay it will be double”, echoed British voters. The question is, what kind of trouble are we in store for?