Fallout From Brexit

Last week we witnessed history being made, as the United Kingdom voted in a referendum to leave the European Union. The origins of the EU date back to post-World War II, when six European nations, not including the U.K., formed the European Coal and Steel Community. In 1957 this coalition was reformed as the European Economic Community, a.k.a. Common Market ‒ still without the United Kingdom. It was not until 1973 that the U.K. joined the European Economic Community, which in 1993 would be refashioned as the European Union.

Made of up of 28 European nations, the EU is structurally similar to the United States, in that both organizations consist of individual entities (nations in the EU; states in the USA), each with separate identities and laws, but jointly subscribing to centralized governmental rule. One of the visible signs of the EU was the implementation on Jan. 1, 1999, of the euro. This standardized currency is subscribed to by 19 EU-member countries; the U.K. was one of eight EU members that chose not to adopt the euro.

Why did U.K. voters elect last week to leave the EU? Probably the biggest reason centers on immigration from war-ravaged North African and Middle Eastern countries. In 2015 alone, 630,000 foreign nationals migrated to the U.K. Many theorize that the stateside version of this immigration issue is much of the root cause of the popularity of Donald Trump in the United States.

What will be the results of the United Kingdom’s exit of the EU? The true answer is that no one knows for sure. There is no precedent upon which to base a reasoned response, thus what is left is only opinion, or at best an educated guess. Many speculate that this is the beginning of the end for the EU. As soon as the vote was in, other European leaders were indicating that perhaps referendum votes should be held in their countries, too. Meantime world leaders are trying to soothe frayed nerves by noting that the U.K.’s departure will take a couple of years to complete, providing time for economies to adjust.

However, financial devastation has already occurred, with stock markets throughout the world being down significantly the day after the vote, with no quick relief in sight. When will stocks rebound? Will this be similar to the recent economic crisis, which took years to recover from?

German Chancellor Angela Merkel called for a meeting with some of the other EU leaders on Monday to discuss how to fix problems with the EU. Should these leaders successfully identify and fix issues causing the unrest that led the U.K. to vote to leave, perhaps they can hold the remaining members together. Perhaps they could even persuade the U.K. to hold another referendum to rejoin, or at least to make the withdrawal as seamless as possible.

As for banks in the United States, the immediate effect was felt by the large international institutions, which suffered losses in their stock prices. Bankers, like stock market investors, favor certainty, not surprises. The big uncertainty now is whether the European economic problems resulting from Brexit will reach the United States. If so, how will the effects be manifested, and how long will they last? Much like the financial crisis in 2008, no one knows what the long-term effects, if any, will be.

Last week’s vote was an impactful event that may change how the world does business in coming years. Nevertheless, let us not lose sight of the fact that, prior to 1993, there technically was no EU, and even its predecessor organizations are relative blips on the historic timeline of Europe. Let us also remember that our banks remain strong and solvent, ready as always to lead us to financial stability.

– S. Joe DeHaven

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