By Anthony Rubinich
On June 23rd, 2016, the British people voted to leave the European Union, the first time in EU history. While to the casual listener this would appear as a seemingly innocuous event, the decision has global economic and social implications. Within hours of the announcement, stock prices plummeted and international markets were sent into a frenzy. The exact story line and the events that led up to the referendum fit the description of a high-octane, political drama. The purpose of this report is to reveal exactly what happened that led to the Brexit referendum and comment on its effect on the US economy.
The European Union was created in 1957 and has grown to include over 20 countries. The EU’s goal was to provide a means of diplomacy in order to prevent an event like World War II from happening again. While England has been a member since 1973, the UK has consistently tried to distance itself from the Union. For instance, Brits have insisted on using the pound and not the EU regulated Euro. For almost fifty years, Brexiters were defeated referendum after referendum. However, the late 2000’s would change all that.
The first 16 years of the 21st Century would prove to be a trying time for England, and the world. In 2009, several countries in the EU defaulted, sparking the European Debt Crisis. As a result, stronger countries had to bear the weight of weaker ones. England was one of them, not to mention the cost of England’s membership in the EU was growing exponentially. According to Open Europe, EU regulations set the U.K. back 33.3 billion pounds, nearly $50 billion.
In addition to economic stress, the Syrian Refugee Crisis would also test the UK’s patience. In response to the Syrian Civil War, Syrians began an Exodus-like movement into the European countries. The mass-immigration of refugees to England resulted in health, education, and housing issues that leaders in Parliament refused to face.
Tensions brought on by immigration boiled over into 2016. On February 20th 2016, Prime Minister David Cameron announced that a Brexit referendum will take place on June 23rd.
June 23rd 2016
The polls closed at 10 pm London time. Five hours later, the announcement was made that the U.K. was leaving the European Union. Even proponents of Brexit were shocked by the results. 52% of Brits voted to leave the Union, even though 75% of young people voted to stay. Without warning, international markets were in tumult. The pound plunged to its lowest level since 1985. Following the declaration, David Cameron announced that he would resign as Prime Minister.
The effect Brexit will have on the US economy is hard to predict. So far, markets and funds on our side of the Atlantic have reacted normally. Our advice to investors is to know your risk, assess liquid reserves, and stay alert for tax saving opportunities. It is important to balance your portfolio and shoot for a long-term growth strategy. Furthermore, it is best to stay away from foreign markets, just for now. Non-US equity is still a good bet but always maintain a 3-5 year view and hold out for the eventual recovery.
What happens next? Before Brexit, the U.K. had one of the top five best economies. With the pound suffering its worst one day drop in history, the international market has become very volatile. The referendum sets a dangerous precedent for other Eurosceptic nations such as France, Spain, and Greece. Should the EU dissolve altogether, diplomatic relations will resemble that of pre-WWII Europe. Without the Union, Eastern countries Lithuania, Belarus, and Poland may be susceptible to a Russian invasion, similar to what happened in the Ukraine. The effect Brexit has on the US is largely unknown. The pounds plunge could have an inverse effect on the value of the US dollar, but it doesn’t necessarily mean the US will become an economic safe haven.
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