Nearly every market move over the last two weeks has been attributed to an upcoming British referendum on whether the United Kingdom should remain with or leave the European Union.
A poll shows Brits might want to leave? Down go stocks. Now it’s looking like the U.K. will stay in the political and economic bloc? Here’s200 points to the upside for the Dow Jones Industrial Average.
And it’s not just stock-trading desks watching the upcoming vote closely; the Federal Reserve Chair Janet Yellen said earlier this monththat a British exit from the E.U. “could have consequences in turn for the U.S. economic outlook.”
So, what exactly is happening?
Citizens* will vote Thursday on the question, “Should the United Kingdom remain a member of the European Union or leave the European Union?”
Polls will close at 10 p.m. London-time (5 p.m. Eastern), and then the official returns are expected to start coming in around 1 a.m. local time (8 p.m. Eastern). About 50 percent of the returns will be counted within the next 3 hours, according to most expectations.
In the event that the leave camp wins, the process of a British exit from the E.U. would begin, but some estimates say the negotiations could take more than two years to complete.
If Brits vote to stay within the E.U., then markets will breath a sigh of relief, and the nation will begin the healing process after a tense period.
*According to the BBC, eligible voters will be “British, Irish and Commonwealth citizens over 18 who are resident in the U.K., along with U.K. nationals living abroad who have been on the electoral register in the U.K. in the past 15 years. Members of the House of Lords and Commonwealth citizens in Gibraltar will also be eligible, unlike in a general election.”
And why is everyone nervous?
As could be expected, the primary stance of E.U. politicians is that the U.K. should stay within the bloc, but nations and expert groups across the world have also expressed their preference for a stay victory.
Important British trading partners — including India and China — have indicated they’re worried that an E.U. exit would create regulatory and political volatility that could harm the economies of everyone involved.
The U.K.’s Treasury itself reported that its analysis shows the nation “would be permanently poorer” if it left the E.U. and adopted any of a number of likely alternatives. “Productivity and GDP per person would be lower in all these alternative scenarios, as the costs would substantially outweigh any potential benefit of leaving the EU,” asummary of the report said.
As the overall economy weakens, the British government would see weaker tax receipts than otherwise, and those losses would vastly outweigh the benefits of reduced contributions to the E.U., according to the analysis.
And although some have dismissed those analyses as “rotten propaganda”, most mainstream economists overwhelming agree the move would be bad for the U.K.
That’s it? That’s the big global concern?
Yeah, so, this is where it gets a tad more complicated. The general thinking is that many international corporations (notably those based in the U.S. and China) invest in U.K. operations partly so they can readily access to the free-trade corridors the U.K. enjoys of the rest of the European Union. So if the leave camp wins, many of those companies will see drastically reduced profits.
The sudden need to reset tons of global investment channels — against the background of the ambiguous and extended period of the U.K.’s exit negotiations — could have a freezing affect on the whole region.
“Negotiations on post-exit arrangements would likely be protracted, resulting in an extended period of heightened uncertainty that could weigh heavily on confidence and investment, all the while increasing financial market volatility. A U.K. exit from Europe’s single market would also likely disrupt and reduce mutual trade and financial flows, curtailing key benefits from economic cooperation and integration, such as those resulting from economies of scale and efficient specialization,” the IMF said in an April report.
Depending on how you measure it, the E.U. as a whole ranges from the first to the third largest economy in the world. And in terms of trade, the bloc easily topped the U.S. and China in both imports and exports.
So a slowdown there would mean a global slowdown. One that could last months — if not years.
And here’s why the fallout is global
Yeah, it does sound hyperbolic, but there are actually a couple arguments for why a British exit would hurt the rest of the globe.
In Europe, the E.U. could run into economic trouble for a couple of reasons. The lengthy and as-yet ambiguous exit negotiations could cripple investment, as mentioned above, but they could also lead tomore exits. Nationalist groups across Europe will be watching the British referendum closely to see if they can use the results into their advantage.
Elsewhere, the economic risks are best understood as a function of uncertainty. E.U. uncertainty: If financiers and companies are concerned that they may get cut out of free-trade channels, they may find safer (which is to say, less productive) uses for their money. And British uncertainty: All those billions of dollars already invested in the U.K. and invested abroad by British entities could be in limbo as London rushes to negotiate new (non-E.U.) trade deals with its key partners.
In the U.S., billions (if not trillions) of dollars could be called into question by a British exit: In 2014, American direct investment into the E.U. totaled about 1.81 trillion euros, and about 1.99 trillion euros flowed in the opposite direction, according to the European Commission.
If even a small percentage of that is disrupted, it could reverberate across the globe.
Similar concerns apply for Chinese, Indian, Japanese and other international companies and investors.
And then there’s the issue of currencies…
With all of that uncertainty rushing around, a British exit would likely result in a massive re-balancing of currencies.
Investors would likely dive out of the British pound and into cash that’s perceived as safe — the Swiss franc, the Japanese yen, the U.S. dollar. The euro could also see some weakening if investors are worried about the fate of the E.U.
While being a safe haven could sound like a boon for the U.S. economy, such a large, sudden currency swing could have significant negative implications for American multinational corporations.
The fallout from those currency moves could be another source of short- and medium-term economic tumult.
So why is the UK even considering leaving?
Most experts are laying out arguments like the ones above in explaining why the U.K. should vote to stay in the European Union. But there are many reasons why some Brits will be voting for an exit.
First and foremost, a lot of people simply don’t care about the multinational corporations and investors who would likely bear the immediate losses of a vote to leave — not to mention the fact that “expert” predictions are increasingly unpersuasive to voters.
And for many, concerns about the costs of continued E.U. membership far outweigh any worries about leaving.
One of the major sticking points in the conversation has been immigration concerns, as some Brits worry that the country’s employment market and social services will drown under the weight of too many new residents. There’s also the worry that upper-crust elites and Brussels bureaucrats are pushing for a continental identity that diminishes the U.K.’s own sense of self.
There are also economic arguments, although they are more often made by pro-exit politicians than by professional economists. Those politicians argue that the E.U.’s strong regulatory regime and its required contributions actually depress the U.K.’s growth potential.