Since the historic vote in 2016 to break away from the European Union, the impact of Brexit on the United Kingdom, the rest of Europe and the global economy has garnered massive attention, and rightfully so. The difficulties encountered in gracefully exiting from the EU have already forced the resignation of Prime Minister Theresa May and left Boris Johnson, the current PM, facing the very real possibility of the UK leaving without a deal. How the UK and its trading relationships will fare following the new October 31, 2019 deadline remains to be seen; however, the process is generating significant uncertainty for Britons and their trading partners, and the impacts are likely to be far-reaching regardless of what happens.
While the UK’s impending departure represents an enormous change and poses many challenges, it’s worth noting that the Treaty of Maastricht, which officially formed the European Union, is less than 30 years old. Leading up to that, European nations after World War II sought to reduce barriers to trade in the hopes that greater cooperation would reduce the potential for war. Six countries joined the European Economic Community (EEC) in 1957, which had expanded to 12 countries by 1986 (the UK joined in 1973).
As the predecessor to the EU, the EEC was notable for implementing a common agricultural policy and removing internal tariffs among members, which significantly increased trade. The success of the EU in its initial objectives was reflected in its being awarded the Nobel Peace Prize in 2012. As Herman Van Rompuy, the first European Council president, described it in his acceptance speech as “binding our interests so tightly that war becomes materially impossible.”
The EU has made it possible for Europeans to move freely across its now 28 member states to live and work. In addition, 19 of the countries adopted a common currency, the euro, and an EU Parliament, which consists of more than 750 representatives, enact binding policies that impact the citizens and businesses of all member states, or 500 million people. So, while the EU has facilitated the free flow of goods and services, its overarching power has generated resentment, concern and, as borne out by Brexit, increasing resistance.
Some cite the reduced autonomy of individual nations in their opposition to the EU’s control, pointing out that the EU’s policies in effect dictate “decisions about the cars Europeans drive, the food they eat and the pets they own.” Others have become frustrated by the perceived erosion of national identity in the face of the EU’s push toward a “pan-European” identity and greater integration. Two factors exacerbated these sentiments. When the financial crisis of 2008 battered the economies Greece, Ireland and Portugal, the EU was required to step in and provide substantial financial relief, which began to fray the sense of member unity. The second was the migrant crisis, highlighted by the exodus of millions fleeing Syria, Afghanistan and Africa for Europe. Within France, Italy, Germany and the UK, the influx of migrants gave rise to growing nationalist movements, setting the stage for Brexit.
What’s the path forward in terms of trade? At the G7 in Biarritz, PM Johnson appears to be looking to a new trade deal with the US to help offset any potential negative impacts from leaving the EU with no deal in place. New trading opportunities (perhaps with partners on other continents) may replace the old way of doing things, though the increased trade tensions between the US and China complicates any new global trade arrangement.
As the UK works to navigate the obstacles to its exit, other European nations, like Italy, who may have been contemplating a similar move, may find reason to reassess their situations. In fact, a recent poll of Italians underscored that while Italy is considered the most likely to follow the UK in leaving the EU, the majority (61%) described it as either “not convenient” or just “wrong.” And, the UK’s own membership may face changes in light of Brexit. Scotland, which along with Northern Ireland, voted to stay in the EU in the 2016 referendum (the vote to leave was carried by England and Wales). This has prompted First Minister Nicola Sturgeon to announce that Scotland will be preparing for an independence referendum as soon as 2021.
Brexit uncertainty caused by not knowing whether the UK will leave or stay has centered the focus on the investment downside risk and not enough on the investment opportunities. No matter what happens, the UK and EU will continue to function, adjusting to the new post Brexit decision paradigm, hopefully with as little disruption to the economy as possible.
View Fund Investment Holdings.