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Brexit - Should they stay or should they go?

On the 23rd of June 2016, Britain will vote on whether to stay within the European Union (EU). What does it all mean? What does it mean for Europe, the UK and the World? What does it mean for your portfolio? Firstly, what is “Brexit”?

What is it?

Brexit is an abbreviation of "British exit" that mirrors the term Grexit. It refers to the possibility that Britain will withdraw from the European Union. The country will hold an in-out referendum on its EU membership on the 23rd of June.

The European Union in brief

The European Union is a unique economic and political union between 28 European countries that together cover much of the continent. The EU was created in the aftermath of the Second World War. The first steps were to foster economic cooperation: the idea being that countries that trade with one another become economically interdependent and more likely to avoid conflict. The result was the European Economic Community (EEC), created in 1958, and initially increasing economic cooperation between six countries: Belgium, Germany, France, Italy, Luxembourg and the Netherlands.

From economic to political union

What began as a purely economic union has evolved into an organization spanning policy areas, from climate, environment and health to external relations and security, justice and migration. A name change from the European Economic Community (EEC) to the European Union (EU) in 1993 reflected this. What started out as an advocate for free trade has now become anti-democratic, protectionist and antiquated. Due to the ever increasing regulation and bloated EU offices, there are currently more than 5000 bureaucrats in the EU that earn more than David Cameron (PM for the UK), for example. The British public now has very little control over the laws imposed over them by the EU.

What does this mean for you and your portfolio?

A vote to leave EU will cause share market volatility, (correction yes, crash no) a depreciating pound and likely a short term economic contraction; as the effect of European tariffs and new trade negotiations create uncertainty. However, tariffs will likely be removed allowing for the correct allocation of resources, on a global scale. By in-large those within the EU are less competitive than those outside it, due to these input tariffs. Currently 30% of the new vehicles in the UK come from Germany, hence their open stance wishing for them to stay. Given the level of interdependence any imposed tariffs will be short lived.  

The freedom to trade with whom they please will be advantageous for Britain; allowing them to trade more freely with the faster growing parts of the world, China, America, Korea, to name a few. A lower pound will make Britain’s exports more competitive on the world scale, creating jobs and increasing incomes.

Switzerland is a prime example of being able to be highly successful on the world scale without the European Union. GDP per capita in Switzerland is 47% higher than the UK (2015). Unemployment in the EU is 9.4% vs the Swiss 3.4%. The world has become a smaller place since the inception of the EU. World trade has become far easier. A ‘leave’ vote will be good in the long run for the UK and painful in the short.

 

This article is written by Jeremy Sullivan (AFA) and does not constitute investment advice. If you have any questions on how this may effect your circumstances, please contact your adviser on 0800 10 40 50 or enquiries@hhg.co.nz 

 

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