What Brexit Means For Us
In thinking about the details of what Brexit (the UK leaving the European Union) means for Britain, Europe, the US economy and the world economy, we must start with an acknowledgement that the affects will almost certainly be different for each. This is the one salient fact which is most often overlooked. Most of the reporting up until now has focused on the campaign that was being run by those who wished to remain. That campaign, like so many political campaigns, contained exaggerations, over simplifications, misinformation, and what Winston Churchill famously referred to as “verbal inexactitudes”.
The overarching theme was that leaving would be terrible, with many claims that Britain would quickly suffer extreme poverty and be unable to meet its obligations. The fear was palpable in many quarters of the country, and it spread to Europe and, to a lesser extent, to America. The key assumption was that if the EU economic ties between England and Europe were severed then nothing would replace them. By exposing that assumption, we hope you can see how ludicrous it really is.
While true that if nothing replaced the EU economic ties the situation would be quite dire for England, it’s just not realistic to think that something else won’t be negotiated. So the key question becomes what will be negotiated to replace the EU agreement and will that be worse or better for England, Europe, the US and the world at large.
Reducing the EU agreement to its simplest economic principle, the agreement allows countries within the EU to trade amongst themselves without tariffs and for all countries within the EU to enjoy whatever benefits the EU can negotiate with other groups. In other words, if the EU negotiates a trade deal with the US, then France does not have to negotiate one, nor does Germany, England, etc. They all get to work under the EU trade agreement.
With England’s leaving the EU, the other countries that remain will still be able to enjoy the benefits of these negotiated trade deals. Britain will now have to negotiate its own trade deal with other countries like the US, and Britain will have to negotiate a trade deal with the EU. The EU agreement calls for a two year “divorce” process in which all sides will negotiate replacement deals. It seems clear to us that England and the EU will negotiate something which is beneficial for all parties because it is in the best interest of all parties to do so, and it’s equally clear that England will reach out to the US and other major countries to negotiate favorable trade agreements.
The bottom line is that several new trade deals will replace the one which is being abandoned. England and the rest of the EU trade a great many goods and services between themselves, and the value of those transactions does not disappear just because England has left the organization. If the French wanted English beef before the Brexit, and if the British wanted French champagne before the Brexit, there is nothing about Brexit which changes those desires. England and the EU will find a way to negotiate a trade deal allowing the Brits to buy their champagne and the French to buy their beef.
How strong or weak those agreements are will impact the relative strength of the French economy or the British economy in this example, but will not dramatically impact the other major economies of the world. In fact, we can make a strong argument that if England and the EU negotiate a bad deal such that British beef can’t be sold to the French, then there will be opportunity for American or other beef producers to meet the French demand. Someone will benefit and someone will be harmed, but overall world trade shouldn’t be negatively impacted.
That’s just one hypothetical example, but the principal is that the world economy will make adjustments to adapt to what happens now between England and the EU. Economically, there are strong incentives for England and the EU to work these things out, and that’s exactly what we believe they will now do.
It is our contention that most of the beneficial economic arrangements which are contained in the current EU agreement will be renegotiated in separate new agreements. Additionally, Britain will be free to cut its own deal with the US, China, or other major economic players. In fact, one of England’s frustrations was that the EU was balking at negotiating a trade deal with the US. The fact that England is now free to do this on their own means that both England and the EU will probably move to execute free trade deals with the US. Both parties will benefit by virtue of this competition.
From a functional perspective, Brexit loosens the power that some of the bureaucracies in Brussels have had. The perception that Brussels was running rough shod over the interests of the various member countries was one of the motivations for England to leave the EU. With England’s departure, the bureaucrats in Brussels will be forced to correct some of the corruptions and structural issues which have impeded economic growth in all EU countries. Here again, Brexit will be beneficial to the extent it forces much needed reforms.
Collectively, we see many benefits for all parties from Brexit even if there are risks in the interim. Much remains to be negotiated, and this introduces uncertainty, which stock markets do not like. Markets around the world read the now obviously flawed polls and had concluded that England would vote to remain. With that “certainty”, markets had risen appreciably the day before the vote. With the surprise of the strong exit vote and the lack of certainty about what agreements and arrangements will be negotiated, stock markets have sold off and may yet go lower.
But the sell-off reflects the uncertainty; the sell-off does not reflect a seriously deteriorated economic situation. The markets will recover and will do so with unpredictable timing. Some individual stocks may be hit very hard, while others may experience a strong rally, but collectively the trends we saw before the Brexit vote remain in play and point to continued slow growth in most major economies.
If there are any actions prompted by the market reaction, they will undoubtedly be on the buying side. Where allocations are significantly disturbed and equities become under-weighted, we will advocate buying into the downturn in order to reap richly from the rebound. For now, view Brexit as a news-making political event, but not necessarily a very significant economic one.