UK Separation from EU! What does it mean?

UK Separation from EU! What does it mean?

Most of you are aware that yesterday the citizens of the United Kingdom elected by a narrow majority margin to terminate their nation’s[…]

Most of you are aware that yesterday the citizens of the United Kingdom elected by a narrow majority margin to terminate their nation’s membership in the European Union (E.U.), which was followed by the announcement that pro-E.U. British Prime Minister David Cameron will be resigning in the near future.  This decision has created a great deal of uncertainty not only in the British economic political and economic sphere, but also throughout all remaining European Union nations, and to a lesser but still significant extent, the rest of the world.  As is almost always the case, investors don’t like uncertainty, and this was definitely reflected in today’s abysmal market performance.  The extreme reaction to this particular event was compounded by the failure of analysts to accurately handicap the vote- in the immediate days prior it was reported by most media outlets that it was almost a foregone conclusion that those wanting the U.K. to remain in the E.U. would win out.  So, in a nutshell, in this case we add to uncertainty the element of surprise and the result we have is single-day losses of 3.5% to 4.5% for most U.S. stock indexes and 6% to 9% in most international markets.

For those of you who would like a better understanding of why the British populace elected to terminate its membership in the E.U., you’re in luck.  I have a couple of very helpful clients who reside in the U.K., and they were kind enough to write and allow me to share with all of you their insightful commentary about why they were among the majority who voted to leave.  I have included their words at the end of this email in bold print.
I want to first make it clear that the U.K.’s exit from the E.U. does not guarantee or even necessarily make it likely that the world will be worse off in the long run.  After all, at least a slight majority of Brits are very happy today in spite of what their investment portfolios look like at the moment.  What this does mean is that the British political system will require a certain degree of realignment and economic relationships between the U.K. and its European trading partners will need to be restructured.  This process will take years to play itself out, and it will be a very long time before anyone can definitively say that this decision was a good one or a bad one, for the U.K. or for anyone else.  We also don’t know whether the U.K.’s exit from the E.U. will prove to be an isolated event or the beginning of the end of the E.U. in its entirety, but whatever happens will likely take many years if not decades to come to a full resolution.  While yesterday’s events events raise many questions about the future, none of this necessarily spells doom for the world’s economy or stock markets.  After all, despite two worlds wars that witnessed 100 million human deaths on European soil in the past century investment markets in Europe and the world have managed to do quite well over the same timeframe.  What we are dealing with at this moment is certainly not as grave a matter.
If market disruptions continue I will reach out to you again, and I’ll certainly contact you individually if I decide to make any adjustments to your respective portfolios.  I’m sure most of you know that I am not inclined to engage in panic-selling in a declining market, and if anything I would be more apt to look for buying opportunities if they arise.
If you have any questions, please contact me.
Lastly, here is the commentary written by my clients in the U.K.:
We both voted for Leave having come to the conclusion many years ago that the EU, as presently constituted, was not what the UK agreed to join in 1975.  Then, we joined a Common Market, that is a Free Trade area, not a political, monetary, fiscal and economic union.  Although the originators of the European Economic Community (EEC) always intended it to become a political union or federation, that was never sold to the British people.  Two subsequent treaties changed the shape of the EEC into the EU – Maastricht in 1992 and Lisbon in 2009.  Maastricht created the Euro but Britain, thankfully, did not join the euro although we signed the treaty which created the EU.  Lisbon was a revamp of an earlier attempt to establish a European Constitution which several countries rejected in referenda but accepted as a treaty.  The UK was promised a referendum on the EU Constitution by the then Labour government but when it was revamped as a treaty, they reneged on that promise.  Lisbon resulted in us surrendering significantly more of our national sovereignty to the EU such that over 50% of all our laws have been imposed from Brussels.
 
The Leave campaign has basically been about us reclaiming our own identity as a country with our own politicians being responsible for legislation and judicial decisions instead of those functions being essentially handed over to an unelected bureaucracy in Europe, with the British voters having no power to either elect them or kick them out if we don’t like them!  There are obviously economic uncertainties as a result of the Brexit vote  but those of us who supported leaving the EU see no reason why the UK should suddenly cease to be capable of continuing as the 5th largest economy in the world, especially as Europe will undoubtedly continue trading with us as our balance of payments with the EU is heavily skewed in their favour.  Immigration played a big part in the referendum as we have no control over who or how many come into the country under EU freedom of movement regulations.  As the UK is a relatively small island (or islands), we cannot absorb unlimited immigrants without collapsing our infrastructure and other services.  The UK has been the target destination of most of the massive wave of immigration into Europe because of our relative economic strength.
 
The challenge now will be to see if the politicians as a whole can overcome their partisan positions and work together to implement the significant changes that will be required to extricate ourselves from the EU – I hope they won’t use the US Congress as an example!!  This vote is just the first step: we have to agree our strategy in negotiating with the EU, then put together the political team to implement that strategy and then trigger the formal process by invoking Article 50 of the Lisbon Treaty which is the formal mechanism for a country to withdraw from the EU.  The current prime minister, David Cameron, has said he will resign within the next three months to allow a new leadership to be installed to carry out the withdrawal process.  That should not require a general election unless complete political anarchy breaks out!  From the point at which Article 50 is invoked, it is expected to take at least two years to sort out the separation terms.  New trade agreements with whomever may take a lot longer but there is no rational reason to believe they can’t be negotiated.  The difference is that we will now be in control of our own destiny instead of being beholden to a bunch of unelected bureaucrats!
 
There certainly may be threats to the overall structure of the UK, particularly in Scotland where the Scottish Nationalists insist they want to stay in the EU, (mainly, I believe, because they think it will provide them a big security blanket now that North Sea oil won’t be their economic salvation), so they are already talking about another independence referendum.  Norther Ireland may also flare up as the nationalists there probably see this as an opportunity to start agitating for a united Ireland once again.  Regardless of these possible problems, we are still delighted that we have had the courage to make this decision and not be bullied into staying in the EU by all the fear tactics that were unleashed.  We believe the EU is doomed to failure anyway as many of the member nations are expressing similar concerns to the Brits about loss of sovereignty, disillusionment with unelected officials telling everyone how to run their lives, and the impossibility of imposing a common currency across a disparate group of individual countries with widely varying economic strengths.  As the old Chinese proverb has it: “May you live in interesting times!”
Marc Aarons
This communication is from Money Managers, Inc., a Registered Investment Advisor Firm. This is not a offer of sell or solicitation only for information purposes , it may contain information which is confidential and may also be privileged. This communication is for the exclusive use of the intended recipient(s).

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