Voters in the United Kingdom decisively opted to leave the European Union on Thursday, favoring Brexit over staying by an unexpectedly high margin of almost three percentage points.
Polls showed that support for leaving the EU revolved primarily around three issues:
Concern that EU is micro-managing UK businesses through over-regulation, which leads to job destruction and slows business expansion. Fears, which grew after the Paris and Brussels terrorist attacks, that EU is unable, and perhaps unwilling, to vet immigrants and screen out terrorists. Passage of what many Britons consider unnecessary laws and regulation that have slowly eroded national sovereignty.
EU politicians argued that Brexit would be a direct threat to the U.K. because of the time it would take to renegotiate trade and other agreements. Businesses and voters throughout the EU are alienated, and it is that estrangement that caused this historic event. The bottom line is that the UK, which represents approximately 25% of all business trade within the EU, runs consistent trade deficits with the rest of Europe.
Regardless of what foreign leaders were declaring before the vote. The EU is going to have to sign a new trade agreement with Great Britain or give them a special exemptions to remain in the EU. If they do not, they will lose a major trade partner. There is no way that any EU country will allow one of its biggest export markets to become remote.
The UK will have about two years to negotiate new trade agreements with other EU countries and to formally leave the European Union. This is actually already been in the works since it will allow the US and UK to sign a free trade deal that the EU has been blocking. However don’t expect the US to run and sign the deal anytime soon. As that will give even more legitimacy to the Brexit vote and could anger the EU further.
Nothing fundamentally will change either tomorrow, next month, or even next year is the general theme.
Stock markets, to be sure, hate instability and there will be significant near-term volatility globally. But like most political catalysts (as opposed to those that are driven by business and the economy) the long-term impact will be negligible and stock markets could rebound quickly.
For investors, this is a “political issue” and not a fundamental economic or business issue. Like the Grexit votes in Greece, once the public realizes there will be no economic harm and that nothing will change for two years the stock markets could stage a rally.
One of the bigger risks that people may need to keep an eye is the domino effect. This may emboldened other countries with anti-EU sentiments to step up calls for their own referendum vote. Northern Ireland and Scotland have already made calls to hold votes that makes inclusion back into the EU a priority. This further alienates Great Britain in terms of political clout and economic strength if those things come to pass down the road. However minority candidates in France, Italy, and Spain have already made rumblings for an EU leave or remain vote.
Point being the EU is going to see drastic changes in the next 12-24 months. Whether that’s through reform or a doubling down of current policies is anyone’s guess.