Should you fear the Brexit?

World stock markets have been roiled in recent days by the growing possibility that Great Britain will vote next Thursday to leave the European Union. The vote has investors worried about what a possible “Brexit” means for the economies of Britain and the EU, for the future of the EU itself, and for international trade. Although investors have long known that the vote was coming, it has only been in recent days that polls suggest the anti-EU faction has gained the upper hand.

Should investors prepare for another mess like the Greek financial crisis, but one that would be much larger?

We think not. Although a decision by Britons to leave the EU could send markets down for a few days after the votes are counted, we think the uncertainties will be solved pretty quickly and both Britain and the EU will forge ahead:

  • The European Union is very important to Britain. In 2015 some 44% of its exports went to the EU, and that trade represented 12% of Britain’s gross domestic product, according to the economic website
  • Both the EU and Britain will move quickly to renegotiate trade agreements, travel regulations, financial rules, and immigration restrictions. Once those agreements are made, the uncertainties created by the vote will vanish.
  • Britain will be able to continue to conduct business if it leaves the EU, unlike Greece, which would have become an economic disaster if it had left the EU a few years ago. Britain, unlike Greece and other EU countries, never joined the monetary union. It continues to use the British pound and continues to have its own strong Central Bank.
  • Rather than signal the beginning of the end for the 28-member EU, a Brexit might be good news. Britain has always had a different conception of how the EU should operate than did the EU’s dominant continental partners, Germany and France. Without the discord created by Britain the EU may become stronger, not weaker.

Our conclusion: stay the course even if the Brexit occurs and markets drop for a few days or weeks. We believe things will even out rather quickly and the world economy will return to business as usual.

Richard Schroeder, CFP®


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