The case presented for Brexit is primarily based on political arguments that centre around, as Boris Johnson, amongst many others, recently highlighted “taking back control”. Regaining control of laws, borders and international relations may or may not be a good or indeed a bad thing in a globalised world but, together with issues of sovereignty and democracy, these debates are political and individual in nature and beyond the scope of this short note.
Currency takes the strain in periods of uncertainty, and sterling is under pressure
To date, economic arguments supporting Brexit have received far less prominence and tend to focus on the benefits of freer trade, freedom from EU red tape and saving of the budget contributions, or as Boris put it so succinctly, “to save them [the people] money”. As yet, little independent research has been published to suggest that from an economic perspective, at least, the UK would be better off outside of the EU.
Report after report from a wide cross-section of informed and influential parties, however, extending from the Governor of the Bank of England, to the CBI and most independent economists, agree with the Prime Minister that it would be a “leap in the dark” with adverse consequences for UK economic prospects. Indeed, the Bank of England’s study, for example, emphasised that Britain had done well out of the union and produced a resounding endorsement of remaining inside. Additionally, in a poll of more than 100 economists for the Financial Times at the start of 2016, in excess of 75% believed Brexit would adversely affect the UK’s medium-term economic prospects.
Uncertainty Poses the Biggest Problem
Differences in this debate centre around the degree of likely damage to the economy where much would depend on negotiated exit conditions. These may not become clear for quite some time and hence, in the meantime, it would be the transitional “uncertainties” that posed the major problem for the economy and investors.
Perhaps this time around UK political issues are receiving far more emotive attention from the public and media, with concerns over immigration and indeed the future of the EU itself, but normally, such referendums tend to be decided by economic self-interest as concerns over possible recession and job losses concentrate the mind.
As for the financial markets, it tends to be the currency that takes the strain in periods of uncertainty and sterling is certainly under pressure. UK equities can be perceived as a net beneficiary of sterling weakness, certainly for the larger international companies, while longer dated gilts are little affected.
One other key issue that has had less attention and deliberation is the impact on the EU itself. The implications for growth are negative and perhaps, more importantly, could cause far greater political uncertainty.
