Understanding the Brexit Vote

Robert SpendloveThe passage of the Brexit vote last week in the UK may seem like an event far away with little impact in the Western US, but it has the potential to not only impact Great Britain, but its ripple effects could be felt around the world.

What is Brexit?

Surprisingly, many of the voters in Great Britain also don’t fully understand the implications of the Brexit vote.  Google reported that AFTER the Brexit vote, the top question coming from the UK was “What does it mean to leave the EU?”  The second highest question was even more striking: “What is the EU?”  

Brexit stands for the concept of Great Britain exiting, or leaving the European Union.  The UK joined the European Union over 40 years ago and has played an important role in guiding efforts to promote peace and free trade throughout Europe.  However, over the past few years, there has been increasing pressure for the UK to leave the European Union and become more independent.

Those in favor of leaving the European Union tend to be older aged and live in more rural parts of the country.  They argue that Great Britain has given up too much sovereignty as part of its EU membership.  They resent that officials in Brussels can impose regulations on British citizens and they feel that other countries are being given preferential treatment in disputes with the UK.  Another hot button issue, which surged in the last few weeks of the Brexit debate, was concerns over immigration in Great Britain.  Those supporting the Brexit vote are concerned about increasing numbers of immigrants from other countries in Europe and on the depressing economic effect of those immigrants on wages of others in the economy.

Those opposed to the Brexit vote tend to be younger and more urbanized.  For instance, the city of London overwhelmingly voted to remain in the EU.  They argue that Great Britain is better off economically and culturally from being part of the European Union.  They point to the greater negotiating power of all countries working together rather than competing with each other for economic opportunities.  They were joined by many of the mainstream leaders of Great Britain and other parts of the world, including Prime Minister David Cameron and President Obama in the United States, who wrote an op-ed in April arguing against the Brexit vote.  

What’s next?

One of the most remarkable parts of the Brexit vote was how everybody got it wrong.  The markets got it wrong; the political experts got it wrong; even the bookies got it wrong.  There are reports that even some of the people who voted in favor of Brexit didn’t seriously want it to pass, and considered their vote no more than a protest vote.  Because of this, some are calling for a second vote – to make sure the British really want to leave.  This will not happen.

Some of the economic results of the Brexit vote were immediate.  As soon as reports of the vote passing began to come out, the British pound dropped dramatically, to its lowest level since 1985.  As investors sought safety, they poured money into the US dollar and into gold, with each increasing significantly.  Throughout the world, equity markets also reacted quickly and dramatically.  In Asia, the Nikkei dropped 8 percent, to it’s lowest level since 2008.  Markets in Hong Kong, Korea, China also dropped significantly.  As European markets opened they followed suit.  In the UK, the FTSE dropped a relatively mild 3 percent, but other European markets didn’t fare so well.  The European Dow dropped nearly 9 percent and markets in both Italy and Spain dropped over 12 percent.  Once US markets opened the writing was on the wall.  The Dow Jones Industrial Average lost more than 600 points on Friday and the NASDAQ and S&P 500 were also down sharply.

The immediate political results were also dramatic.  David Cameron announced his resignation as Prime Minister of Great Britain and a new government will be formed later this year.  Because he was in favor of remaining in the EU, he feels Britain will need a Prime Minister who supported the Brexit so they can better guide the UK through the complicated process of leaving.  The British government will now begin the process of negotiating the exit from the European Union.  This process will continue into the longer run and could last for the next few years.

How does this impact the US?

Because this result was so unexpected, no one knows for sure what the implications are for the United States.  However, there are several probable results.  

On the economic front, a weaker British pound will further strengthen the US dollar.  A strengthening dollar will make US exports more expensive to the rest of the world.  This will constrain export activity and slow US export markets.  The slowing US economy will weigh heavily on Janet Yellen and the Federal Reserve Bank.  While the Fed had indicated a desire to continue increasing interest rates throughout 2016, this has become progressively more difficult and there is now a growing probability that the Fed will actually need to cut interest rates if the US economy slows too quickly or too dramatically as a result of British and European weakness.

On the political front, the impacts could be just as dramatic.  The successful Brexit vote is a sign of increased resentment of the political establishment and a greater emphasis on nationalism, isolationism, and the overall populist movement.  Donald Trump quickly championed the British vote and predicted a similar result in the US.  

“Come November, the American people will have the chance to re-declare their independence. Americans will have a chance to vote for trade, immigration and foreign policies that put our citizens first,” he said. “They will have the chance to reject today’s rule by the global elite, and to embrace real change that delivers a government of, by and for the people.”

While it is too early to see if Trump’s predictions will come true, one thing is certain.  The populist movement is surging and it is catching the establishment off guard.  The underlying resentment and concerns of globalism are real and they are increasing throughout the world.  Whether it is in Great Britain, Washington, or the Intermountain West, this sentiment is strong and it is getting stronger every day.  Another thing the Brexit vote showed is that even the most experienced and sophisticated analyst cannot predict how these issues will play out.