by David Moon
On Thursday, voters in the United Kingdom decided to leave the European Union (EU), passing the so-called Brexit (Britain exit) referendum. It was a major defeat for Britain’s political and business elite, providing a massive victory for the anti-establishment, populist Brexit supporters.
British Prime Minister David Cameron will resign and the UK will begin a several year process of extricating itself from the EU, a 28-member, quasi-sovereign, hybrid continental government, complete with its own army and central bank.
The EU provides for free movement of capital, consumer goods and people among most of the member states, alleviating the need for each country to negotiate individual trade deals with the others. The member countries pay a tax to the EU, which the officials in Brussels then distribute among the 28 countries based on their assessment of economic need among the states.
In 2015, the UK paid $18.8 billion to the EU, two-thirds of which was redistributed among net recipient countries, such as Greece, Spain and Portugal. There is a massive productivity and wealth gap (“wage inequality,” to use the popular term here in the colonies) among the EU’s members. GDP per capita ranges from US$9,000 annually (Moldova) to US$115,000 (Luxembourg.)
Brexit support was, in large part, about immigration. Brexit opponents warned that leaving the EU would destroy Britain’s economy.
Unless you’re David Cameron, the immediate practical changes, however, will be minimal. Britain never adopted the euro as its currency. It never joined the EU passport-free Schengen zone, so the effect on immigration will be more symbolic that practical. (The EU open borders are already falling apart. Checkpoints have recently been re-instituted, presumably temporarily, at the Denmark/Germany, Austria/Slovenia, Belgium/France and Hungary/Croatia borders.)
Britain will go to Brussels to negotiate 100 treaties with the very people at whom it just snubbed its sovereign nose. But Brussels needs Britain more than Britain needs the EU.
Despite weeks of market volatility attributed to changing expectations about the vote, Brexit will cause little of lasting macroeconomic importance. European demand for diapers, beer, business computer services and most other consumer products won’t change. Currency valuations will bounce around, but they always do.
Writing in Barron’s, Randall Forsyth compared Brexit fears to the Y2K panic. Yet on the morning of January 1, 2000, computers did not crash, planes did not fall from the sky and the sun peeked out above the eastern horizon, just like it had, at least, since the Y1K panic.
In the US, Brexit is more of a warning to the political class than it is a threat to the economy. Support for leaving the EU was driven by a lower and middle-class sense of nationalism–an anti-establishment, “make Britain great again” mentality.
David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).