Monday, June 27, 2016

Brexit: A Time for Extraordinary Leadership

So last Thursday (6/23) the UK asked its citizens whether it should leave the EU. The citizens from England and Wales said "yes"--citizens in Scotland and Northern Ireland strongly voted to remain.

The voters were presented with a simple question: "Should the United Kingdom remain a member of the European Union or leave the European Union?" They were given the choice to mark "Remain a member of the European Union" or "Leave the European Union." Here were the results:

The EU is not a country, of course; it's an economic and political partnership of 28 countries. The United Kingdom has its own passport. It's been floating slightly offshore all along: the UK is not part of the Schengen zone (which abolished most internal EU borders) and the UK never adopted the common currency, the Euro. 

The UK is the fifth largest economy in the world, and second largest economy in Europe. Here is nominal GDP for the four largest EU economies measured in USD. 

Germany:  $3.9 trillion
UK:  $2.9 trillion
France: $2.8 trillion
Italy:  $2.1 trillion

The Brexit vote has raised lots of questions. What happens next? How quickly will the process move forward? Is exit in fact inevitable? Will the remaining EU countries act to punish the UK by extracting unfavorable terms for continued access to EU markets in order to set an example and discourage further defections? Will this lead to others leaving the EU? Could this be in Britain's long term interest? Could this lead to positive reform of the EU? Will the UK survive, or will Scotland and/or Northern Ireland split? How and when might any of this happen? 

Amidst all this uncertainty the UK's separate currency, the pound sterling, has declined to a 30 year low in the wake of the referendum; stocks have declined sharply

The BBC has a handy guide [which provided the above chart]. 

So far, other than lots of talk and anxiety, and falling currencies and stocks, nothing is happening. The UK is in the EU. In order to start the process of withdrawal they will have to provide official notice pursuant to Article 50 of the Lisbon Treaty. See also Wikipedia.
Article 50 
1. Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements. 
2. A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. .... It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament. 
3. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period..... 
Some proponents of the Brexit referendum in the UK are urging the UK to "go slow" in invoking the Article 50 process. David Cameron has vowed to resign in October and to focus on steading the ship in the meantime. So it's quite possible that the UK will not "notify the European Council of its intention" until after Cameron resigns, triggering a two year negotiation process with a nominal deadline of late 2018. In accordance with Article 50, the EU could agree to extend that deadline indefinitely. Some suggest that Britain may ultimately not invoke Article 50 at all.

People like drama, but in the meantime, I say this looks a good day to invest in some stocks.

Here is what George Soros has to say. He points to many reasons for worry but concludes:
[W]e must not give up. Admittedly, the EU is a flawed construction. After Brexit, all of us who believe in the values and principles that the EU was designed to uphold must band together to save it by thoroughly reconstructing it. I am convinced that as the consequences of Brexit unfold in the weeks and months ahead, more and more people will join us.
Here is Barry Eichengreen. He suggests "it's the economy, stupid!"

Here is Brad DeLong. He suggests that this is no time to be complacent and that "if the Eurozone is to be a good thing for Europe rather than a millstone around the neck of the continent, I think that utopian frenzy is needed."

DeLong and Soros appear to be in agreement that this is an extraordinary time, a critical time, a time that requires extraordinary leadership.

May we be so lucky.


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