Now that the long-awaited Brexit referendum is over and it appears the UK will leave the European Union (EU), the prognosticators are out in force, their crystal balls glowing like searchlights on a dark night. Ironically, many who confidently predicted British voters would reject Brexit are now sure they know what the future holds.
Most of that future seems to involve more than a healthy dose of doom and gloom. The British departure will disrupt not only Britain’s economy, but also that of the rest of the EU. The financial fallout will be an unmitigated disaster.
But will it? In truth, those predicting the end of the world as we know it don’t know much more than the rest of us. But their pronouncements sure get eyeballs on a lot of articles, news programs and TV shows.
It’s too early to tell what effect Brexit will have on the global economy and financial markets, let alone the prospect that it will represent the end of Western civilization. So let’s step back from the hysteria and try to analyze the event rationally.
Fear Is Ruling the Day — And It’s All Based on Speculation
Right now the sky is falling — at least that’s what’s playing out according to the media. Forgotten in the commotion is the fact that the UK has existed for centuries but has been in the EU only since 1973. Also forgotten, or perhaps ignored, is that Britain never did join the EU monetary union, as other European states have.
But beyond the specifics related to Britain, the EU has always been — and continues to be — a monumental project, perhaps even an unworkable one. It may even have been doomed from the start.
Let’s focus on some of the major issues that continue to present significant obstacles to the entire concept of the European Union:
- Monetary union without fiscal union. Though the member states employ a common currency, the euro, each of the 28 countries continues to operate its own fiscal ship of state. And since each country has different fiscal needs, there’s no unified whole within the union. Increasing levels of regulations from the EU have done little to change that situation.
The effect of individual national economies on the common currency. A currency is always a reflection of the country that issues it. But in the case of the euro, the participating countries have widely varying rates of economic strength and weakness. The unified currency attempts to ignore these differences. This has helped to create imbalances between the member countries. Again, Britain never adopted the euro, so that part of Brexit is already a known commodity.
- Loss of national sovereignty even in routine decisions.This is particularly a problem on a landmass like Europe. Each of the 28 countries has a unique national history, as well as a very distinct culture. Yet they are being forced to homogenize under the centralized authority of the EU. It’s still not clear this effort by the EU is successful or ever will be.
- Perpetual bail-outs. The inability of the EU to effectively balance the many economies within the union has created a collection of rich countries and poor countries — the very outcome the EU was supposed to eliminate. The only way for the EU to continue is for the rich countries to bail out the poor ones. Failure to do so means the poor countries will continue to get poorer. That prospect virtually guarantees continuous bail-outs.
So while the world may be panicking over Brexit, it’s entirely possible the whole arrangement was doomed to failure from the very beginning. Is that really even a new development?
The Road out of the EU Won’t Be Straight — Or Quick
Despite the fact that Brexit is being considered as a done deal, the truth is nowhere close. The referendum itself was just the trigger that set the process in motion. And that process is going to take a long time to play out, most likely several years.
To begin with, Britain’s exit from the EU is governed by Article 50 of the Lisbon Treaty. That article provides for a process that can take up to two years from the time a member state notifies the EU Council that it’s leaving the union. British Prime Minister David Cameron has promised he would trigger Article 50 upon a “yes” vote on the exit, and when that happens, the two-year timeframe will begin.
That two-year space of time will include negotiations on a complex set of issues, including continued trade with other EU members, as well as the unraveling of regulations affecting commerce, employment, pensions, immigration and nearly all aspects of modern life. It’s entirely possible it will not be accomplished in as little as two years.
But there’s even more. At the end of two years, Britain’s membership could continue if they don’t actually withdraw and all members of the EU unanimously agree to continue the negotiations. A different political landscape in Britain at that time could open up the possibility of new elections that would either stall the departure or even stop it permanently.
If that were to happen, the current Brexit pandemonium will prove to be a great big nothing.
Sifting Through the Panic
The concept of voluntary integrated international economic unions between nations is new. The departure of a country from such a union is even newer. Yes, we had the breakup of the Soviet Union back in the 1990s, but that was hardly a voluntary union, and certainly not economic. The point is there’s no track record on what will take place in the aftermath of Brexit. Yet if you follow the media, talking heads are confidently predicting various outcomes, many of them cataclysmic in scope.
The reality is no one knows how this will play out. We are truly in uncharted waters. The initial reaction of the financial markets was negative, as was fully expected. That’s no surprise, considering financial markets thrive on stability. Brexit has caused a disturbance in the calm, and the markets are reacting predictably.
But the market has largely recovered the losses sustained in the first two trading days after the Brexit vote.
This is why it’s important to remember that knee-jerk reactions to new developments don’t necessarily signal gloom and doom ahead. Yes, there will be a period of adjustment. And yes, some of that adjustment will be unsettling. But change will happen, and normalcy will be restored. The British economy may very well handle the transition faster and better than anyone thinks. And who knows, the remaining EU countries may fare just as well.
Sticking With Your Game Plan
More than anything else, market selloffs represent a change in ownership. Those who panic and give up their positions do so at a discount, as a result of selling into a declining market. Those who remain calm and buy stocks are able to get them at a discount, precisely because of the seller panic.
This is a time to ask yourself if you want to be a buyer or a seller in this type of market. More importantly, this is when the confidence you have in your investment strategy will be severely tested. Have you been making intelligent investment decisions up to this point? Do the fundamentals support the long-term health of your investment selections? And are truly committed as a long-term investor?
When the dust settles, it’s very likely Brexit will prove to be nothing more than a temporary disruption. As a long-term investor, you should be fully prepared for such events and ready to stay with your long-term investment plan. And prepare to be a buyer as discounted stocks become available, as they surely will in the coming months.