Historic Changes in Europe: How they may affect your business – Part 2

Brexit: Keep Calm and Carry On.

The votes are in. On June 23rd, 2016, the UK voted to leave the European Union (EU). The referendum passed by a slim margin with “Leave” wining by 52% to 48%. Following the vote, the mood from UK political leaders, EU leaders, and the financial sector is that of uncertainty. No one really knows what happens now. This air of uncertainty leaves many of us pondering what do we do now. In the short term the best answer seems to be Keep Calm and Carry On.
A true exit will take at least two years, as mandated by Article 50 of the Lisbon treaty. This intermediary period will be critical for the UK and the EU. During this time frame the UK will need to parse through thousands of EU rules and regulations, as it attempts to disentangle itself and its laws from the EU. In their stead, the UK will have to find the time and resources to implement new legal statutes and entities to cover those areas usually covered by the Union. All the while, the remaining 27 EU countries will have to agree on the terms of Britain’s departure, without a British vote. This may spell trouble for the UK, if the EU decides to take a hardline approach in attempt to dissuade similar referendums by other members. A hardline tactic that harms Britain’s economy, however, may harm Europe’s as well.
The prognosis, in the short-term, of a true British exit is not stellar. The exit vote triggered a negative global market reaction. Almost immediately after the vote, the British pound fell by over 10% to $1.32 against the U.S. dollar, a 30-year low. The financial market’s reaction to the UK’s “leave” vote was swift and grim; investments do not thrive in uncertainty. Markets have, however, stabilized as the immediate shock of the vote has worn off. Nevertheless, a collapsed pound will drive up inflation up, pressing real incomes for many UK citizens. Some will lose their jobs. The British economy is big enough for a recession there to have a meaningful effect on Europe’s economy.
Still, the UK has many decisions to finalize before the true effects of the referendum manifests. The Labour government has yet to invoke article 50; must decide on new leadership; and settle the rumblings of separatism all before the air of uncertainty will lift. Calm is warranted because it is also extremely likely, with regards to trade that a UK exit may, instead, be akin to a partial exit. The possibility remains that the UK will enter into a special agreement with the EU, just as many other countries have done. A relationship that will, perhaps, ensure continued free movement of people and goods between Britain and the EU.
It is too soon to tell what a British exit truly means. But for now, there are no plans for mass deportations of immigrants from the UK; and capital, goods, and services will still flow in and out of the UK. In this period of uncertainty, it is perhaps best to Keep Calm and Carry On.

Conclusion from previous article in our June newsletter: With regards to these historic changes in Europe, the general feeling is “wait and see.” Overall, commentators believe the changes in Europe would not have significant negative, long-term effects on the currency or labor markets, or the overall global economy. Negative interest rates, a thing of economist’s nightmares, are here to stay. What that means for long-term investment strategies and currency devaluation, as more and more Central banks implement such a strategy, is unknown. As for a British exit from the EU, it is uncertain what that means in terms of trade and labor. These unprecedented changes in Europe will no doubt have a far-reaching impact across multiple markets, but it is too soon to tell what that impact will be. For now, investors, employers, and Banks across Europe and the world have to “wait and see.”

Best regards
und viele Grüße aus Charlotte
Reinhard von Hennigs