Brexit Pros Vs Cons

Brexit Pros Weekly Geopolitical Report By Kaisa Stucke, CFA

The U.K. joined the European Common Market, what is now known as the EU, in 1973. In 1992, the Maastricht Treaty formally created the EU. However, as part of the treaty, the U.K. negotiated that it would be exempt from adopting the euro and joining the Eurozone. Despite the EU ‘s founding premise that members should seek an ever closer union, both politically and monetarily, the U.K. is questioning the net benefits of its membership altogether.
The British public’s perception of the benefits of the U.K.’s EU membership has always been mixed. Following a recent increase in public opinion asking to separate from the EU, U.K. Prime Minister David Cameron set a referendum on membership for June 23. Cameron supports remaining in the EU, especially after he was able to negotiate a deal with the EU regarding some hotly contested issues for the country. However, several other highly visible members of Cameron’s Conservative Party have stepped out in support of leaving the EU. Political discussions have recently become quite heated and will likely remain so until the June referendum. Additionally, political uncertainty will likely weigh on financial markets, increasing volatility as we move closer to the referendum date.
In this week’s report, we will take a look at the main factors leading to the call for Brexit and their impact on the economy and the markets. As always, we wi II conclude with market ramifications.

Brexit Pros Vs Cons The U.K. within the EU

This is not the first referendum that the U.K. has held regarding its membership in the European community. The country held a referendum in 1975 shortly after it joined what was then called the European Common Market in which the popular vote favored staying in the EU by an overwhelming majority. However, it has remained a controversial topic. The British public is uncomfortable with the extension of EU control over the past 40 years since the initial referendum. Additionally, British influence has been diluted in the organization as the EU has grown, now comprised of 28 countries.
The discussion over the country’s membership encompasses both financial and emotional issues. The U.K. is a net financial contributor to the EU, meaning that the country pays into the common coffers more than it receives back. The public argues that these funds could be better used within the country. On an emotional level, the public values its sovereignty, preferring its own British politicians to shape policies rather than EU officials, who have many more constituents to serve. It is generally the public’s perception that the U.K.’s interests have not been well served by EU policies.
Additionally, a founding principle of the EU is the “free movement of people,” which has brought an increasing flow of immigrants into the U.K. Similar to the arguments made in the U.S. over Mexican immigrants, the number of mostly Eastern European immigrants into the U.K. is seen as taking jobs from the Brits. I lived in London during the ti me when many Eastern European countries joined the EU (including my own motherland, Estonia), and the public fully expected swarms of laborers to storm the U.K., taking jobs from the locals (one prominent symbol of this fear was that of the Polish plumber). It is true that many economic migrants have moved to the U.K. since 2004, many coming from other poorer EU member countries. However, not everything about immigration has been bad for the British economy. The flow of mostly young immigrants has allowed the U.K. to enjoy an improving demographic profile, unlike many other European countries. The young immigrants also boost aggregate demand and, in many cases, integrate easily due to their European background.