Is “Brexit” The Beginning of the End For European Union?
ORECASTS & TRENDS E-LETTER
by Gary D. Halbert
July 5, 2016
In April, Li Lu and Bruce Greenwald took part in a discussion at the 13th Annual Columbia China Business Conference. The value investor and professor discussed multiple topics, including the value investing philosophy and the qualities Li looks for when evaluating potential investments. Q3 2021 hedge fund letters, conferences and more How Value Investing Has Read More
IN THIS ISSUE:
1. United Kingdom to Leave European Union in Surprise Vote
2. How Could the Polls Have Gotten Brexit So Wrong?
3. Is “Brexit” the Beginning of the End For European Union?
4. Will Brexit Actually Happen? Maybe, Maybe Not
Just about everywhere I go lately people ask me what I think about “BREXIT” and the ramifications it will have for Great Britain, Europe and even the United States. My standard answer since the vote on June 23 is that I don’t think about it much.
The reason is that, other than the vote itself wherein the “Leave” crowd won 52%-48% over the “Remain” crowd, nothing else has happened to make Brexit the law of the land, and may not happen for months to come. British Prime Minister David Cameron resigned the day after the vote didn’t go his way, but offered to stay on until October if need be to find a replacement.
In order to officially initiate its withdrawal from the European Union, Britain must invoke “Article 50” of the 2007 Lisbon Treaty with the EU, and it now looks likely that such a notification won’t happen until after the new Prime Minister is in office. And then withdrawal from the EU is a two-year process after that.
I last wrote about Brexit on Thursday, June 23, the day of the referendum, in my Blog. At that time, I noted that some of the final polls showed a slim lead for the Leave crowd. I also noted that the Leave crowd in Britain is part of a “global anti-establishment movement” that is growing around the world – which has brought us the likes of Donald Trump and Bernie Sanders.
While the Brexit outcome roiled the global equity markets for the first couple of days following the vote, some of those losses have been recovered. Frankly, I expect Brexit will fall out of the headlines soon, if it hasn’t already, and the media attention for the rest of this month will be on the GOP convention on July 18-21 and the Democratic convention on July 25-28.
Nevertheless, I will give you my thoughts and those from others I read on Brexit as we go along today. Just keep in mind that we don’t have any idea when Brexit will happen, under what terms it will happen or even if it will happen at all.
United Kingdom to Leave European Union in Surprise Vote
The United Kingdom/European Union Membership Referendum was held on Thursday, June 23, and a majority of the media, government leaders in the UK, the EU and elsewhere and most oddsmakers around the world believed that Britons would vote to remain in the EU.
This referendum had been years in the making. In June 2012, with his approval ratings in the dumps, Prime Minister Cameron himself floated the idea of a national referendum on Britain’s relationship with the EU. It was a political gamble that ultimately backfired on him.
In the weeks ahead of the referendum, the mainstream media around the world admitted that the vote was going to be close, which was obvious from dozens of independent polls. Yet there was a strong undercurrent within the media that the vote would ultimately go for Remain.
The mainstream media and the “Establishment” leadership in Britain assumed that many citizens who said they would vote for Leave in polls would not actually do so when it came time to cast their votes. Well, that assumption was dead wrong.
Polls leading up to the referendum had swung back and forth between the Remain crowd and the Leave crowd. Yet as I reported in my Blog on June 23, most of the polls I followed showed a slight lead for the Leave crowd. As it turned out, Leave won by a comfortable margin of 52% to 48% over the Remain movement.
The London Times post-election analysis (and this is key) found that the UK upper classes voted 57% for Remain; the upper middle class was fairly divided (roughly 50-50); and everyone below them voted roughly two-thirds for Leave. It doesn’t get much plainer than that.
For reasons I don’t understand, the world seemed stunned by the outcome. The Brexit vote reflected what many are calling “The Great Rebellion.” The elites in the UK were outraged at the results. Working-class Brits who voted for Leave were demonized by the Establishment.
The British media claimed that most of the Leave crowd had no idea what Brexit really meant.
The media claimed that the victory for Leave most certainly assured that an economic recession would unfold in both the UK and the EU. Few solid reasons why were offered – merely that the uncertainties of Brexit would cause citizens to pull back on spending. Likewise, there were claims that foreign investors would yank their money out of Britain and Europe.
Immediately, there were (and still are) calls for a second referendum. Never mind that Prime Minister Cameron had repeatedly assured the public that the result would be final regardless of the outcome. His announcement of resignation on June 24 underscored the finality of the result.
How Could the Polls Have Gotten Brexit So Wrong?
Ahead of the Brexit referendum on June 23, polls across the UK found that a large majority of young people aged 18-30 favored the Remain position. Yet among pensioners aged 60 and older, almost 60% preferred the Leave position.
When all of the more than 33 million ballots were counted on Friday morning, the position favored by most pensioners won out by a margin of around 1.3 million votes. The result was a 52% to 48% decision to withdraw from the EU.
One reason why the media was so confident that Remain would prevail was due to the belief in “status-quo reversion” — the idea that undecided voters will be more likely to choose the status-quo option (in this case, Remain) than the alternative.
This tendency is well supported in British general elections, but as numerous pollsters found in the aftermath, the status-quo effect was much smaller in the referendum than had been expected. Some concluded that there was no status-quo reversion in the Brexit election.
Oxford University professor and professional pollster Steve Fisher explained that the lack of status-quo effect was at least in part because the Leave campaign was successful in creating the idea that a vote for Remain was not a vote for the status-quo, but rather a vote for ever more European integration and regulations.
He added that given the types of areas that voted for Leave, and given the available polling evidence, it seems likely that a majority of Britons voted to trade the economic benefits of being in the EU for restrictions on people from Europe coming to live and work in Britain. The areas which voted Leave were older, whiter and less likely to have a university education.
Nigel Farage, leader of the UK Independence Party which pushed for “Leave”
Upon closer examination, the polling “miss” on Brexit was even greater than the final outcome of 52% to 48%. As late as 6:00 p.m. Eastern in the United States, less than five hours before the results became clear, betting markets gave Remain an 88% chance to win the referendum.
No wonder that the Leave decision came as such a shock to financial markets around the world. Global equity markets plunged by 5% to 12% or more on Friday and the bloodletting continued the next Monday as well.
I should point out that the British polling firm TNS Global, which my long-time business associate Spencer Wright and I followed very closely ahead of the Brexit vote, correctly predicted that Leave would win the EU referendum in the days just before the historic vote. I reported that the Leave crowd had a lead in my Blog on the day of the election:
“Yet this week, the Leave movement seemed to creep back into a narrow lead.
Based on market responses over the last few weeks, most expect that global
stock markets will react negatively and the British pound would get clobbered
initially if Leave prevails.
Many in the Remain camp predict that a decision to Leave will spark a new global financial crisis, chaos in Britain’s economy and a spike in market volatility around
[This is yet another reason why you should subscribe to my Blog, which is FREE and normally comes out each Thursday afternoon, if you haven’t already. You just never know what I may choose to write about each week in the Blog. CLICK HERE to join the conversation.]
Is “Brexit” the Beginning of the End For European Union?
For months, Britons were told that leaving the EU would be a mistake of historic proportions. A made-in-the-UK recession, massive job losses and a currency crisis were only some of the nightmare scenarios conjured up by the likes of Britain’s Chancellor, the Bank of England, the International Monetary Fund, European leaders and economists and even President Barack Obama.
Yet it remains to be seen if any of those nightmare scenarios will come to pass. Yes, the British currency plunged initially to a 31-year low before stabilizing, but the weaker pound sterling should be good for the economy, especially for UK exporters.
That the world’s fifth-largest economy is turning its back on the globe’s largest trading block, Europe, is momentous news regardless of what happens next. Many fear it may prove to be the destabilizing domino that knocks other, less robust, nations like Greece, Italy, Spain and possibly even France from the European Union.
Marie Le Pen, the leader of France’s far-right National Front Party, and likely presidential candidate next spring, tweeted her congratulations to the Leave campaign, making it clear she found inspiration in the result. Le Pen wrote: “Victory for freedom! As I’ve said for years, we need the same referendum in France and in the EU countries.”
The Leave vote is a stinging repudiation of ideas Western governments have pushed for decades: that economic globalization was a tide to lift all boats; that integration is good; and that advanced economies will be the big winners of the globalized market.
The Remain crowd failed to recognize that economic globalization was not lifting all boats, in fact far from it. Over 17 million Brits voted for Leave versus 16 million who voted to Remain. The Leave crowd wants to take back their borders and limit immigration and spend the EU payments in areas like education, healthcare and creating jobs.
It remains to be seen if other EU countries will follow Britain’s lead.
Will Brexit Actually Happen? Maybe, Maybe Not
As noted in today’s introduction, we still don’t have any idea when Brexit will happen, under what terms it will happen or even if it will happen at all. What is clear is that the UK needs the EU and the EU needs the UK. Yet it remains to be seen how the leaders of both Unions will deal and negotiate with each other.
But I’m getting ahead of myself. The Brexit vote is a non-binding referendum. For certain, the Remain crowd is looking at all possible ways to overturn the vote to leave. One option is to have a second referendum and hope for a different outcome. That will be difficult to pull off considering PM Cameron’s repeated assurances that the outcome of the vote would be final.
Another option would be for the British Parliament to simply override the referendum. While difficult, Parliament apparently does have the power to overturn the Brexit vote, at least until Article 50 of the 2007 Lisbon Treaty is triggered. Once that happens, Brexit is binding and Britain would have to leave the EU after two years.
PM Cameron vowed ahead of the vote to initiate Article 50 immediately if Leave won. Yet in his resignation announcement on June 24 he said the decision to invoke Article 50 should be made by Britain’s new leader. So it could be a while before Brexit becomes binding, if at all.
It will be very interesting to watch as all this plays out. If the Remain crowd mounts a serious move to reverse Brexit, Britain could blow up like a powder keg! Stay tuned.
There are some interesting links on Brexit in SPECIAL ARTICLES below.
All the best,
Gary D. Halbert
Brexit Won Because Common Sense Prevailed (good read)
Brexit Wake-Up Call – Don’t Assume Trump Will Lose
Elitist Rage Over Brexit (pardon the opening expletive)