Brexit, Schmexit! Part 3: The Economy

| About: CurrencyShares British (FXB)

When I started The Barker Report, I made a conscious decision to keep it a financial/economics blog, and to steer clear from politics, but the upcoming EU referendum is hardly an economic decision on its own. Over the last few months, politicians from both ends of the spectrum have said the most outrageous things about the fate of the UK in the aftermath of the referendum: High pound, low pound; inflation, deflation; war, peace; more money, less money; businesses staying, businesses leaving; more expensive vacations, cheaper vacations… you get the idea.

The fact that the vote on the 23rd is as much a political decision as it is economical is undeniable; what needs to be decided is who’s telling the truth, and who is lying. Seeing through the noise and zeroing in what really matters to each one of us, is the hardest part.

The truth is: nobody knows what will happen, because it has never happened before. All we can do is take educated guesses; educated being the key word. Some of the claims described above lack that basic aspect. In my previous blogs: Brexit, Schmexit! Part 1: The Pound, and Brexit, Schmexit! Part 2: The Banks, I addressed the impacts of Brexit on the Pound and the Banks, let’s now take a look at how will it affect the economy overall.

Britain is the second largest economy in Europe and the fifth largest in the world. The UK has a trade deficit with the rest of Europe, meaning that they sell to it more than it buys from them; so, should Britain Exit the EU, it is more likely than not, that the EU will promptly negotiate a free trade agreement with Britain. Claims from President Obama that the UK would be pushed to the end of the queue still sound more visceral than thought through. Britain is one of the top trading partners of the US, I would be very surprised if they fixed a trade agreement with Mali before the UK.

Will there be fluctuation in the financial markets as a direct result of Brexit? Sure, the markets don’t like uncertainty, and that is exactly what we’ll get in case of the leave vote winning. We even get it right now every time leave edges ahead in the polls the Pound tanks. Will it be the end of the world as we know it? Most likely not. There is very little chance of WWIII starting as a result, or that there would be more or less terrorist threats.

It all comes down to two things, sovereignty: i.e. the government making its own laws, deporting foreign terrorists and determining its own taxes and environmental policies; and the economy. More people mean the pie gets divided into smaller pieces, and more people means more pressure on housing, schooling, health and public services, hence more taxes.

Let’s talk about the controversial £350 million that Britain sends every week to the EU. It amounts to £1.8 billion a year. I can think of many things that can be done in any economy with that amount of money, but the fact is we don’t know what it will be used for. It is only a fraction of the £754 billion that represents the total UK budget for 2016, so it is very likely that the money will fall through the cracks and nobody will ever see it. There is, of course, the issue of the rebate, which comes back a year later and can only be spent on endeavors sanctioned by the EU. At the end of the day, I don’t think it will make any difference. The government is so bloated, and there is so much waste going on, that an extra billion or two will not make anyone’s life better (or worse). But the fact that the country could be able to decide how to spend it, ties back to the sovereignty issue mentioned above.

The polls are showing leave ahead, but anybody who witnessed the 2015 election knows how unreliable polls can be. The real callers of an election are the bookies, and so far remain is still ahead by a margin.