Brexit, Schmexit! Part 4: Europe

| About: Vanguard FTSE (VGK)

So, four months have passed since the British Prime Minister David Cameron announced the in-or-out referendum from the EU. Over that period of time, the pound sterling has been all over the place, first dropping to lows not seen since the height of the sub-prime crisis in 2008/09, recovered all of its losses and then some, dropped back to the $1.4 level on fears that the leave camp was gaining on the remain side, only to bounce yesterday back to $1.46. The uncertainty is not confined to the pound, but it also pushed the FTSE 100 that has also had a roller-coaster ride.

On the previous blog posts in the Brexit, Schmexit series Brexit, Schmexit! Part 1: The Pound, Brexit, Schmexit! Part 2: The Banks, and most recently Brexit, Schmexit! Part 3: The Economy, I took a deep look at the effects that a potential Brexit could have on the UK currency, its banks and economy. However, what to many seems to be a UK-centric affair is in yours truly's humble opinion going to affect Europe more that it will affect Britain in the longer run. This seems like a pretty bold statement, so let's analyze it in detail.

For starters, Angela Merkel, François Hollande, Mateo Renzi, Mario Draghi, Christine Lagarde, Wolfgang Schäuble have all endorsed the remain camp... wonder why?

Setting a precedent

The EU has a mandate for ever-growing and ever-integrating. Over the last 60 years, the union has grown from its original six members to 28, with another few expected to join in the coming years. This blind trust in ever-growing and ever-integrating has left it oblivious to the fact that someone might want out - I mean it's a union, not the mafia. The truth is, this scenario has never crossed its minds, and therefore it isn't prepared for it. There is no blueprint of how to disconnect a country from the EU apparatus. Fortunately, the UK kept its currency, otherwise exiting a currency integration like the eurozone would be a lot harder. But still, there are no set of rules, nobody know what to do on June 24th should it vote to leave. For a massively bureaucratic organization, not having a policies and procedures booklet could leave a few politicians running like chicken without heads, trying to figure out what to do next.

What will happen for sure is that within a very short period of time, other countries that are unhappy with the current state of the union (the European Union that is) will most likely push for a vote themselves. This could open the floodgates for people demanding similar referenda in other countries.

When allowed, economics always trumps politics

The EU, as well as the euro, are the stubborn whims of German and French politicians. It is the reason they insist on pursuing a political agenda that makes little or no economic sense. The fact that no other country has ever put its EU membership to the vote is simply because they understand that when asked, there is always a chance of the people voting against it. So they decide to keep the people out of it, because obviously governments always know best what is in their people's interest. The general discontent with the EU is demonstrated with the rise of far-right parties across different countries in Europe. The migrant crisis and the border-free Schengen area are creating a very volatile environment across many countries, prompting some to erect barb-wired fences across borders within the borderless zone.

Bailouts?

With the UK outside of the EU, it will have less money available for bank or government bailouts. Unlike what happened during the sub-prime crisis and then again during the Greek debt crisis, where regardless of how much it protested, the UK was on the hook for a few billion euros here and there. With Brexit, this won't happen anymore, which leaves Germany, France, and Italy as the sole G8 economies bearing the brunt of the EU/eurozone troubles to come. And let's face it… Italy does not bring much to that table either, so it will come down to Germany and France.

Revenge?

The EU could decide to "punish" the UK for daring to leave. Sort of like sending a message to other countries. If it retaliates on the economic front, it can do so by raising tariffs. But since the UK has a trade deficit with the rest of the EU, that would be like cutting off its nose just to spite the face. But again, since when do decisions made by bureaucrats in Brussels make logical or economical sense? So, it is very likely that after this knee-jerk reaction, they will receive enough pressure from their local industries and start softening their stance.

With just a few days to go to the vote and a nasty campaign that has already claimed its first victim, not to mention splitting the Conservative Party, alienating Labour's core vote in the north, renewing separatist movements in Scotland, and its outcome holds the career of the Prime Minister and Chancellor of the Exchequer in the balance. This is turning out to be one of the key votes of the century. It should keep everybody glued to their TV screens (provided there isn't something better to watch on the UEFA Euro 2016).

Next week, it will all be history. Until then!