Brexit Is Not A Done Deal

| About: iShares MSCI (EWU)

Summary

The Brexit Referendum does not guarantee a British exit from the EU.

There are two years of negotiation to conclude, and voters could change their mind, or the government.

Once the markets finish panicking, consider some bargain hunting.

This morning everyone in England and on the continent of Europe is making the requisite nice noises about the UK leaving the EU.

The wishes of the people must be respected, says the Chancellor, who opposed it. Project Fear is over, says Boris Johnson, who supported it. Even the Scots, who voted against the move overwhelmingly after failing to win an independence referendum, admit they can't stop it.

But it can be stopped.

The process starts by invoking Rule 50 of the Treaty of Lisbon, under which the European Union operates. Notifying Brussels of a withdrawal under Rule 50 starts a two-year process of negotiation, which then must be ratified by the exiting country. At any point in this process, the exiting country has the right to change its mind.

The referendum last week was not an invocation of Rule 50. It was a statement by the people that they want the government to invoke it. Since the referendum results were announced, some EU officials have called on the British to invoke it immediately although German chancellor Angela Merkel is trying to slow-walk the process, hoping to prevent other countries from following England out the door.

Is a rethink possible? The resignation of Prime Minister David Cameron, immediately after the vote, triggers a process under which the Conservative Party must choose a new leader. That leader does not have to be pro-Brexit, and the economic fallout from the referendum might indeed cause the party, which formerly opposed the referendum, to do its own U-turn.

Even if, say, pro-Brexit Boris Johnson becomes Prime Minister, it is very likely there will be an early election to ratify his Administration, which is where the current turmoil within Labour becomes important. That fight is really over what is said to be leader Jeremy Corbyn's squishy support for Remain. His replacement would likely be even more in favor of Remain.

This would give voters a clear choice, later this year, well before the Rule 50 negotiations could possibly be concluded, between Remain and Brexit, following a long period of economic decline. Will the losses of jobs, of market value, of the value of the pound cause more young voters to turn out than last week, or some older voters to re-think their position?

I think that's a dead certainty.

Jean Monnet, a French diplomat considered the father of what became the EU, wrote in his memoir that "Europe will be forged in crises, and will be the sum of the solutions adopted for those crises."

I have a sort-of stake in this, because one of the diplomats on the German side of that negotiation was named Herbert Blankenhorn. A former Nazi, and no relation to me that I know of, I still jokingly refer to him as "Unkie Herb" to friends, because Blankenhorns are thin on the ground everywhere.

The crises faced by the generation of Monnet and Unkie Herb make today's Brexit look like a pimple on an elephant. They overcame them, and created structures designed to get the most out of future crises, like this one.

So I wouldn't cancel Europe just yet. I wouldn't even cancel out England. Once the markets calm, you can look for bargains. The British ETF, EWU (NYSEARCA:EWU), has lost 18% of its value over the last few days. Its eurozone equivalent (BATS:EZU) has lost 20% of its value, and the German ETF (NYSEARCA:EWG) is down 13%.

My guess is that, in a week or two, you can probably make some money here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.