The Mourning After

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Summary

The severity of the Brexit is slowly dawning on Great Britain.

There is no reason to think that the United Kingdom will continue to have free access to the common market.

The only silver lining is that what happens to Great Britain may serve as a warning to conservative populist movements in other countries.

It has been widely reported that following the Brexit vote in the United Kingdom, Google searches, which revealed many in the country did not fully understand the consequences of the vote, spiked. While humorous, it is more anecdotal than instructive. Most Brits had a fairly good understanding of what exactly they were voting for in the referendum - what the European Union is and what they were voting to accomplish by leaving. They voted for "No more being dictated to by Brussels" and "No more onerous regulations". As Boris Johnson proclaimed, this was "Independence Day"!

Those on the "remain" side labeled their campaign "Project Fear". They warned about not being able to go back. They warned about losing access to the common market. They warned about dire economic consequences. They warned about a decline of British influence in the world. Those on the "leave" side threw cold water on these fears and insisted that those advocating for "remain" were simply using scare tactics to bully voters.

Michael Gove, the most senior member of David Cameron's government to favor the leave vote, was completely sanguine about the consequences, touting the importance of the British economy to the eurozone.

The eurozone economies are dependent on trade with the UK. We are the fifth largest economy in the world, while many of them are in a desperate state due to the failing single currency. There is no question about it, Britain will still have access to the single market after we vote leave. It would be perverse of the eurozone to try to create artificial barriers - and would do far more damage to them than to anyone else.

Source: Washington Post

The typical "leave" voter was not likely completely ignorant of the European Union or the choice before them, they just chose to believe that the "remain" campaign was intended to frighten them and that the rosier scenarios painted by the advocates of "leave" were more accurate. They are likely to proven very wrong.

The damage so far has been measurable, but not catastrophic. The British pound has declined by almost 11% versus the US dollar, from $1.4789 to $1.3216, a 31-year low. Meanwhile, the FTSE 100 stock index has fallen by less than 6%. What is truly shocking is that even now, so many continue to be in denial about the consequences of Brexit.

Prior to Britain's vote, German Finance Minister Wolfgang Schauble was as clear as he could be about the consequences:

It would require the country to abide by the rules of a club from which it currently wants to withdraw. If the majority in Britain opts for Brexit, that would be a decision against the single market. In is in. Out is out. One has to respect the sovereignty of the British people.

Source: Der Spiegel as reported by The Guardian

A resolution whereby Great Britain abides by none of the requirements of membership in the European Union while getting access to the European Common Market does not come even close to the realm of realistic. If this were to happen, the entire European experiment would lay in ruins promptly as no country would anymore have any incentive to remain.

Those that think Mr. Schauble was bluffing should feel free to give Greek Prime Minister Alexis Tsipras a call to find out. After calling a referendum on a proposed bailout and winning a "No" vote, Tsipras promptly gave in to German demands and agreed to tax increases and spending cuts in exchange for fresh loans.

In that situation, as now, Germany took the only option available to it - had it given into Greek demands, then it knew Portugal, Italy, and Spain would be right behind in asking for concessions. Britain may not be seeking loans or a monetary bailout, but it is seeking sweeping demands on limiting the free movement of people and of economic regulations.

What lays before the United Kingdom is not something that will correct itself as people calm down or the case of an overreaction by markets. It is a watershed from which there can be no return. Estimates range as a high as a few percentage points in lost real GDP for Great Britain if it should lose preferential access to the EU market. That may not sound like a lot, but it is enormous. Real GDP declined by 4% in the United States during the Great Recession. While British citizens have been taken aback by the move in markets since the referendum, the true damage will only be felt over time.

Perhaps there is a silver lining in all of this. Conservative populism has gained ground across the world, but so far has had little of the responsibility of governing, which means no one has yet had the opportunity to see just how bad the ideas emanating from these various movements are. The National Front in France and the Tea Party in the United States can hurl grenades and offer rhetoric and condemn the counter-arguments as elitist and out of touch.

Had the EU referendum in the UK failed, then persistent and pernicious myths would have been much easier to cling to. Donald Trump has endorsed the Brexit vote. US voters will get a chance to see what happens to Great Britain between now and November and ask themselves if they want a replay in the United States.

All of this is not meant to excuse the European Union. It has been poorly conceived and poorly executed. But the solution to past mistakes is not anachronistic stupidity.

In discussing NAFTA in 1993, Bill Clinton made the following statement:

Make no mistake, the global economy with all of its promise and perils is now the central fact of life for hard-working Americans. It has enriched the lives of millions of Americans. But for too many those same winds of change have worn away at [the] basis of their security. For two decades, most people have worked harder for less. Seemingly secure jobs have been lost. And while America once again is the most productive nation on Earth, this productivity itself holds the seeds of further insecurity. After all, productivity means the same people can produce more or, very often, that fewer people can produce more. This is the world we face. We cannot stop global change. We cannot repeal the international economic competition that is everywhere. We can only harness the energy to our benefit. Now we must recognize that the only way for a wealthy nation to grow richer is to export, to simply find new customers for the products and services it makes. That, my fellow Americans, is the decision the Congress made when they voted to ratify NAFTA.

Source: The Miller Center

This is still the world we face. It is true that globalization has brought challenges to every part of the world as well as opportunities. But living in denial about the world in which we live is not the solution to adjusting to these challenges. As the situation in Great Britain comes into sharper focus, voters across the developed world will have to make choices about whether they want to follow its example.

Let us hope that at the very least the example of Great Britain will allow those voters to understand what they would be giving up if they choose to do so.

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.