Last Exit To Brexit

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By Jim McCaughan, CEO, Principal Global Investors

The political backlash against free trade and immigration has been the most disturbing element of politics this year on both sides of the Atlantic. Growth and prosperity over the last 50 years has been driven by lower tariffs and harmonization of product and service standards. Indeed, the entry of hundreds of millions of people globally into the middle class would have been impossible without all the trade liberalization. The European Union's big success has been a result of the free movement of goods, people, services, and capital. But Britain, the strongest free trade advocate in the EU, has had a very contentious campaign ahead of the referendum vote on membership next week, on June 23.

A random walk through Europe

The island nation has always been part of, and at the same time distinct from, mainland Europe - you've heard it at hotel breakfast perhaps. "Continental" was originally a British term used to differentiate the peculiar (to the British, at least) cultural differences of mainlanders… even including eating a light breakfast versus the historically heavy "full English."

Breakfast aside, Britain was actually excluded by French President Charles de Gaulle from the European Economic Community (EEC) - the first post-war organization of European countries that aimed to integrate economies and markets. But after de Gaulle died in 1967, the EEC backed down and Britain was admitted. And in 1992, the official European Union we know today came into existence with the signing of the Maastricht Treaty, with Britain as a full member.

And for the most part, the European Union has been a major success - it's the largest and most successful free trade area in the world. But in the past few years, relationships among the EU member countries have been strained. First by economic constraints and central banking decisions stemming from the Global Financial Crisis, and more recently immigration and trade issues. The influx of refugees into Europe from the troubles in the Middle East and North Africa has caused fears regarding the stress on health and benefit systems, and the resulting fear is feeding isolationist sentiment in European countries, including Britain.

The upcoming June 23 vote was promised by British Prime Minster David Cameron ahead of the 2015 general election - if his party won, he said he would leave Britain's EU membership up to a simple Yes or No vote. Conservatives won over Labour, and here we are.

Yea or Nea?

Polls have fluctuated, and given their poor showing for recent elections in Britain are not much trusted. Recent polls look 50/50, but the betting websites, which have a better track record of prediction than opinion polls, are suggesting 70/30 in favor of "remain." For such a momentous decision, this is too close to call.

However, I'd say that on one level, I remain very concerned, and that is because an exit would be very disruptive - mainly to free trade, movement of labor, and currency among EU countries - all of which are drivers of a global economy. For these reasons, it's my opinion that to pull out of the EU would likely cause significant market instability and be bad for business and economies in general.

I would also say that the push to exit the EU is part of a bigger phenomenon. And on both sides of the Atlantic, there's been a fair number of people who have suffered from free trade as their jobs have moved abroad - with governments shouldering some of the blame for not providing avenues for those impacted to move into better opportunities. So it's no surprise that what I hear from the advocates of Brexit is very similar to what I hear from advocates of the Trump campaign here in the U.S.

But whatever the personalities involved, and whatever the politics - we may see this populist backlash against trade causing unintended consequences. Those of us that operate in the global economy - and that includes Principal - believe for the most part that we ought to keep free trade around. That isn't a verdict on Brexit or not - but more about the benefits of trade and capital flows.

I also want to note that I understand people aren't advocating for a Brexit because they want to intentionally disrupt or hold back economic prosperity. Of course, that's not how people think about it - but I think it could hurt the economy, and might be dangerous if the world backs away from trade. Trade is in many ways what's made us relatively prosperous compared to past generations.

This summer: Britain 2016

What are your thoughts on this week's vote? I'd love to hear from our British colleagues who've been inundated with Brexit-related messages this year. But as I've noted - the impact of this decision has far-reaching consequences than a small island in the North Atlantic.​