In The Details

Financial Articles from Hefren-Tillotson

Update on the U.K. and the Brexit Vote

May 31, 2016

ICapturen one month, on June 23rd, U.K. residents will go to the polls to vote on whether to stay in the European Union (commonly referred to as the Brexit vote). While the U.K. does not use the Euro currency, it is a full member of the European Union (E.U.), contributing a net amount of about $12 billion to the E.U. budget after deducting the $6.5 billion that the E.U. spends in the U.K.

One of the greatest benefits of E.U. membership is that firms that operate in one European country can easily do business in another. Companies that operate in England can automatically set up shop and make deals in other parts of Europe. This has helped establish London as one of the largest financial hubs in the world, making a significant contribution to the U.K. economy. Those opposing the exit feel that many companies might abandon London if the U.K. leaves the E.U., shrinking the U.K. economy as well as creating logistical difficulties for the U.K., as it would have to negotiate new trade treaties with the rest of Europe.

Those in favor of leaving feel that the U.K. could do just fine on its own and will benefit from not having to pay into the E.U. budget. Immigration is another matter of contention, as citizens of any E.U. country are free to live and work in other E.U. countries. Many have opted to move to the U.K. and if the U.K. leaves the E.U., it would be free to limit European immigration.

U.K. stocks have held up relatively well this year despite the uncertainty. U.K. financial companies have not fared as well, as they would presumably be hurt by any limitations on London serving as a financial hub (see top chart). The British currency, the pound, has weakened against the dollar over the last year, as the possible changes to the U.K. economy could make the currency less attractive (see bottom chart).

Current polls put those voting against the exit ahead, which would mean business as usual going forward. Even if the U.K. voted to leave, the exit would take place over at least two years, giving markets time to acclimate.