All of this talk about the UK referendum, aka the “Brexit” vote, has led to a lot of confusion and concern.
While this vote, which will occur next Thursday, may trigger some volatility in the short-term, the longer term effects may be less severe than some investors are expecting. This is according to a new report from Capital Economics.
The first point Capital Economics argues is that some polls may favor the “Leave” camp currently. But money talks, and bookmakers are still putting the odds on a “Remain” vote. Therefore, a vote for Brexit is less certain than polls may imply. The markets are also volatile right now due to this uncertainty - this should at least be removed by next Friday, regardless of which way the vote goes.
A vote for Leave is also unlikely to happen very quickly, and may ultimately result in a situation that is little changed.
“Second, even if the vote is for Brexit, the UK would probably remain a member of the EU for several years,” the report said. “The result of the referendum would only be advisory.” In other words, this vote is not legally binding. Combined with most of the political leaders preferring to remain in the EU means that the leaving process will be dragged out, and may not even officially occur until 2020. Additionally, UK leaders may end up coming out with a deal that is ultimately very similar to their current membership with the EU, while still technically leaving it.
Thirdly, the ramifications of a Leave vote may also have less of an economic effect than economists and politicians are currently arguing. So then why is everyone freaking out about the vote? “Those favouring Remain have an incentive to talk up the risks of Brexit” right now, in an attempt to “influence the electorate.” Specifically, Capital Economics addresses the risk of euroscepticism spreading to other EU countries, the weakening of the sterling and falling UK interest rates.
The UK isn’t the only country in the EU with folks talking about leaving the union. In the recent past, Greece and Spain have been among countries seeking their own Grexits and Spexits.
These other countries with populations that are considering leaving the EU will likely want to wait until they know what sort of deal the UK will end up getting. As stated earlier, this isn’t likely to be known until 2020. These other countries may also want to see “what the impact [of the deal] would be on the UK,” which would further stretch out the timeline.
In the short-term, the pound is likely to fall (relative to other currencies), along with interest rates. But policymakers won’t sit idly by. The events will be mitigated by the Federal Reserve’s slow pace of rate hikes and massive easing programs from the European Central Bank and Bank of Japan.
The sterling may even ultimately end up being seen as a “safe haven” in Europe. Capital Economics is also expecting that the BOJ will increase their stimulus program in July, further weakening the yen.