Commentary: Is the Brexit the Best Thing That Could Happen to the EU?

Jun 24 2016 | 2:44pm ET

Commentary: Is the Brexit the Best Thing That Could Have Happened to the EU?
by Steven Lord, FINalternatives

Pre-referendum polls notwithstanding, the Brexit is not a surprise. At least not to anyone in European finance during the creation of the euro. We all knew at the time that Britain was always a reluctant participant in the whole idea of a Greater Europe. It’s role has been the same for 200 years – enjoy political influence on the Continent but avoid anything that smacked of political obligations. It’s why Britain balked at joining the euro in the first place.

Indeed, the currency volatility that preceded the formation of the euro was partly due to the disbelief that Europe’s nations would actually 1) manage to pull their economies and currencies together under a single monetary policy, and 2) stick to the fiscal and economic conditions spelled out in the Treaty of Lisbon.

They were right. In the event, the first worked. The second didn’t, not only because there was no mechanism to compel compliance but also because while the treaty that formed the European Union meshed a great many things across borders, from workers to trade, it conspicuously did not mesh tax, banking and financial systems. It was never a truly full union, akin to that in the U.S. and something that is neither fish nor fowl rarely succeeds at being either one. 

This meant that by the time the inherent contradictions of a common European monetary policy – e.g. the interest rates appropriate for Portugal, Spain and Greece are fundamentally at odds with those good for Germany, Holland and France – blossomed into a full-blown debt crisis, there were no mechanisms to deal with them. The result has been billions upon billions funneled from “stronger” members of the Union to weaker ones.

From this perspective, the British decision makes sense. The Brexit vote reflects a broad dissatisfaction with years of taking it in the chin for a common cause, and many Europeans feel the same way. The rules that emanate from the bureaucrats in Brussels are a standing joke from Calais to Cologne. But the reaction is not unlike that of many Americans to the federal rules made in Washington D.C. – one only has to look at the dust-ups around transgender bathrooms or the Confederate flag to see that states rights still evoke a lot of emotions here. Human nature is the same everywhere.

The difference is that little bit of sovereignty that goes out the door once a nation is part of a union. It’s easier to accept in a young country made up of like-minded statelets that share a common heritage and language. Getting a group of 25-odd full-blown nation states with distinct cultures, languages, biases and thousands of years of history to unequivocally embrace the common cause? Good luck. This was, and remains, one of the most intractable problems with the concept of a “united Europe”. 

Markets were already paring their overnight losses as this article was being written. While volatility will remain, political events often engender dramatic moves in financial markets but rarely start new ones. Usually the underlying trends are already in place. For instance, the dramatic drop in yields is likely a blowoff ending to what has been the final stage of a multi-decade trend for a few years now, not the emergence of a new one. 

Also, while the short-term volatility will be disruptive, the decline in sterling (if it holds) will ultimately result in stronger British exports, the vast majority of which flow to other European nations. In that sense, the Brits can thank their lucky stars they did not sign up for the euro – an EU exit is immeasurably more complicated from within the common currency than from without. Conversely, European exports just became a lot more expensive in Britain, prompting one money manager we know to say the best trade now is long Britain, short Europe. 

It won’t happen overnight, though. There are very large questions still to be answered about exactly how the U.K. exits the EU, both legally and practically. Regardless, it will take a very long time - Article 50 of the Treaty stipulates a two year period after notification to leave, after which the terms of exit will be negotiated between Britain’s 27 counterparts, each of which can veto certain elements. After that, EU national parliaments have to ratify the departure. The creation of new trade relationships, visa requirements, etc. will take years. If it sounds like the kind of bureaucratic nightmare only the EU could design, that’s because it is. 

Nonetheless, it is a wake-up call for the EU, which may ultimately result in new construct for Europe’s collective future that is better designed, fairer and more robust. That’s important, since one of the core reasons behind the notion of a European community was to put an end to the wars that have plagued the region since time eternal. The EU and its predecessor organizations, however flawed, are widely credited with ushering the longest period of peace and prosperity in European history. It is not a trivial point.

All things considered – which is what one must do when looking at the true intersection of global finance, economics and politics – the Brexit’s biggest advantage may not lie with Britain, but with a Europe that ultimately functions better for it. 

In Depth

PAAMCO: Will Inflation Deflate the Asset Bubble?

Jan 30 2018 | 9:49pm ET

As the U.S. shifts from monetary stimulus to fiscal stimulus, market pricing should...


CFA Institute To Add Computer Science To Exam Curriculum

May 24 2017 | 9:25pm ET

Starting in 2019, financial industry executives sitting for the coveted Chartered...

Guest Contributor

Boost Hedge Fund Marketing ROI By Raising Your ROO

Feb 14 2018 | 9:57pm ET

Tasked with delivering returns on client capital, a common dilemma for many alternative...