6:41 PM / Sunday March 26, 2023

6 Jul 2016

Brexit, Stage Left

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July 6, 2016 Category: Week In Review Posted by:

ABOVE PHOTO:  Demonstrators opposing Britain’s exit from the European Union demonstrate in Parliament Square following yesterday’s EU referendum result, London, Saturday, June 25, 2016. Britain voted to leave the European Union after a bitterly divisive referendum campaign. (AP Photo/Tim Ireland)

Or, what does England’s break from the European Union mean for my 401k plan?

By Denise Clay

Last Saturday, British citizens voted to get out of the European Union in a campaign known as Brexit, or British Exit.

Brexit was the brainchild of the UK Independence Party, a conservative group that believes that Britain was being held back by the EU through onerous business regulations, membership fees, and the open borders that allow people from EU member states to live or work wherever they want.

But while UKIP was happy with the results of the non-binding referendum, a lot of people weren’t. British Prime Minister David Cameron resigned. The financial markets swung so violently that it felt like an earthquake.

The British Pound lost so much value in relation to the American dollar that if you walked into Harrod’s in London with $500 in American dollars, you could probably walk out with just about anything you want. The stock market dropped considerably and Britain’s credit rating has dropped.

British voters, many of whom didn’t seem to realize exactly what they had voted to do, found themselves on Google, looking for information and hoping that there’s some way that the decision could be reversed.

Meanwhile, the EU and Britain are discussing the terms of the divorce. Britain wants a separation while EU ministers want the divorce papers, known as Article 50, filed now.

But while all of this sounds pretty crazy, what does Brexit mean for Americans? What, if anything, is going to change in our relationship with both parties?

To get those answers, the SUN reached out to Bertrand Guillotin. Guillotin is an assistant professor and the Academic Director of the undergraduate International Business Administration program in the Strategic Management department of Temple University’s Fox School of Business.  His research combines international business and strategic management and has been published in a variety of publications including the Financial Times, Thunderbird International Business Review, and Les Echos, a prominent French economic newspaper. 

Here, Guillotin explains some of the nuts and bolts of Brexit, it’s impact on such things as your 401k, and why we could be talking about this for a while.

SUN: Thank you for your time Professor Guillotin. I really appreciate it. I guess my first question is about the concept of Brexit itself. To the best of your knowledge, what was that all about? Was it a financial thing? Was it cultural? Was it a combination of the two?

BG: It was a combination of the two; i.e., financial since many Brexit voters consider the EU as a costly bureaucracy that has damaged their prosperity and cultural in the sense that these voters feel lost in the EU and want to express their cultural identity. Other demographic and socio-economic factors played a role.

In my opinion, what has shocked the world is that the Brexit voters seem to have acted more emotionally than rationally, not understanding the implications of their vote and the fact that they might actually get what they wished for. All too often, we (mistakenly) expect rational behaviors. Then, reality happens.

SUN: Now Americans have an idea of what the European Union is, but how would you describe it? What do you think we as Americans don’t know about it, but should?

BG: The EU is a political and economic union that combines (soon-to-be) 27-member countries. What Americans may not know or remember is that the EU is the result of a regional integration process. That process started after WWII to give incentives to countries to trade together and preserve peace. 

Today, the EU is one of the largest single markets in the world with approximately 500 million consumers. Considered as an economy, it is the 2nd largest economy in the world after the US. Each country has joined the EU and sacrificed some national sovereignty with the expectation that they would be more competitive in the global economy (“together we are stronger”), reducing their costs of trading with one another along the way.

SUN: In terms of economics, does the EU trade with other nations as a block or do the group’s members do so independently?

BG: As a block, the EU is a single market. In terms of goods, services, and people flows, it operates quite similarly to the way the US operates between and/or across States.

SUN: Now how with this break between Britain and the EU ultimately impact the economy of the United States? I’ve heard a few things about the possible impact on 401k plans and the value of the Pound seems to have taken a beating, but what impact, if any, will this have on Americans financially? Will we have to rethink how we approach things when it comes to trade? Will it impact Americans traveling to Europe in any way?

BG: Business people and investors, in particular, do not like surprises and uncertainties. Some will win, some will lose. In essence, I expect that there will be an economic impact in the US. The remaining questions pertain to the magnitude and duration of that impact.

In addition to uncertainties, the negative aspects of the impact will, for example, be associated with US companies that either export to the UK (all things being equal, British customers would order less since they have to pay more in USD to the GBP being weaker) or have profits in British pounds that they want to convert into USD and repatriate.

As these companies and/or US banks suffer from these negative consequences, their stock price might go down. The shareholders of the entities would suffer losses and 401k balances might decrease.

At the same time, if a company and/or an individual understands the risks and can manage them, this Brexit crisis can offer some opportunities to invest more cheaply in the UK and to travel there on a significant discount using US dollars. By the same token, importing goods and services from the UK is now a relative bargain, as compared with a week ago. 

SUN: Article 50, the request that a member nation has to make in order to break from the EU, hasn’t been invoked by England yet as far as I know. While there appears to be a willingness to delay this process by English voters mortified by the impact that Brexit has had on the economy since the results of the vote were announced, some members of the EU have taken a “get it over with, already” approach.

Since Brexit was a non-binding resolution, does Britain have the option of saying “we didn’t mean it’ and staying in the EU, or have relations between the collective become so soured through this vote that there’s no turning back?

BG: Technically, it is possible to invoke article 50.

The fact is that the EU (not just the UK) is in an acute political turmoil that has drastic and immediate consequences, such as trillions of dollars evaporating from the stock markets.

Markets are expected to recover since they fluctuate over time. However, EU politicians must have a tough stand publicly to reassure markets and may be more flexible behind the scenes. The EU could see additional referendum, a domino effect, taking place. This would hurt investors’ confidence and more capital would leave the EU.

Based on this, I consider the invocation of Article 50 improbable but still possible in the immediate future. This crisis will obviously not be solved overnight.

We still have a lot of work to do to educate everyone on how the global economy works and as we all learn from this unprecedented event.

SUN: Thank you so much for your time Professor. We’ll definitely be keeping an eye on this.

BG: Thank you.

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