Britain goes to the polls on June 23 to decide whether the UK should remain a member of the European Union. Conventional wisdom suggests that a decision to leave would be bad for Britain, the European Union, and even the United States. In this recent article, I looked at the downside of a Brexit particularly for the United Kingdom. But focusing on the pitfalls, we may be missing the new opportunities it creates. The most compelling arguments for a Brexit are both economically and politically driven.
Leaving the union would result in an immediate cost savings, as the country would no longer contribute to the EU budget. In any given year, the UK is a net contributor to the European Union. Last year, Britain paid £17.8 billion but also received £4.9 billion in rebates and £4.4 billion in farm subsidies and other programs. As a result, net contributions equaled £8.5 billion or almost £350 million a week. Leaving would open up billions of pounds for more important priorities.
Trade was one of the principal influences when forming the European Union in 1993. The EU is a single market in which no tariffs are imposed on imports and exports between member states. Trade is important for Britain because it accounts for 40% of GDP with 50% of its exports going to the EU. Britain risks losing some leverage power by leaving, but it also presents an opportunity to establish a more favorable agreement.
A better deal frees businesses from unnecessary and costly regulations. Decisions on where to invest would be based on factors other than EU membership. Shares of trade with the EU have already started to decline in favor of trade with emerging economies. A recent study suggests that GDP could rise by 1.6% if the UK could maintain its current trade setup without the regulatory constraints.
The European Commission has placed numerous regulatory burdens on businesses across its member states. The EU has been at the forefront of fighting climate change which has forced member states to adopt high cost energy sources. The result has been higher expenses and costlier commodities. Adapting to climate change is an admirable cause, but some argue that this should be left to national governments to enforce as it deems necessary.
Additionally, financial regulations have been a hindrance for London, the second largest financial hub in the world. Reduced regulations would provide a small boost to productivity, but not enough to have a material impact.
In uncertain times it’s not abnormal to see market volatility spike. In the run up to the referendum, we should start to see large fluctuations in the financial market as investors gain a better idea of the outcome. The best bet for short-term investors is to hedge against volatility through index funds and volatility funds. The FTSE 100, consisting of the country’s largest multinationals, is prepared to gain in the near to long term.
Meanwhile tourism, energy and the services industry should expect to benefit. The tourism industry would profit from a depressed sterling, while energy intensive manufactures would be free to operate independently of expensive EU policies. Any initial drop-offs offer long term investors the opportunity to buy low and hold until the volatility subsides.
Under the current EU law, citizens are free to live in any member state without authorization from the government. The recent pace of immigration has limited the number of available houses and reduced the social safety net in Britain. While both sides benefit under the current law, a more tailored immigration policy should have a quantifiable impact.
Conventional wisdom may suggest that economic prospects will suffer if Britain votes in favor of leaving; however, Britain has pulled ahead of the European Union in recent years and remains one of the fastest growing advanced economies in the world. Whether they decide to stay or go, the outlook still looks promising.