On Thursday, the United Kingdom will hold a referendum on whether the country should remain in the European Union. Ripples from that outcome could be felt around the world, maybe even in your investment portfolio.
The EU, formed after World War II, consist of 28 European countries that act as a “single market” where people and goods can move easily and a common currency, the Euro, is employed, except in the UK, which retains its’ own separate currency. All member countries must enforce economic regulations issued by the EU, even if the member country did not previously have such rule – or want one.
The “Brexit” vote was prompted by a growing feeling among some British people that the EU has usurped too much of the UK’s political independence, allowed too much immigration, and that membership in the organization is a net negative for the UK’s economy and culture. Give credit to British Prime Minister David Cameron. This controversial, disruptive vote is being held largely because he promised voters it would happen if his Conservative party won a majority in Parliament.
I tend to agree with those, including PM Cameron, who think Britain should stay in the EU. Membership makes it easier to move and sell British product across Europe. Economic research hints at a recession in Britain if it leaves the EU, with a long-term 2%-6% reduction in the county’s GDP. That would cost the average British family about $6,000 per year.
What’s more, leaving the union would diminish Britain’s influence on EU trade and political policies. It would also diminish the stature of the organization, which is made up of some of America’s closest allies.
It’s hard to know whether a vote in favor of Brexit would impact the world economy, or stock markets for an extended period. Billionaire George Soros is loudly warning that a UK exit would throw Britain into recession and prompt a sell-off of the British pound. That kind of turmoil certainly could roil the markets in the short term.
My Brexit investment advice is predictable. At least I hope it is. If you wake up Friday to news that Britain is leaving the EU, and the U.S. markets are in flux, take a breath. This, too, shall pass.
But I don’t expect that to happen. Why? Despite polling that shows British voters are fairly evenly split on this issue, the edge is still with the “Stay” side. What’s more, a major British betting parlor is currently offering 3 to 1 odds on Britain leaving. Bet $5 and you’d win $15 if the UK voters approve the measure. This is one place where I’ll trust the market makers over the pollsters!
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