Brexit 101: What regular Americans need to know but are too afraid to ask
Nearly every market move over the last two weeks has been attributed to the upcoming British referendum on whether the United Kingdom should remain with or leave the European Union. But it's not just stock-trading desks watching the the runup to Thursday's referendum. It matters to everyone. Here's what you need to know. http://cnb.cx/28Md9ZF
- •So, what exactly is happening?British citizens will vote on the question, "Should the United Kingdom remain a member of the European Union or leave the European Union?"
- •When is this happening?Polls will close at Thursday 10 p.m. London-time (5 p.m. Eastern), and then the official returns are expected to start coming in around 1 a.m. Friday local time (8 p.m. Eastern). About 50 percent of the returns will be counted within the next three hours, according to most expectations.
- •Why is the UK even considering leaving?One of the major sticking points in the conversation has been immigration concerns, as some Brits worry that the country's employment market and social services will drown under the weight of too many new residents. There's also the worry that upper-crust elites and Brussels bureaucrats are pushing for a continental identity that diminishes the U.K.'s own sense of self. There are also economic arguments, although they are more often made by pro-exit politicians than by professional economists.
- •What happens if the "Leave" side wins?In the event that the leave camp wins, the process of a British exit from the EU would begin, but some estimates say the negotiations could take more than two years.
- •What happens if the "Remain" side wins?If Brits vote to stay, then markets will breath a sigh of relief, and the nation will begin the healing process after a tense period.
- •Who can vote?According to the BBC, eligible voters will be "British, Irish and Commonwealth citizens over 18 who are resident in the U.K., along with U.K. nationals living abroad who have been on the electoral register in the U.K. in the past 15 years. Members of the House of Lords and Commonwealth citizens in Gibraltar will also be eligible, unlike in a general election."
- •Why is everyone so nervous about it?Important British trading partners, like India and China, have indicated they're worried that an exit would create regulatory and political volatility that could harm the economies of everyone involved. The U.K.'s Treasury itself reported that its analysis shows the nation "would be permanently poorer" if it left the EU and adopted any of a number of likely alternatives. "Productivity and GDP per person would be lower in all these alternative scenarios."
- •Would it really be THAT bad if they left?As the overall economy weakens, the British government would see weaker tax receipts than otherwise, and those losses would vastly outweigh the benefits of reduced contributions to the EU, according to the analysis. The Bank of England, the International Monetary Fund, and others have warned of the long-term negative effects of a British exit. And although some have dismissed those analyses as "rotten propaganda," most mainstream economists overwhelming agree the move would be bad for the U.K.
- •Here's where it gets tricky for U.S. companiesThe general thinking is that many international corporations, notably those based in the U.S. and China, invest in U.K. operations partly so they can readily access the free-trade corridors the U.K. enjoys with the rest of the European Union. So if the leave camp wins, many of those companies will see drastically reduced profits.The sudden need to reset tons of global investment channels could have a freezing effect on the whole region.
- •So why is this a GLOBAL problem, and not a local one?Depending on how you measure it, the EU as a whole ranges from the first to the third largest economy in the world. And in terms of trade, the bloc easily topped the U.S. and China in both imports and exports. So a slowdown there would mean a global slowdown. One that could last months — if not years.
- •Is it contagious?The lengthy and as-yet ambiguous exit negotiations could cripple investment, as mentioned above, but they could also lead to MORE EXITS. Nationalist groups across Europe will be watching the referendum closely to see if they can use the results into their advantage.
- •How much U.S. money is actually at risk?In the U.S., billions, if not trillions, of dollars could be called into question by a British exit: In 2014, American direct investment into the EU totaled about 1.81 trillion euros, and about 1.99 trillion euros flowed in the opposite direction, according to the European Commission.
- •And then there's the issue of currencies.With all of that uncertainty rushing around, a British exit would likely result in a massive rebalancing of currencies.Investors would likely dive out of the British pound and into cash that's perceived as safe — the Swiss franc, the Japanese yen, the U.S. dollar. The euro could also see some weakening if investors are worried about the fate of the EU.
- •So is this good or bad for the U.S. currency?While being a safe haven could sound like a boon for the U.S. economy, such a large, sudden currency swing could have significant negative implications for American multinational corporations. The fallout from those currency moves could be another source of short- and medium-term economic tumult.