British citizens will vote to decide if the United Kingdom should continue to remain in the European Union, or leave it, in a referendum which is to be held on June 23rd, 2016. The European Union is a political and economic partnership between 28 countries.
Why is this referendum being held?
Barring the usage of the pound sterling as their currency, the U.K. is an integral part of the European Union. In 1975, after joining the European Union, the U.K. had a similar referendum, where upon the nation decided to remain in the European Union, which was called ‘The Common Market’, at that time. However, since then, the EU has gained both in stature, as well as power, and its’ actions now affect the daily lives of the citizens.
Many believe that the EU is holding back the U.K. and is forcing certain regulations down their throats. Hence, a large number of the population and politicians have been demanding a referendum, which was rejected by Prime Minister David Cameron, initially, but later he agreed to hold onto it while under unpopular pressure from the public.
What is Brexit?
The word ‘Brexit’ has been coined from two words, Britain and Exit. There are two options, either Great Britain will continue to remain as part of the EU or it will exit the union. If the citizens vote for remaining in the EU, then there will not be immediate problems, temporarily! However, if the British citizens decide to exit, it will have a major impact on the world currencies and stock markets. The British pound is already quivering with the expectation of a ‘Brexit’. According to the experts, it will be ‘clobbered’ even further should ‘Brexit’ occur.
Viewing the chart below, if the current support level breaks, the British pound will retest the lows of 1.05, which it reached in February of 1985.
What is the global economic impact of ‘Brexit’?
The experts are divided on the impact of ‘Brexit’ upon the U.K.s’ economy. Analysts at Credit Suisse predict that it will shave off 2 percent from their GDP, CBI predicts a loss of one million jobs and £100bn in revenue to the U.K.s’ economy.
Moody’s believes that the impact will be small and it will not lead to large losses.
Willem Buiter, Global Chief Economist at Citigroup declares “Should Brexit occur, the economic impact of a divorce from the EU would be dramatic. A deep recession and a financial crisis are inevitable”.
The Financial Times. A lot will also depend upon the negotiations between the U.K., post the referendum, hence the vast differing views!
Why is this important to the entire world?
Although the referendum is more important to the citizens of the U.K. and the EU, if the results of this referendum are in favor of a ‘Brexit’, it will have a far-reaching impact within the economic stability of the world!
A ‘Brexit’ will encourage the currency traders to bet against the Euro, which will lead to massive pressures on the already leveraged European Central Bank. The question regarding the future and the stability of the euro, will take center stage since a large number of French citizens are demanding a ‘Frexit’, similar to the ‘Brexit’.
What do the exit polls suggest?
Varying polls are forecasting different results with most of them giving equal chances with a lot depending upon the undecided votes. However, since the European debt crisis, as well as the most recent Paris and Brussels bombings, support for ‘Brexit’ is now further increasing!
What happens to the Euro after ‘Brexit’?
The euro is the second most popular reserve currency in the world, with 20.3% holdings by the various Central Banks and governments, globally, according to Wikipedia. In the U.S. dollar index (DXY), the Euro has a 57.6% weight, therefore, any major move in the Euro will have serious repercussions in the value of the U.S. Dollar leading to large volatility on all the major currency pairs.
What Happens if Great Britain does vote to remain in the European Union?
Even if Great Britain votes to remain in the EU, it will cast a shadow of doubt over other referendums throughout other nations.
Conclusion:
If ‘Brexit’ receives a ‘green signal’, it will change the dynamics of Europe and the euro, forever. I forecast tough times over the next three to five years; will ‘Brexit’ be the precursor which will lead to the next financial crisis? Only time will tell, but it certainly has the makings of a future crisis and will encourage investors to move towards making huge investments in gold and away from the fiat currencies.