On June 23, Britain will vote on whether to leave the European Union.
For those like me, brought up in Britain and now past middle age, it’s an exciting moment. A chance to redo the referendum vote of 1975, when a 67% majority of the country (including me) voted to stay in.
Alas, having lived outside Britain for more than 15 years, I don’t get a vote this time.
So will Britain vote to leave?
At the moment, polling shows that the vote is quite close.
But the most difficult question for the electorate will be what they’re voting for: What would the British economy look like if it left the EU?
London: No Longer Europe’s Financial Hub?
There are clearly some losers from a “Brexit.”
The City of London has built its modern business partly on being the financial center for the EU.
It employs hundreds of thousands of non-British EU nationals and doesn’t actually have much British presence at all in its top management, with most banking behemoths controlled from foreign head offices.
A Brexit means Britain will lose much of its EU financial center business – EU bureaucracy will see to that.
However, London will probably still remain the top financial center in Europe. The City does too much business with Asia, the Americas, the Middle East, and the world in general, to lose out entirely to Paris or Frankfurt.
Nevertheless, while the City’s modest downsizing wouldn’t be great, it would still have a knock-on effect on the rest of the economy…
Real Estate: London’s Housing Bubble to Burst
Most importantly, the London real estate market bubble would finally pop.
House prices there are around four times higher in real terms than they were 20 years ago, which wasn’t a time of market depression.
Hence, we could expect to see house prices in the city decline by about three quarters, as relatively wealthy Europeans and a mass of “hot money” types move out.
This would inflict great hardship on my contemporaries who kept their London houses and used their relentless rise in value as an ATM – and overspent their incomes through lavish foreign vacations and other extravagances.
However, it would enable Millennials working in London to buy houses at more reasonable prices, and could make London a much more attractive center for all but the most high-end services.
The Pound: Sterling to Plunge
Another consequence of Britain’s exit and the City of London’s downsizing would be a fall in the value of sterling. Indeed, this is already happening. The pound has fallen by 17% against the dollar over the past two years.
It will decline further before the referendum, and if Britain votes to leave the EU, it would probably fall to around 1-to-1 against the U.S. dollar.
However, Britain runs a perpetual balance of payments deficit, so a lower pound would obviously stimulate the British export industries.
Combined with the fall in London real estate values, this would make British manufacturing and services far more competitive than they’ve been in 30 years, since the pound last approached 1-to-1 against the dollar in early 1985.
Scotland: Another Independence Referendum Looming?
The referendum question is further complicated by Scotland.
If you recall, the country almost voted to leave the United Kingdom entirely in the Scottish independence referendum of September 2014, and opinion there is fairly strongly pro-EU.
So if Britain voted to leave the EU, it’s likely that Scotland would insist on holding another referendum – and would this time vote to leave Britain and remain within the EU.
So when considering the economic effects, we should consider the likely fate of a Britain without Scotland.
Back in the 1980s and 1990s, Scotland contributed more than its fair share to the British economy, because of its North Sea oil reserves. But that’s mostly gone now – and what’s left is worth much less.
Losing Scotland would also eliminate the subsidy to that benighted and heavily socialist country.
My Take on the Brexit
While a British exit from the EU might sound ominous, the picture for the economy is actually quite bright.
Losing the costs of the Brussels bureaucracy and subsidies to poorer countries would save the country about $20 billion per year in direct costs, plus an additional huge amount in eliminated regulatory costs.
With those costs gone, taxes reduced, real estate costs slashed, and the exchange rate more competitive, Britain would be well-placed to compete with the Americas, the Far East, Middle East, and Africa – most of which are growing much faster than the sclerotic EU.
Some of that growth would be in high-end services, but high-end manufacturing would also see a renaissance. For example, did you know Britain was once the world’s leading manufacturer of Formula One racing cars?
There would doubtless be a few bumpy years. But in the long run, Britain would become richer and grow faster. More importantly, wealth would be spread more evenly among all classes and all regions of the country, not just heavily concentrated among London-dwellers and the very rich.
As for the United States, while there are concerns over Britain leaving the EU, it would also benefit from having a substantial, friendly trading partner that’s able to make more of its own decisions.
From an investment angle, we should wait until the referendum has happened in June – and for perhaps a month afterwards – in order to miss the inevitable reactionary decline in the UK markets and sterling immediately after a Brexit.
But from, say, mid-July, Britain would become a strong “Buy” through simple, diversified ETFs like the iShares MSCI United Kingdom (NYSE:EWU).
Good investing.