Our top economists talk about the upcoming referendum


In June, the United Kingdom will vote on whether to remain in the European Union. How is this uncertainty affecting the markets and what can investors expect if the U.K. withdraws from the EU? In this video, Global Chief Economist Joe Davis and Senior Economist Roger Aliaga-Díaz talk about potential effects on global trade and the markets, and discuss what “Brexit” could mean for the EU’s long-term stability.


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Noni Robinson
Noni Robinson
Noni Robinson: Roger, in June, the U.K. will vote on whether to remain in the European Union [EU] or not. If they do decide to leave the EU, what risks and opportunities might that present for Europe and the rest of the globe?

Roger Aliaga-Diaz
Roger Aliaga-Diaz
Roger Aliaga-Díaz: Yes, so on June 23rd [is] the referendum to decide whether they continue to be part of the European Union. I mean, in terms of the long term, we can talk about risk and opportunities. We think, in the short term, clearly, there will be a little bit of volatility and risk from the uncertainty [going] into that decision. If they do leave, we have to think in terms of what are the economic linkages between Britain and the continent, and the rest of the continent, being, one of them, international trade. Fifty percent of trade in the U.K. comes from the rest of Europe. So it’s not that all that is going to be gone but, clearly, the tariff treatment that those imports and exports are going to receive from the rest of Europe [is] going to be similar to that [of] all the non-European, non-EU countries, right? And that clearly is going to destroy a little bit of trade. Foreign direct investment that these companies from continental Europe located in the U.K. to do business—hiring people and building factories—that also could be affected. And we can think of many banks and many companies that basically reside in London in order to get access to the European market, which also could be affected by the decision. So, in the short term, there will have to be a lot of questions answered in terms of how all these shocks will be digested for the European economy, for Britain, right? Long term, of course, the autonomy for the U.K. in terms of immigration, in terms of regulations, financial regulations, other things could start bearing some fruit. But, clearly, the risks are more front-loaded if they decide to leave. Regardless of whether they leave or not, [there is still] the uncertainty around the voting of this decision and how the markets are going to react. We’re starting to see a little bit of movement in the currency market, in the pound sterling. We would anticipate, regardless of what the decision is, there will be volatility leading to that period.

Joe Davis
Joe Davis
Joe Davis: And just to further amplify Roger’s points, I mean, again from our reading and from our experts in London, our team in London, it’s hard to say how it [would] not be a very close call regardless of the outcome. And so, if you do play that forward, there could be a little bit of parallels to, say, in the U.S. where [there was] a great deal uncertainty around, if you recall [in] 2011, with the fiscal cliff, 2012, right, the sort of, “Are we going to have a budget impasse or are we not?” and the risk of default. So that in itself, again, the dust settled. But that volatility spike certainly led, at a minimum, to a pause in certain business and investment decisions. Financial market volatility spiked, and so subsequently, several months later, we had a soft patch in the U.S. economy. I think it would be fair to say, at the minimum, that’s what we’re looking at. I mean, should Britain decide to leave the European Union, it’s hard to see that the U.K. [would] not . . . fall into recession. That’s not to say [that’s] a reason not to do it. Again, that’s not our purpose here.

Roger Aliaga-Díaz: And we have also to think of the implications on the European Union side. If Britain, if U.K. decides to leave, which country is going to be next, right? I mean, the European Union is a political and economic project of integration in terms of commerce, in terms of other common interests. But, clearly, there is a sense, with all the Euro crises we have been living over the last couple of years or more, that there are some aspects that are not working as well. And, basically, an event like this one could trigger questions about other countries going through the same type of thing.

Joe Davis: Well, sure, because you could make the strong argument that the U.K. economy is among the, not necessarily the most vibrant, but among the most vibrant and diversified of the European Union economies. So, all else equal, should Brexit occur, [the] European Union, as an economy, as an economic entity, is just weaker.


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All investing is subject to risk, including the possible loss of the money you invest. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. © 2016 The Vanguard Group, Inc. All rights reserved.