In recent weeks, we have felt a change in climate when examining the EU. This feeling has not stemmed from what some might consider a weak link in the EU’s chain, but from one of the stronger players in the European Union.
While Britain toys with the notion of leaving the EU, we should take a step back and see how a positive or negative decision might affect the European and global trading markets.
70/30 . . . The prevailing opinion across the EU is that the odds of Britain staying in the EU are 70/30.
The weeks ahead, leading up to the referendum, will be very interesting, with the result being nothing less than historic. Historic, meaning some might consider the referendum as possibly being the beginning of the end for the EU, whilst others view it as a possible end of the beginning.
‘No’ voters would most likely rejoice over a negative outcome, and celebrate the beginning of the deconstruction the European project in its current form.
The Brits, being the referendum’s primary early adopters, have lost faith in the common European goal, and are making a very strong statement. Mind you, the referendum is not only closely watched in the UK, but all over the world, especially in other EU countries where anti-EU sentiment has gained popularity in recent years.
Interestingly the swings in the markets have failed to show any significant correlation with the movements of the GBP.
On the other hand, if the historically EU-skeptical Britain votes to remain in the EU, it could be interpreted by many as a vote of confidence – confidence in the European project, albeit needing adjustments to modernise its current status. Adjustments deemed necessary by many.
So how will it turn out?
That’s the big question on a lot of traders’ and investors’ minds, and it is definitely going to make the next few weeks very interesting. To be honest, it’s too early to make an informed call.
Polls, cleared of undecided voters, seem to be hovering around 52% for pro-EU. In an effort to gain a bit more clarity, and being an economics aficionado, what we have looked at, and what might be an equally good indicator of sentiment, are the odds being offered by professional speculators across the EU. Surprisingly, various sites are quoting in the 65% to 72% range for Britain to stay in the EU.
Cross border trading
Before we take a look at how any decision might affect the British economy and the value of the GBP, we first need to analyse the implications of cross-border trading. In 2014, the UK exported 44.6% of its goods and services to the continental EU. Additionally, 53.2% of its imported goods and services came from the continental EU, despite the deficit for trading goods and the surplus for exporting services.
The European project needs a stronger British participant
Admittedly, whilst the Referendum concerns exiting the political union and being granted an assimilated economic status similar to that of Iceland, Liechtenstein, Norway, and the single-market member, Switzerland, any form of Brexit promises to be complicated. The implications of a Brexit will most likely result in long-standing consequences across the greater EU, due to the country’s strong inter-related economic and trade ties with the union.
Should the pro-EU voters win, the majority of us would most likely agree that the inevitable consequences of Britain’s economy and currency would be minimal. A pro-EU vote will be seen as a vote of confidence and serve as a trigger for structural reforms – reforms so many people in the EU long for desperately.
Brexit on the charts
Interestingly, the swings in the markets have failed to show any significant correlation with the movements of the GBP. However, it’s also unclear whether the movements are being led by sentiment surrounding the odds of a Brexit, or the GBP itself. Sure, volatility spikes in the GBP might be visible around the time of the vote, but in the short-run, it seems a Brexit might be a non-event for the currency. And of course, the economy is already on a solid track.
In the long-run, and in case of a negative Referendum, we are considering the real implications to be more political, primarily due to the UK not sitting on the sidelines of the EU when the big blinds are played in the global economic game. Admittedly, as the fifth largest single economy, according to nominal GDP figures, the UK has fared reasonably well over the past few years, successfully sending its trade delegations from China to Brazil and many other emerging economies.
However, influencing an EU envoy and holding side discussions for its own economic benefit to the extent the UK currently enjoys, will not, officially, be possible following a Brexit. One might assume this will lead Britain to pursue its own global economic interests.
So, to wrap it up, a close call could be interpreted by the British government as a mandate to initiate structural reforms at the EU-level from which, we believe the EU, as well as Britain could benefit. After all, Britain has been at the forefront of political, judicial, and institutional development and one of Europe’s leading nations for centuries. Therefore, the European project needs a stronger British participant rather than a weaker one.
The bigger question, at the end of the day is if the US has any pro-EU influence on the polls.
Dennis the Jong is a Managing Director at UFX, offering <MassIsights trading technology