As you would have heard by now, the British population has surprisingly voted in favour of a Brexit. That is, they voted to leave the European Union (EU). The question we should all be asking is what does that mean for me?
In order to strengthen his position prior to the most recent election in Great Britain, prime minister David Cameron promised that if re-elected (which he was), he would give voters the chance to decide if they wanted to remain in the EU. Cameron has always been strongly in favour of remaining, and campaigned strongly on that basis. In fact, he campaigned so strongly that when the Brexit vote went against him, he felt compelled to resign immediately.
While the population has voted in favour of leaving the EU, the departure still needs to be approved by the British parliament.
Why did the population vote to leave?
Key influencers such as Boris Johnson ran a successful (albeit ugly) fear campaign, focusing on the British people being able to self-determine their own destiny. He also prayed on the concern about refugees making their way through Europe to the United Kingdom. The key segments that voted to leave were in England (but outside London), and the older population. People in London, Scotland, and the under-35’s voted overwhelmingly to remain in the EU.
What could it mean for Great Britain and Europe?
There are significant implications in terms of trade and immigration. At present there is free trade between Great Britain and Europe. In fact, half of Great Britain’s imports and exports are to/from European countries. Similarly, there are millions of Europeans working in the UK and vice versa.
Once Brexit is complete, trade and immigration barriers will be put in place. This will adversely affect thousands of businesses and millions of employees. Both British and European businesses will lose clients, suppliers and employees. Many people will lose their jobs. This will have a profound impact on the British and European economies.
What is the timing of Brexit?
This is the Fifty Million Dollar question. The British and European economies have become so intertwined, that it will take years to negotiate, draft, and then pass the legislation required for the changes to take effect. Some experts have predicted that will take up to a decade. In fact it may prove to be so difficult, that some are suggesting it may never actually happen. In the meantime, the sun continues to rise each day and not much changes.
Why has the sharemarket fallen?
In the 24 hours after the Brexit vote, sharemarkets around the world fell between 3% and 5%. There were also wild swings in currencies, with the Pound falling substantially. The markets are falling for 2 reasons:
- The economic impact of trade and immigration restrictions, as described above.
- The unknown second and third order consequences. For example, will this encourage other countries to exit the EU. Are we in danger of getting Grexit, Departugal, Italeave or Czechout? What will this mean for trade, immigration, and even world peace? In the meantime, what will be the impact of uncertainty?
What will happen from here?
For the British and European economies – we are likely to see a period of confusion, uncertainty and distraction.
For the rest of the world – in the short-medium term there is a strong chance that this will be a blip on the horizon.
So what should you do?
The same rules apply as always: Continue to budget and save. Reduce debt where you can, especially where you don’t receive a tax deduction for your interest (such as credit card debt, personal loans, and even your home loan). And invest wisely. If you have some money sitting on the sidelines, this may prove to be a great time to have bought into the sharemarket. As Warren Buffet says, buy when others are fearful and sell when others are greedy.
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