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June 21, 2016

Brexit: Breaking Up Is Hard To Do

British Prime Minister David Cameron must be frustrated with Brexit. He has long pushed for Britain to remain in the European Union (EU), but the vote is turning against him. Like a parent responding to a child who just realized that adults really can’t force him to do anything, Cameron’s struggling to persuade the population to see things his way.
He tried telling people about the wonderful, harmonic world they now enjoy as a pan-European group, but that didn’t fly. He waved white papers estimating that British GDP would fall 3% to 4% per year, but still no dice. So now, he has thrown down the fear card.
If Britain leaves the EU, trade will suffer, GDP will fall, tax revenue will take a hit, and the government will have fewer resources to pay for healthcare and retirement benefits.
If you vote for a Brexit, Cameron tells Brits, then you’re risking your health and your pension!
Britons aren’t taking the bait.
The latest polls show the British Exit (Brexit) crowd ahead of the British Remain (Bremain) crowd by more than 5 points. As the June 23 vote gets closer, the Brexit group is gaining ground.
Cameron and his Bremain sympathizers cannot figure it out. Life in the EU is pretty good, with a free flow of trade and capital, and easy travel for citizens.
And it’s not like the burdens of EU membership are terrible. Just a handful of regulations on production, commodities, pricing, and various other aspects of trade, but nothing draconian.
Curbing the free flow of people from the EU, where immigration recently became a hot button, is an issue, but England will remain a destination from its previous colonies.
If they leave, Britain will need to negotiate new trade agreements with the EU, develop new border controls, and figure out what to do about capital flows. It’s all doable, but it will be a negotiating nightmare.
This is Cameron’s dilemma. Even though sticking with the EU makes sense on paper, there’s something about it driving his population away. It seems obvious, but he still fails to understand the changing mindset sweeping through the Western world.
After the financial crisis, things are different.
In the late 1990s and mid 2000s, we had a tough time convincing people that the U.S. markets would suffer a dramatic downturn. People couldn’t understand how baby boomers would slow their spending and become risk averse. It was all part of our demographic research on predictable consumer spending, but still, many had to see it to believe it.
When asked how the world would look in the years after a downturn, we often talked about financial markets and economic factors (lower returns, lower interest rates, slow GDP growth), but we also hit on social issues.
Harry Dent told audiences that social unrest would be the order of the day. Citizens who had never voted would demand change as they saw their standard of living erode, and violence would be common in city centers.
We weren’t talking about mass immigration like they have in Europe, but instead widespread discontent. The problem is that the Average Joe won’t see opportunity like he did before, and he’ll want someone to blame.
That’s where we are today. Whether it’s right or wrong, this point of view is showing up in politics, immigration, education, finance, and even international economic cooperatives.
People are frustrated and plagued by the sense that we’re on the wrong track, and need to make a course adjustment. But no one knows what the new course should be, which leaves us with “anything but what we’ve got right now.”
The mood won’t change until people see their opportunities improve.
That won’t happen until the current down cycle of consumer spending finally bottoms, which should be in the early 2020s. Prime Minister Cameron, and the status quo in general, don’t have a chance. People have their pitchforks ready, just itching to join a mob, demanding change.
The sad part is that even if the Brexit crowd wins the day, it won’t give them what they want. They’ll have greater control over some trade issues, and can thumb their noses at Belgian regulations on migration and immigration, but simply leaving the EU won’t make Western European populations, among Britain’s biggest trading partners, any younger.
What we all need are more clients for the goods and services that we provide. Greater sales, both at home and abroad, would mean more jobs, higher wages, and rising standards of living.
On this front, at least Brits and Americans can see some light at the end of the tunnel. Our young millennial generation is bigger than the boomers, though spread over more years. Countries like Japan, Germany, Spain, and Italy aren’t so lucky.
While most of the conversation regarding the possible Brexit centers on economics and regulations, the Brits should at least consider one of the main reasons for economic cooperation in the first place.
If your financial future is tied to your neighbor’s financial future, you’re much less likely to start a war. A Brexit won’t lead to war specifically, but a wave of isolationism across the globe would make armed conflict that much more likely.

Courtesy of Rodney Johnson, Economy and Markets  
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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