The Independent Market Observer

Beyond Brexit: The Longer-Term Risks

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Jun 22, 2016 2:30:19 PM

and tagged In the News

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brexitAs we watch how the British referendum plays out tomorrow, we need to keep something in mind: It’s almost never the bus you are watching that hits you.

With all the commentary and predictions, the possibility of the United Kingdom exiting the European Union is pretty firmly in the public eye. If the Leave vote does win, no one can say they weren’t warned.

That’s one reason I suspect the predictions of doom may be overstated. I could be wrong, but this reminds me a bit of the Y2K scare. After months of worry, extensive preparations, and endless news coverage, the actual event was an anticlimax. It could have been worse, of course, but the coverage itself led everyone to prepare for and expect a disaster. On the eve of the Brexit vote, the parallels seem relevant.

Other threats flying under the radar

If Brexit is the bus we are watching, what else is lurking out there that might hit us from an unexpected direction? Other European elections and referenda are getting less attention (and may have less of an immediate impact) but could nevertheless take the risk of an EU breakup to the next level.

The Spanish general election. Spaniards head to the polls this Sunday, three days after the Brexit vote. After the last Spanish election, in 2015, no party could form a government. This political failure united the left, creating the potential for an anti-austerity group victory and conflict between Spain and the northern members of the eurozone. We could see another Syriza/Germany-style confrontation—but this time, in one of the largest economies in the EU.

Italy’s constitutional referendum. If it fails, the upcoming referendum in Italy could rock the government and possibly lead to fresh elections. After its recent victories in mayoral races, the euroskeptic Five Star Movement could well gain more influence over policy, with potential consequences similar to Spain's. Increasing uncertainty in the fourth and fifth largest economies in the EU (excluding Britain) could pull the union even further apart.

The French presidential election. Looking a bit further out, the French will elect a new president in April of next year. One of the major candidates, Marine Le Pen of the National Front, is explicitly euroskeptic and has called for a referendum on exiting the EU—a Frexit. Whether or not she wins, other parties may feel forced to agree to a referendum (as David Cameron’s Tories did in the UK) in order to nullify the issue’s appeal to voters.

The political stakes will only get higher

Clearly, the Brexit vote isn't the end of EU political risks. In fact, it's just the beginning. Although the short-term threat may be overstated, the medium- and longer-term risks to the European Union are very real. Looking at this simply as a Brexit issue both overstates current risk and understates longer-term risks.

As investors, let’s try to keep our eye on the ball and neither overreact nor underreact. Above all, let’s not get too agitated by Brexit news coverage. After all, the media's incentives tend to be short term, while our goals are long term. It's important not to confuse the two.

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