The Independent Market Observer

Countdown to the Brexit Vote

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jun 21, 2016 3:33:37 PM

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brexitWith the British referendum on leaving the European Union—the “Brexit” vote—just two days away, worries are starting to rise again. As I wrote recently, I suspect that the Remain side will win. And even if the Leave camp prevails, the actual impact may be much less severe than many are now predicting. 

Referendum seems unlikely to pass

Over the past 10 days, there’s been a surge in the prediction markets, with the chances of an exit rising from around 1 in 3 to almost 1 in 2, but then declining to about 1 in 4. The closer we get, the less likely Brexit looks. On top of that, significantly more trading is taking place in these markets, indicating that the signal is fairly strong.

Two factors are driving this trend. First was the tragic murder of a pro-Remain member of Parliament, Jo Cox, which seems to have halted the momentum of the Leave camp. Second is a bounce back to the status quo in the later part of the campaign, similar to what we saw in the last Scottish independence referendum. Although some polls still put Leave ahead, it remains close, and the balance seems to have shifted.

In any event, risks may be less than feared

Even if the referendum were to pass, the effects would likely be limited. In addition to the points I mentioned in my last post, there are several others worth noting.

First, the referendum is advisory, not legally binding. As such, any withdrawal would have to go through Parliament to actually happen. Reportedly, a large majority (around 75 percent) of members of the British legislature favor remaining in the EU, which raises the bar considerably. A bare majority for Leave might have a difficult time forcing the exit through Parliament. It would take a considerably larger margin than seems likely to make that happen.

If it did go to Parliament, a break in the Conservative Party also becomes more likely, possibly leading to a general election fought around the idea of an exit. For example, if Labor campaigned on a Remain position and won, the party could certainly argue that the general election supersedes the referendum results. The notion that a Leave vote would mean an immediate exit ignores the realities of British politics.

Further, even if Leave wins and Parliament okays an exit, there’s nothing to prevent the government from stalling on implementation in the hope of rerunning the referendum when conditions are more favorable. 

Finally, the rest of Europe wants Britain to stay, and a pro-Brexit vote wouldn’t change that. European politicians are talking tough now, as they have to, but it is very much in everyone’s interest to keep Britain as engaged as possible—for economic, political, and military reasons. The terms of the relationship may change, but there is simply no good alternative to continued engagement for Europe and Britain.

Potential repercussions around the EU

This isn’t to say there aren’t real risks surrounding the Brexit vote. There are, but they lie more in what the referendum means for the rest of Europe.

Marine Le Pen of France’s National Front has called for a French referendum on the EU. Other countries are looking at Britain’s demands and special deals and asking, Why not us? With the recent mayoral victory in Rome by the anti-Europe Five Star Movement, even Italy may be moving away from the EU.

Pass or fail, the Brexit referendum has already changed the narrative irrevocably. 

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