Wed Apr 13 2016
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Would Britain’s EU Exit Trigger a Mass Exodus?

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On June 23, Britain will vote on whether or not it will exit the European Union, with recent polls now suggesting that a vote in favor of a “Brexit” is quite likely.

It’s easy to see why. Britain’s relations with the European Union bureaucracy are troubled, at best. And Britain is hardly alone here.

Indeed, a Dutch referendum result last week suggests the union is unpopular elsewhere, too.

Therefore, the big questions are these: Will other countries opt to follow Britain out of the EU? And what are the chances of them doing so?

How Do You Solve a Problem Like Greece?

There’s little doubt that a Greek departure from the EU would certainly be cheered by its EU partners, and even by the central EU bureaucracy.

When it joined the EU in 1981, Greece was so heavily subsidized that its living standards, in gross domestic product (GDP) per capita terms, rose to $ 32,000 per annum – three times that of neighboring Bulgaria.

In 2010, the decision was made to keep Greece as a member of the eurozone and undergo “austerity.” But Greece’s living standards were chopped in half in order for it to become competitive, and austerity was impossibly painful – even though the EU propped it up with hundreds of billions of dollars more debt.

Then, in 2015, Greece elected a left-populist government. And despite promising further “reforms,” the election mostly riled the populace into resenting the austerity.

Though this outrage is not unreasonable, it opens the door for yet another crisis.

This time, the EU will hopefully live up to its 2010 goals: Throw Greece out of the euro, and usher in the fall of the “new drachma” to one-third of its previous value.

If the EU can manage this, Greece’s economy could regain its competitive edge.

However, since this process will be contentious, there’s a chance that Greece will leave the EU and the euro altogether. This would be a mistake, in my view, but the current Greek government isn’t particularly rational.

So what of the other countries?

Will They Stay or Will They Go?

In general, the poorer EU nations – Romania, Bulgaria, Malta, Portugal, Croatia, Poland, and even the Baltic states – would be irresponsible to leave the EU.

As members of the EU, these countries receive subsidies, foreign investment, and (in the case of the Baltics) protection from Russia – all of which they’d surrender by leaving the EU.

Poland has proven that while countries are probably better off without the euro, the EU itself is a good deal for its members. Even with EU bureaucracy, members gain a lot from being a source of cheap labor for manufacturers in wealthier countries.

However, these richer countries are still poorly run – Italy, France, Belgium, Cyprus, and even Spain, which threw out a functional government and replaced it with a dysfunctional one with a variety of issues.

All of these nations benefit from the EU in their own way. They enjoy EU slush funds and largely ignore bureaucrats’ instructions to fix their budgets, etc. Without the EU’s support, they’d struggle to survive in a cold, harsh world.

In short, they’d be crazy if they opted to leave the EU.

Could Europe’s Rich Club Abandon the EU?

Other countries that are major beneficiaries of the EU would be unlikely to leave voluntarily.

We’re talking about countries like Ireland, which has become a tax haven for corporations doing business in the EU; Austria, a country that earns large incomes via entrepot services between the EU and the rest of the world; and Luxembourg, a large banking center.

At the top of the EU’s income scale, Germany, the Netherlands, and the Scandinavian nations are the wealthiest and most well-governed, and pay into the EU far more than they get out.

But they’re also being held back by the EU’s morass of regulation. This is partly because these societies tend to obey regulations, rather than skirt them.

Under the leadership of Angela Merkel, Germany is the core of the great European project. However, the German people are becoming increasingly discontent with her rule, mostly due to the divisive issues of the refugee crisis and Greece.

It’s no longer inconceivable that a German nationalist government – a coalition between parties of very different economic views – would come to support an EU exit.

The Netherlands and Scandinavia already have such nationalist parties – some of whom are already in power as part of coalitions, or otherwise riding high in opinion polls. On an accession treaty with Ukraine, the Dutch referendum proved that a majority of people were against the outcome desired by the Euro-bureaucrats. The turnout for the referendum was just over 30%, however, adding to the illusion of apathy towards the government.

If Britain were to lead the way out of the EU, the Netherlands and possibly one or more of the Scandinavian countries could also vote to leave.

In turn, this would inspire other countries to re-examine their position – a kind of euro domino effect.

The Future of the EU

If you’re wondering whether the EU will break up altogether, it’s very unlikely – at least within this generation.

Still, Britain may not be alone in its departure. Over time, several more countries could find their destinies more attractive outside the union.

More likely, if there is a shift towards multiple exits, the EU would potentially seek to reform into a less-regulated grouping, or even opt to separate into several smaller groupings, with varying degrees of integration.

Remember, the EU was conceived from the war-torn Europe of the 1950s as a means of avoiding further conflict. Sixty years later, European countries are disinclined to cause strife, meaning the EU may no longer be necessary.

After all, European hegemony no longer yields the strength that it did in 1914 – a united Europe would rank only fourth or fifth among the world’s major powers.

For investors, the uncertainty is troubling, but not terribly so.

Newly independent ex-EU members will remain friendly, mixed economies with strong capabilities. So they’ll continue to be investable.

Indeed, the turbulence surrounding potential EU exits may actually provide excellent buying opportunities.

Good investing,

Martin Hutchinson

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