A critical, national referendum. A pair of deeply divided political parties and ideological visions. Portentous societal claims and dire economic scenarios. Campaign slogans. A flotilla. Why does it feel like the U.K. has sort of been here before? Oh, wait. It has.
On June 23, the U.K.’s citizens will vote on whether or not their country should remain within the European Union, or EU for short, which is different than the Euro or Schengen Visa Zone, as the U.K. already isn’t a member of either of those. If that sounds confusing, imagine actually casting a ballot at one of Britain’s polling centers come Thursday.
A Maginot Line Has Formed
Simply stated, this departure or “Brexit” from the EU is about the U.K. separating itself from the regulatory and financial commitments required of all nations within the European bloc. Supporters of the move, like former London Mayor Boris Johnson, believe that Brussels, headquarters of the EU, threatens the sovereignty of the U.K. by enacting open immigration policies and numerous industry regulations. Opponents, like current Prime Minister David Cameron, see the departure as an abandonment of duty to Europe and a shift that could have massive economic and political consequences for the U.K.
Before outlining those predictions of calamity, of which Britain’s financial services industry is expected to be affected, it’s important to understand the two sides, and the following Economist chart provides a tidy and visually appealing overview of both arguments:
Is the Sky Falling or Are People Just Squawking?
After months of back and forth, polling now shows the “Out” votes taking favor, and while no one seems to have a complete view as to the damage a Brexit could cause, hypotheticals and hyperbole abound. Some oft repeated prognostications are that
- the British Pound will weaken
- favorable trade conditions will disappear
- housing values will tumble
- the markets will plummet
- job losses will mount
Doomsday scenarios aside, the common thread among soothsaying analysts and journalists alike is that the financial services industry, specifically banks, will take the biggest hit in terms of revenue losses and operational adjustments. Morgan Stanley has warned it will move 1,000 employees out of London and into the EU if the referendum passes. JP Morgan’s CEO has indicated his firm may relocate up to a quarter of its U.K. staff due to the fact that if a bank wishes to work productively with an EU business, it must exist within the EU; managing a company’s or an individual’s finances from across the English Channel will become too cumbersome and expensive to maintain.
The idea of increased costs at a time when the entire industry feels squeezed between regulatory demands and technological threats is certainly something no firm wishes to see come to fruition, but nonetheless, as Jamie Dimon, CEO of JP Morgan said, “We are going to start planning for the worst. I have to – if you were my board you would say: ‘Are you prepared if the outcome is a really bad one?’.”
Follow the Money
Beyond altering the economic conditions within the U.K. and the balance sheets of global banks like JP Morgan, investors want to know what this looming storm directly means for the U.S. Certainly the markets will continue to react negatively, but with the exception of a possible benefit for New York, as firms pivot to London’s rival financial hub, few can make conclusive statements. However, one can hypothesize that even the smallest threat of market contagion will feed the anxiety and apprehension already present within those budding investors still on the sidelines, like Millennials, as they watch yet another macroeconomic fiasco wreak havoc around the world.
Thursday’s referendum can’t come soon enough for many, and that’s probably because whatever the outcome, they want to achieve some sort of certainty and normalcy on Friday, even if it involves finding a solution to another consequence of operating in a globally-exposed, yet not cohesive financial climate. And if there’s any truth to the “skin in the game” idiom, another group also eager for Britons to vote is the U.K.’s bookmaker industry. With the odds close to favoring a Brexit and tightening daily, the future of the U.K. within the EU, and even the EU itself, is seemingly anyone’s bet in 2016.
