Europe & Brexit: Problems of an Imperfect Union

Citizens of the U.K. are voting today to remain in or leave the European Union. Polling data suggest that the vote is very close; though the “remain” vote is slightly ahead, it is well within the margin of error and there are a large number of people undecided. There are a wide variety of issues: trade, regulation, immigration, and national sovereignty are some of the bigger ones. These have all been discussed at great length in other forums.

The economic and political integration of Europe began after World War II. The first continental governing body was the European Coal and Steel Community, created to prevent Germany from acquiring the raw materials for war. From there, the concept of Europe as a political entity, rather than just a geographic one, grew. With some notable exceptions (the breakups of Yugoslavia and Czechoslovakia, and the dissolution of the U.S.S.R.), the trend in Europe has been toward increasing political and economic integration.

More recently, Europe, as a political entity, has become stuck. It has engaged in monetary union, with the creation of the euro and the European Central Bank. Yet Europe continues to have national taxation and spending policies. The incongruity of having common monetary policies but different fiscal ones was displayed front and center during the still unresolved Greek debt crisis. Europe also lacks a common foreign policy; thus, it has been unable to play a significant role in major global events that impact it. For example, Europe is struggling to deal with refugees from the Syrian crisis, but it has no real mechanism to treat the root cause of that problem.

The Brexit vote can be viewed in the context of Europe’s decision to either move forward or backward. It seems unlikely that it will be able to stay in its current configuration. In some ways, Europe after WWII is similar to the colonies after the American Revolution. In both cases, independent entities joined together. The American colonies quickly determined that the Articles of Confederation were inadequate and created the Constitution of the United States. Europe may be at a similar crossroads.

Should the U.K. vote to leave, it will likely set off a wave of other devolutionary events. But even if the U.K. decides to stay, the EU will be faced with the problems of an incomplete union. Many people—and not just in the U.K.—view the status quo as unacceptable. This recent issue involves the U.K. membership. How the U.K. votes will impact not only its own membership, but may also decide if Europe moves forward or backward.

Below are some helpful links regarding the Brexit vote:

The economic forecasts set forth in the presentation may not develop as predicted.

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This research material has been prepared by LPL Financial LLC.

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