Update on Brexit

The few days immediately after the United Kingdom’s (U.K.) surprising vote to leave the European Union (EU) have been filled with political unrest and uncertainty. Although many questions remain unanswerable, a few issues have become clearer, and a few more have come to the surface. One suggestion that keeps arising is that the U.K. could end up remaining in the EU. Is this even possible?

Technically yes, though we view this as unlikely. Thursday’s vote to leave is non-binding on the U.K. government. The formal start of the process to leave will begin when the U.K. submits its withdrawal notification under Article 50 of the Treaty of Lisbon. Prime Minister David Cameron has stated that, as someone who campaigned to stay in the EU, he is not the right person to negotiate the withdrawal; he resigned as Prime Minister on Friday. It will likely take several months for the U.K. to select new leadership.

The U.K. has time to change its mind, at least in theory. However, there is no set process by which this change would take place. As the vote is non-binding, the government could ignore it. The U.K. could also hold a second referendum. Both of these scenarios become more likely if there are new elections and pro-EU parties receive unusually strong support, creating an implicit mandate to reconsider the referendum. But these scenarios would upset the majority of people who voted to leave the EU. The potential of a new referendum would give credence to the “leave” advocates who have complained that the EU was forced on ordinary citizens. Ultimately, however, the decision on whether and how to determine EU membership is a function of national politics. The EU itself has no involvement in these decisions.

Further reducing the probability of a reversal is the anger within the EU. Many European leaders have stated that they want the U.K. gone as soon as possible. They are exasperated at the possibility that, after being rejected by the U.K., it is the U.K. that may have to delay its own exit due to internal political disagreements. This acrimony is also likely to color the negotiations between the parties when they actually begin.

By voting to leave, the people of the U.K. have let the proverbial genie out of the bottle. It will be very difficult, but not impossible, to get him back inside.

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

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

This research material has been prepared by LPL Financial LLC.

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