UK’s Referendum – A Wake-Up Call to Europe

June 20, 2016

“Nobody in Europe will be abandoned. Nobody in Europe will be excluded. Europe only succeeds if we work together”.
Angela Merkel, Chancellor of Germany

Ladies and gentlemen, we are about to witness an event that could change the face of Europe as a whole. On Thursday, citizens of the United Kingdom will give their vote to either leave the European Union or remain part of it. To this day, it is not clear which side has the upper hand because recent polls are close to 50/50 hence the outcome of the referendum is basically a coin flip. Every trader, every financial institution is doing its best to prepare for potential market turmoil that could wipe out entire fortunes. Nobody knows what will happen with the stocks or British Pound when the “leave” vote should win and in the same time, nobody knows how the markets may react if the opposite should happen. In either case, one thing is absolutely clear – we are sailing in uncharted waters.

As many have already mentioned, the main fear that comes from Brexit is that it’s contagious and that the UK’s referendum will start a chain reaction which will eventually lead to a total collapse of the European Union in its current form. While it may sound a bit too dramatically, it is definitely something that we cannot ignore, since the people’s trust and commitment to the EU seems to be evaporating. The entire existence of the union relies on its ability to convince the citizens of Europe that it’s necessary and beneficiary to everyone to be part of it but since the collapse of the housing market in 2008 and the beginning of the financial crisis, EU and EZ have both failed to do so. The unemployment rate in the common currency area is still above 10 percent, the economic growth is almost non-existent and austerity measures, introduced during the peak of the crisis, are still intact in some countries.

Furthermore, European Union has turned into a “house of bureaucracy” introducing new laws and regulations on constant bases. The problem is that those changes often enough affect those who create jobs and wealth – in other words, entrepreneurs. Business activity is sluggish in the Euro area and creating new businesses is not overly attractive these days because the economic environment in general is not in a state that could be described as appealing. Mr. Mario Draghi has called for more aggressive structural reforms in the Euro zone for at least two years now but the politicians are not keen to make those changes because they may not be overly popular. Unfortunately without change European Union or Euro area cannot go forward and hence the dissatisfaction with both of the unions may grow and reach a breaking point.

Perhaps the UK’s referendum will act as wake-up call to everyone in the European Union and it will trigger a larger discussion about potential reforms to make Europe more competitive on a global scale. Leaving the Euro area has also been a hot topic in several countries in recent years because they find that Euro as a currency is their main obstacle to spark a new round of economic growth. While it may have some truth to it from a certain perspective then in the bigger picture, being part of the common currency union is definitely not the issue here. Many EU and EZ countries are deeply in debt and unfortunately for them, leaving the Euro will definitely not fix their budget problems, quite the opposite in fact, it may turn out to be the worst decision possible. Just look at what is happening in Venezuela, where the government has managed to create hyperinflation and as a result, has destroyed the entire economy, largely by printing new currency units out of thin air.

In general, European Union’s fate is the hands of policy makers. Brexit vote is a very good sign to everyone that perhaps it’s time to start thinking about potential changes in the way the entire union operates. Hopefully it is not too late because if EU should fall apart, then it may take decades to clean up the mess and during the process Europe may fall further behind everyone else in terms of life quality, security and innovation.

Long live Europe!

Capital Properties FX
20.06.2016

Capital Properties FX