Brexit Spells Ruin of EU, Strife for U.S.

Brexit Spells Ruin of EU, Strife for U.S.

My son sent me a text a couple weeks ago with a link to an iPhone app. “Get this” was all he wrote.

The app is called Been. It maps, catalogs and displays all the countries and states I’ve visited in my travels through the years, and tells me what percentage of the world and the U.S. I’ve seen so far (57 countries for 23% of the world; and 43 states for 84% of America).

Outside America, the region where I’ve spent most of my time is Europe. I’ve visited 22 countries, or 38% of the Continent. I’ve traveled from Northern Ireland to eastern Romania. From Spain to Russia, Turkey to Sweden, and Italy to France to Estonia to Poland to Slovakia, Greece and beyond.

On those journeys, I’ve talked to business executives, economists, think-tank leaders, cabbies, a few politicians, academicians, hotel clerks, waitresses and entrepreneurs.

All of which is why I feel qualified to say to anyone who believes that Britain should exit the European Union: You don’t have a clue what you’re talking about!

I’m not really addressing that last comment to most Americans. I’m really addressing it to Brits — though I know few Brits will see this. (And if you know any Brits, feel free to pass this along; it needs to be read by those in Britain who live under the delusion that life outside the EU will be better.)

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But Americans need to understand what’s at stake in Britain’s June 23 referendum on remaining in the EU or exiting — what’s known colloquially as Brexit. See, if a majority of Brits vote to leave, the reverberations will, like the old British Empire, circle the earth and leave behind a good bit of damage and destruction … particularly here in in America, where the knock-on effects of a Brexit vote will hit the American economy by way of the U.S. dollar.

Together We Stand?

First, let me say that of all the interviews and conversations I’ve had in Europe in the wake of the European debt crisis, the only place I have ever heard anyone tell me their home country would be better off outside the EU was Britain. Not a single person anywhere else — literally not a single person — has said life outside the EU would be better.

That includes people in Greece, where I was gathering research in the run-up to the controversial Greek vote last summer, as well as Germany, where much media writing has focused on the anger Germans feel toward the Greeks (and pretty much anyone along the southern periphery of Europe). They’ve all expressed some level of anger and dissatisfaction with the way the EU operates, but to a person, they’ve conceded the EU is necessary in the modern world.

But in Britain, it’s different. I’ve heard a number of people there insist that Britain would thrive outside the EU and must flee the EU.

Maybe it’s British arrogance. Maybe it’s the fact the Brits seem peeved that Germany, not England, is the heart of the European economy.

If Brits allow that mentality to push them out of the EU, well, watch out…

A Dangerously Strong Dollar

Here’s how a Brexit likely plays out in big strokes:

  1. The global markets immediately question the EU’s viability, given that the U.K., at 18% of the EU’s aggregate economy, is second only to Germany in economic heft;
  2. Which begets a fall in the value of the euro relative to our U.S. dollar as investors fear that the EU will disintegrate, erasing any need for a pan-Continental currency.
  3. Britain’s economic relevancy within Europe declines in the short run because trade ties and other contractual obligations are altered — and with more than 64 million people, the U.K. is a major source of demand and supply for many European countries;
  4. Which also begets a fall in the value of the euro relative to the dollar.
  5. A stronger dollar will shrink sales for U.S. manufacturers and exporters since U.S.-made goods become expensive relative to similar foreign products. The already tepid U.S. economy weakens.
  6. A stronger dollar means the Chinese yuan is stronger, too, since the two remain strongly tied;
  7. Which reduces demand for Chinese products globally;
  8. Which reduces China’s GDP growth;
  9. Which reduces demand for commodities;
  10. Which shrinks commodity-country economies and their currencies relative to the dollar;
  11. Which piles additional pain onto U.S. exporters;
  12. Slowing the U.S. economy even more and likely leading to a rise in unemployment;
  13. Which prompts the Federal Reserve to stop talking about interest-rate hikes and to, instead, reopen the quantitative-easing playbook.

In short, what seems like a domestic quarrel between Brits who see the wisdom of remaining in the EU and those who don’t is, at its core, a larger threat to the U.S. economy.

Geography aside, Britain isn’t an island unto itself, and Brits pressing for a Brexit would do their country, the EU, the U.S. and the world economy a great disservice in thinking parochially.

I am a long-term dollar bear because the financial and monetary fundamentals backing our currency are undeniably heinous and getting worse by the year, literally. But in the event the Brexit vote carries the day on June 23, you’re going to want to show the dollar a lot of love and short the euro, the British pound and commodity currencies because they will all struggle.

The British shaped the world with their empire — and not always for the best. They have a chance to do it again.

Until next time, good trading…
Brexit Spells Ruin of EU, Strife for U.S.
Jeff D. Opdyke
Editor, Total Wealth Insider