The real cause of yesterday’s vote by the British electorate to end its membership in the European Union was actually a well-executed plot by the BBC.
With the BBC hit, Downton Abbey, ending after six seasons, the executives were searching for another multi-season blockbuster to help justify their special status as a quasi-public broadcaster. Add to that the criticism that the BBC had drifted from its mission: “To enrich people’s lives with programmes and services that inform, educate and entertain,” the executive team was seeking a way to inform and educate, rather than just entertain.
[Tweet “Just like the famed plot of Downton Abbey, the new Brexit sequel promises to be just as dramatic.”]
Just like the famed plot of Downton Abbey, with gossip, death, murder, crisis, war, and poverty, the new Brexit sequel promises to be just as dramatic.
The hype has been better than even the best estimates by the BBC: London’s blue chip index, the Financial Times Stock Exchange 100, lost 4.4% of its value in one day, while Germany’s DAX market lost more than 7%. The British pound sterling is getting crushed (down 14% against the yen, 10% against the dollar).
The reality will not be as exciting, as the BBC must change from the initial entertainment of the Brexit plot to actually inform and educate. If the Brexit even happens, it will be about as fast as the sloths working at the DMV from the movie Zootopia. (https://www.youtube.com/watch?v=0oMbwWqceNw)
The important thing to understand is that the current market disruptions represent an emotional roller coaster, an immediate panic reaction to what is likely to be a very long-term, drawn out, ultimately graceful accommodation between the UK and Europe. German companies are certainly not 7% less valuable today than they were before the vote, and the pound sterling is certainly not suddenly a second-rate currency. When the dust settles, people will see that this panicky Brexit aftermath was a buying opportunity, rather than a time to sell. People who sell will realize they were suckered once again by panic masquerading as an assessment of real damage to the companies they’ve invested in.
What happens next for Britain and its former partners on the continent? Let’s start with what will NOT happen. Unlike other European nations, Britain will not have to start printing a new currency. When the UK entered the EU, it chose to retain the British pound—that fact, of course, will continue.
On the trade and regulatory side, the actual split is still years away. One of the things you might not be hearing in the breathless coverage in the press is that the British electorate’s vote is actually not legally binding. It will not be until and unless the British government formally notifies the European Union of its intention to leave under Article 50 of the Treaty of Lisbon—known as the “exit clause.” If that happens, Article 50 sets forth a two-year period of negotiations between the exiting country and the remaining union. Since British Prime Minister David Cameron has officially resigned his post and called for a new election, that clock probably won’t start ticking until the British people decide on their next leader. For the foreseeable future, despite what you read, the UK is still part of the Eurozone.
After notification, attorneys in Whitehall and Brussels would begin negotiating, piece by piece, a new trade relationship, including tariffs, how open the UK borders will be for travel, and a variety of hot button immigration issues. Estimates vary, but nobody seems to think the process will take less than five years to complete, and current arrangements will stay in place until new ones are agreed upon.
The BBC executives are hoping to get at least 5 seasons of Brexit. I expect they have planned out a set of hype and non-news, news events to maintain viewership. (At least it is a nice break from all the election coverage.)
Meanwhile, since the Brexit vote is not legally binding, it’s possible that the new government might decide to delay invoking Article 50. Or Parliament could instruct the prime minister not to invoke Article 50 until the government has had a chance to study further the implications. There could even be a second referendum to undo the first.
The important thing for everybody to remember is that the quick-twitch traders and speculators on Wall Street are chasing sentiment, not underlying value, and the markets right now are being driven by emotion to what is perceived as an event, but is really a long process that will be managed by reasonable people who aren’t interested in damaging their nation’s economic fortunes. Nobody knows exactly how the long-term prospects of Britain, the EU or American companies doing business across the Atlantic will be impacted by Brexit, but it would be unwise to assume the worst so quickly after the vote.
But you can bet that, long-term, everybody will find a way to move past this interesting, unexpected event without suffering—or imposing—too much damage. Meanwhile, hang on, because the market roller coaster seems to have entered one of those wild rides that we all experience periodically.