What began as an experiment after the Second World War has run aground in a very short time from a historical perspective. For centuries, Europe has had a history of turmoil with major wars following about every 50 years. After World War I, an attempt was made for a lasting peace with the League of Nations, but that did not last long.
After the carnage of World War II, Konrad Adenauer and Charles DeGaulle set about avoiding yet another major war on the continent. If the countries of Europe could be united economically, it was reasoned, maybe they could avoid future wars. Beginning with small agreements, initially about coal, and later about tariffs in general, the seeds of the European Union were planted. Out of that initial effort came an economic union, a common currency and the ability to travel and ship goods freely throughout Europe. No longer were hours long waits at borders necessary to cross the borders. No longer did you need a different currency in each country. Young people in Europe began to think of themselves as European, not Germans or Poles. Military conflict was all most unknown, except for the breakup of countries like Yugoslavia or the Russian invasion of Crimea. The example of Western Europe was so strong that Eastern European counties wanted to be part of the EU and use the Euro currency.
But this all fell apart when the crisis in the Middle East launched 65 million refugees worldwide, many toward Europe. Europe could not cope with this crisis. Valiant efforts were made by some European leaders such as Angela Merkel, chancellor of Germany, but in the end they just could not cope.
There were many reasons to be dissatisfied with the EU bureaucracy, located in Brussels. Nearly everyone had a bone to pick with them. But the advantages far outweighed the disadvantages, that is until the wave of immigrants hit Europe. Borders were closed, the economy and people suffered. Optimism faded. What started as a comic movement for Britain leaving the European Union became so much more until even the Lord Mayor of London supported it.
London, the financial center of Europe had perhaps the most to lose. At the end of the day, only London metro and Scotland voted to remain; the rest of the country voted to exit. The parallels to the U.S. Presidential race cannot go unnoticed. A comic character with no political experience captures a major party, tapping into immigration and economic unrest and presents a challenge to the American experiment.
David Cameron, the British prime minister, may not be the last to resign. Angela Merkel, who has been the grownup in the room, could be the next to go. Right wing parties have shown strength in elections in Europe with a number of major elections coming up. Will more countries try to exit the EU? The questions are many and will only be answered by time.
The markets suffered immediately from the vote. The pound dropped significantly in value. The London equity markets slumped 5 percent. Markets around the world dropped and there will be impact for months to come. There may be euphoria for some, but when the coming recession grips Britain, people may wonder why a robust economy faltered, companies left the U.K., property prices fell, unemployment rose and wages stagnated. Young Britons are already waking up to the fact that before today they could work anywhere in 27 countries, but not after Brexit takes effect.
We brought our investments home, to the U.S. over a year ago. Not because of Brexit, but because of all the Sturm and Drang in Europe. I did not predict the Leave vote, which was only foreseen by the true believers. But I did think the U.S. was the “best house on a bad block.”
With the leave vote in the books, the unraveling of the EU will take years. Both the UK and Europe will suffer. Expect recriminations. It is no time for celebration, but expect some to cheer. They might as well cheer at their own funeral.
The U.S. should appear even more attractive to investors. We still have the largest economy in the world. We can freely trade with both proponents and opponents of Brexit. Our currency is strong and still the reserve currency of the world. Our bonds are backed by the full faith and credit of the U.S. economy.
William D. Rutherford is an investment manager in Portland, Ore.