Brex… in !

Didier Le Menestrel (pictured), chairman of La Financière de l’Echiquier, shares its views on the forthcoming Brexit poll.

23rd June 2016. The British people just voted to pull out of the European Union. After weeks of heated debates, the notorious “Brexit” finally came to pass. However the atmosphere is far from joyful: the streets of London are bustling as usual, though nothing more.

Some victories leave a bitter taste… On both sides of the channel, no one is sure how to they should react. Thousands of French brain drain refugees, exiles from the world of finance, are starting to consider moving to a new tax destination or acceptable occupation. The Paris real estate market is starting to heat up.

In Luxembourg in contrast, cases of champagne are being uncorked; and not simply because the 23rd June is their national holiday.

This time, the celebration is for the economic miracle offered to a tiny country of only 300,000 citizens, suddenly bolstered by the prospect of UK fund managers forced to sell their asset management expertise through the Grand Duchy of Luxembourg.

This short exercise of science fiction has already started to inspire editorialists. Forecasts of such scenarios will no doubt multiply in the weeks ahead as the countdown to the referendum advances.

However, while market players are not writers of fiction, they are always quick to act. They have already not hesitated to justify their erratic behaviour by invoking the uncertain outcome of the referendum results. Yet another hypothetical event to fuel the cacophony of financial markets… as if the developments in recent weeks were not enough!

Regarding this latter point, it is worth remembering that there is in fact nothing exceptional about the current market volatility.

Market participants actually tend to appreciate environments of permanent market instability and many products derive their justification and prosper from exclusively the price component of the assets.

In a global economic context where growth is expected to remain stuck under 3% and the recent historic economic engines (China, oil-producing countries, emerging countries) are starting to run out of steam, it is easy for uncertainties and fears to dampen enthusiasm and interest in investing.

This type of market configuration, in which players no longer know which type of asset classes to choose, is not unusual in economic and financial market history: inflation in the 1970s, the excesses of the world of finance (already) in the 1980s or the monetary policies of the following decade. These all resulted in many difficult nights for investors who were bombarded by a wave of alarming news originating from all sides.

However, the real long-term situation was to be found elsewhere: declining interest rates, an expanding worldwide consumer base, the free circulation of goods and people won out over the most anxiety-inducing economic scenarios.

Ultimately, the dynamic of financial markets by itself is of little importance, and the messages they convey are often misleading. It is not the possible economic impacts of a withdrawal from the European Community that are troubling but rather the very symbol itself of a Brexit. To be effective, economic liberalism requires peace, stability and efficiency in the circulation of people and wealth.

The rising tide of nationalisms throughout the world and the temptation of retreat into parochialism must not feed from this example, even though coming from a nation who has proven over history its pragmatism and capacity to make difficult choices.

Let us acknowledge the lucidity of our friends across the Channel that is unrivalled in continental Europe, to call into question rules which they find too cumbersome.

Shedding light, through this referendum process, on the failings of the current organization of the European Community (definition of borders, budget, regulation) will be useful to everyone, provided the core principles remain intact: “The contribution which an organized and living Europe can bring to civilization is indispensable to the maintenance of peaceful relations“.

The United Kingdom is that friend (we all have one like that) that we would prefer not to encounter too often because they have the ability to tell us the truth to our face. A friend no doubt a little difficult to support year after year.

But let us still call them a “friend” and invite them to the table, because we know deep down that without them, we will not move forward in the same way.

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