Brexit…. Saw it Coming an Ocean Away.
In the summer of 2009, as I sat in a study abroad law course offered by DePaul University College of Law in Madrid, Spain called European Business and Commercial Law, learning about the European Union(EU) and Eurozone, I wondered when I would ever get to use this knowledge. I performed very well in the course despite enjoying the social and cultural offerings of Spain during my (3) three day weekends (traveling north for the Bull Run in Pamplona, visiting the sandy beaches of Barcelona; and then south to the palatial estates of Alhambra in Granada, and enjoying the delicious foods in quaint town of Seville). Fast forward to Spring of 2012, I was working as a large bank supervision staff at the Federal Reserve Bank of Chicago and a colleague pens this report about the increased risk and potential fallout from the Greece bailout crisis on EU and Eurozone at the time. He shared the report with me and I disagreed with his thesis. The recent Brexit referendum vote that saw the people of UK decide to leave the EU was one of my central arguments.
Grand Thesis
My colleague's grand thesis: the European Union break-up risk was high if Greece did not accept the Bailout deal (with all the austerity measures) and instead choose to leave (or was kicked out of) the EU. The currency (i.e., the Eurozone) would be the first thing to go, he concluded. I had tremendous respect for my colleague and thought (and still think) very highly of him, but his thesis was wrong and I told him as much. He did not take it too well as you would imagine, being the market/liquidity risk specialist and I… well, a risk generalist. He had already shared his report with our senior management before sharing it with me so I did not feel a need (or duty) to broadcast my thoughts to others. But knowing this colleague, he probably retracted or softened arguments in his report after our discussion. He was at least intellectually honest (again I respected him for sticking his neck out).
On the European Union and Euro Zone
The immediate and potential long-term impact of the Brexit vote to leave the EU during the past 48 hours caused me to vividly remember my arguments against my colleague’s thesis. To be clear, the European Union refers to monetary coordination and economic partnership of 28 countries; the European Zone is a smaller group of EU countries that use/share the euro currency. So why didn’t I agree with his thesis?
First, Greece’s economy as portion of the European Union is very small (especially relative to the United Kingdom’s). Greece’s 2012 gross domestic product (GDP), which is a gross measure of a nation’s total economic activity, was only $250 billion or $25K per capita versus UK’s 2012 GDP of $2.615 trillion ($2,615 billion) or $41K per capita. Said differently, in 2012 Greece’s GDP was less than 10% of UK’s GDP. And this was by far my biggest and best argument: Greece was not a significant part of the European Union. As a percentage of the total European Union’s 2012 GDP, which was roughly over $10.239 trillion (or $10,239 billion), Greece’s GDP was a mere 2.4% versus UK’s GDP, which was 25% of the EU’s GDP. All this to say, we made such a big deal over Greece’s potential exit from the EU but the UK was actually the tail risk event hardly no one saw coming.
Historically— United Kingdom has been a Major Economic (Military and Political) Power with a Shared History with almost every Country in the World.
Second, Greece has historically not been an integral part of Europe’s economy or the world economy for that matter. Particularly for the reason I already mentioned above (i.e., their economic contribution is simply not material). With the exception of food exports, Greece has not been a major historical net exporter (or importer). France, Spain, Italy, Germany, Netherlands, and UK are very relevant to the EU. While an important ally of the British (since the UK helped Greece gain independence from the Ottoman Empire in the 1820s), Greece’s importance in the EU lies in its political, cultural, and strategic location(read: migration enforcement). I hear Greece is beautiful, I hope to visit soon after I visit London.
Euro Currency
Last, as it relates to the euro currency I remembered this from the sangria dazed summer evenings broken up by mornings spent in class: the Eurozone would be the last thing to be phased out if in fact the European Union were to fail. This is because transactions between parties in the zone were contracted in the euro currency. That usually, and practically, will take time to work it self out as we will see over the course of the next few month and years with the Brexit.
EU Leaders and Referendums
These two referendums are an island apart in more ways than one, but they do share one similarity. Greece’s referendum vote was on whether they would accept the bailout loan terms (with austerity measures). The Greeks decided against the bailout in July 2015 under a populist Prime Minister (Alexis Tsipras) after the prior Prime Minister (Antonis Samaras) was able to bring the measure to vote in 2011 and eventually lost his position in January 2015. It is still unclear what the ramifications are for Greece as it relates to their membership in the EU and Eurozone. What is clear is that whatever the ramifications are for Greece, the ramifications for the EU and Eurozone is minimal.
UK’s referendum, however, was more specific and frankly more impactful. It directly asked the question on whether the UK should remain or leave the EU. Also, unlike the Greece referendum, it was undertaken under a non- populist leader (David Cameron). Cameron (and his Conservative Party) could not sway more than half the population to vote to remain in the EU. The majority of Brits voted to leave the EU.
The similarity of these votes were that both were one against the EU, and against current form of globalization that accrues benefits to a few at the expense of the masses. However, unlike the results of Greece referendum, the UK vote to leave sends a direct message: We’re out of the EU. That has ramifications for the EU and the UK alike because it is the UK. Cameron clearly misread the temperature of the UK citizens, otherwise he may have cancelled the referendum just as Samaras did in Greece in 2011 — buying himself and his party more time.
