Understanding the Brexit

If you read a lot of financial news, you are probably sick of hearing about the vote held in the U.K. to leave the European Union, which has been coined the Brexit. Even I’m sick of hearing about it, but there is a story that we in the Dakotas may be able to take away from all of this.

What first struck me is, why the U.K.? Clearly, they didn’t have as much to gain by leaving the European Union as other countries. You see, Greece and Spain are stuck in this horrible situation with very high unemployment and economic stagnation. They have largely endured these situations because they have remained part of the European Union, and more importantly, maintained the Euro as their currency. Before the EU and the Euro, Greece and Spain could have devalued their currencies, making goods and services cheaper, which in turn attracts more consumption and puts their populations back to work. I was so sure this is what Greece and Spain needed to do, that I assumed it would undoubtedly lead to them leaving the EU. But, they haven’t. Why?

Greece and Spain may still leave, but given what they have suffered through, it might be considered a surprising change of course as of 2016. They chose to remain in the EU because, despite the suffering of their people, they believed very strongly in a European dream. They felt that suffering was short-term, and in the long-term greater integration would payoff both economically and politically.

Now, let’s look at the United Kingdom. Their economic realities were not as bad as that of Greece and Spain. But, their people felt, in the long-run, they would be worse off with free trade and the free movement of labor. Also, the United Kingdom did not adopt the Euro currency but retained their pound sterling. For these reasons, it would seem as though the European dream did not burn as brightly in the United Kingdom, which is why they have voted to leave the EU. This means in large part, Spain and Greece remain in the EU, and the UK seeks to leave, despite their economic realities. Their choices are fueled by ideas and beliefs, and it shows how strong ideas can be in the face of economic reality.

Like in the UK, there are many who believe we here in the US would be better off pulling out of NAFTA and pursuing protectionist trade policies. Again, the power of ideas is strong and may not correlate with our economic reality. Both North Dakota and South Dakota export beef and grain all over the world, and each have over 28,000 jobs in their respective state that depends on trade with Canada. Pulling out of NAFTA, and having foreign countries apply tariffs on our agricultural products, would have a noticeable effect on many farmers and businesses in our region. I think it is fair to say that several jobs would be cut or lost. So the question which must be examined is, “Is the idea of being less integrated into the global community worth what we will lose by cutting ties?”