The Irreverent Economist

On “Brexit”

The EU was created via the Maastricht Treaty of 1992 to promote the free movement of trade, capital and labor throughout its 28 member states. It has done so in large part through the standardization of economic policies and regulations, which have brought many benefits to the citizens of Europe.

The EU traces its origins to the European Economic Community (EEC) which was established in the 1950s to promote free trade in Europe. The UK joined the EEC in 1973, but decided NOT to join the European Monetary Union (EMU i.e., the euro) in 1999. The British government reasoned that a freely floating currency would be invaluable in helping the UK economy adjust to changing global economic conditions. And so it has: the UK economy has enjoyed stronger growth than the euro zone, with moderate inflation, in the years since.

Even so, many citizens of the UK, as well as those in continental Europe, have begun to chafe under the centralization of regulatory authority in Brussels. Their uneasiness reflects not only the slower growth of recent years (regulation and standardization have, arguably, become too much of a good thing) but also the fact that growth has not been as widely distributed as it was in the past. The trend toward income inequality has not been limited to the United States, but has intensified all over the world. As Benjamin Friedman explains in his magisterial work, The Moral Consequences of Economic Growth, bad things often happen when economies stagnate and inequality worsens.

However, even if growth had been faster and more fairly distributed, we likely would have reached this point before too long. Citizens everywhere are saying that self-determination is important to them—perhaps even more important than material gain. They don’t want to be reduced to economic units in a centralized machine. Culture matters to all of us, all the more so as we enter the realm of artificial intelligence. Culture (or community, or tribe—or whatever you want to call it) has sometimes been denigrated as a vestige of our primeval selves. However, it is good to remember that Homo sapiens prevailed over all other species due to our adaptability and resilience, much of which derives from our communal intelligence. It is foolish and condescending to tell people to shed all of their personal and cultural allegiances for an abstract “greater good.”

I have lived and traveled all over the world in various public and private sector roles, and have deep respect for other people and cultures. That respect is embodied in the name of this company: KPF Global Investment Strategies. Even though I consider myself a world citizen, I do not believe that global consciousness can be manufactured by elites who are the principal beneficiaries of the system. The pace of change that has resulted from globalization, technology, automation and migration has occurred at lightning speed, and people need time to adjust. If the centralization associated with these trends is forced down peoples’ throats, they will, quite obviously, reject it. Expansion and consolidation, creation and destruction are the natural ebb and flow of human history. To everything there is a season…

If the UK leaves the European Union, the sky will not fall. The UK economy is vibrant and competitive. Its financial hub (known as the City of London) played a pivotal role in the global financial system long before Maastricht--for centuries, in fact--and will remain so even if the UK leaves. Many countries enjoy free trade and close economic ties with one another outside of the EU, and there is no reason to think the UK cannot do so as well. Indeed, many of the worries now circulating were present when the UK decided not to join the euro area, and they proved to be unfounded.

Having said all that, we at KPF Global believe that a departure of the UK from EU will test the foundations of the Union, and precipitate profound challenges from within the Continent. We have long considered these risks to be substantial; back in 1999 we predicted that the euro would not last more than 20 years. The 2011 European banking crisis, the 2012 events Cyprus, and the ongoing Greek drama are evidence of unresolved internal tensions. In light of these risks, last spring (2015) we substantially reduced our clients’ exposure to European markets, instead tilting our international portfolios toward Asia. We believe there are likely to be attractive investment opportunities emerging from the volatility that lies ahead, and are looking forward to helping our clients profit from them as we move forward.

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