The market abhors uncertainty, political or otherwise. Given the global economy’s fragile state, shortsighted populist policies, such as the one that led to the referendum on the UK remaining in the EU, can potentially derail the recovery.
Discontent about the economy and the established political leadership in developed economies create a situation where uncertainty about election results and their implications for future policy represent a headwind for equities, especially with the US presidential election this fall. And don’t forget about the general elections in Holland and Germany next year as well as the presidential race in France.
If protectionist and nationalistic policies rule the day in these elections, a global economic downturn—already a risk at this point in the cycle—could arrive sooner than expected. A recession that coincides with a period of political dysfunction among the world’s developed economies will last longer and inflict more pain.
In 1963, Charles de Gaulle opposed the UK joining the European Economic Community (EEC), while the Kennedy administration lobbied for Britain’s inclusion with all its might, threatening to levy financial and trade sanctions.
Ten years later, the UK joined the EEC with Ireland and Denmark, though the average Briton and Prime Minister Harold “Mac” McMillan weren’t entirely thrilled by the prospect.
The English have never been that keen on truly integrating with the Europe and remained comfortable in their traditional role as Continental outsiders.
Britain regarded the EU primarily as an arena for free trade; political, monetary and financial integration were never on the table. As a result, the UK’s reticence has often been behind the various mini-crises that occasionally cropped up in the EU.
The point isn’t that the English, being (at least in their view) more practical than their Continental counterparts, had the foresight to understand that the European dream might not work. Rather, their skepticism toward efforts in this direction helped to make this view viable.
Despite the intellectualizing in the UK about the EU’s eventual unraveling, the forces mobilizing the Brexit vote centered on appeals to British essentialism and fears about an influx of refugees and immigrants.