Brexit wins, why is the market crashing?

We wake up this morning to Brexit winning, the pound dropping like a stone, and UK bank stocks losing a lot of value. One Tory MP appeared on BBC News explaining that these are Remain’s “scare tactics” turning into reality. Norman Tebbit was there to say that no, this little crash is just the result of the Leave side scaring gullible markets into believing that terrible things will happen, even though they won’t really, because France will still want to buy cars off us (his exact example).

With all due respect to Mr. Tebbit, while stock and currency markets are certainly capable of some pretty irrational hijinks, this really isn’t one of them.

The problem was never that Brexit would mean we never sell a single pencil south of the channel again. Nobody ever claimed that the EU was the only thing physically holding the British Isles above the grey North Atlantic waves.

But imagine that you are a successful, let’s say Italian, company. Things are going so well that you want to open up a UK headquarters. That’s great news for the Britain, because it means you’re guying to hire a lot of locals to work in the offices, do local sales, manage the local HR, wipe and vacuum it at night, supply food to the cafeteria, etc. Those people will all get paid, then take their wages to the local supermarket, pay rent, buy houses, pay taxes, etc. So it provides jobs and income for a whole lot of Brits beyond even the ones who are directly hired. As I say, good news.

But when you open an operation like this, there are lots of potentially expensive things you have to worry about. You have to pay your lawyers to make sure that you comply with all the local labour and business practice laws. You have to pay accountants to make sure that you are complying with all the local rules about how you spend and account for your money. This is the kind of boring, tedious, invisible but necessary legwork that goes into running big operations.

If Britain is part of the EU, then those regulations and laws are pretty much the same here as they are in Milan, Rome, Frankfurt, or Madrid. Opening a new regional headquarters in Birmingham or Manchester is easy, then. You don’t even need visas for any workers you move over – they just show up, follow all the normal rules (for the most part), and get on with it.

But if Britain is not in the EU, then it’s going to have its own regulations that will be different from the EU ones. That means that you need to hire a whole new set of local lawyers and accountants, and spend time training your managers on the different rules. It means you need to worry about work visas for employees. And that all costs money. Quite a lot of money. Enough that you might want to take a serious look at putting your headquarters in Ireland or Northern France or somewhere else nearby instead. Which means the jobs and the income all go somewhere else, and Britain loses out.

It’s a similar problem if you are an American or Japanese company deciding where to set up local shop. GB isn’t has an economy the size of California, so it’s got plenty of people with money to sell stuff to. But even without Britain, the EU has an economy the size of almost the entire USA (including California). That’s a much bigger and richer market. So if you are deciding which side of the fence to put your HQ on – which side you want to pick to be easy to operate in, and which side to take on the extra border hassles of working over – all else equal, you’re probably looking for the place with the biggest market potential. Out of the available choices, Sheffield just got a lot less likely.

This is an example of the ways an independent Britain loses out economically (there are others too).

Now you might ask what that has to do with bank stocks and pound sterling crashing. After all, nobody has yet taken a single one of these business decisions, so why be so dramatic? Is this just silliness from crazy investors scared by the Remain campaign’s over-hyped rhetoric?

Well, possibly, but the thing about these trading markets is that the prices they pay for things have a lot of expectations for future success already baked into them. When I buy stock in Lloyd’s bank, it’s not because I necessarily think they are making lots of money now (Amazon sold stock for very high prices when it first opened, despite losing money hand over fist at the time). It’s because I think that they are going to keep on making lots of money into the future, and so they will be able to pay me dividends, or their stock will become even more popular, letting me sell mine for a profit (which is what happened with Amazon – they lost money initially because they were investing so much of it in growing their business – if you bought the stock then, and still own it now, then you are reaping the payoff you invested in). If I suddenly realize that LLoyd’s or RSB’s future looks a lot less rosy than it used to, then all of a sudden the price I’m willing to pay drops, because I’m not expecting to get nearly so much future reward out of them.

That’s exactly why the pound and bank stocks crashed this morning. The people who have staked their own cash in Britain’s future prosperity believe that yesterday’s big decisions means there’s going to be less of that prosperity coming down the road than there used to be, and so they are not putting nearly so much of their cash on the line for it any more.

None of which means that Britain’s economy is over – it will still go on, there are still 60 million customers on this island who buy things, there are still companies here who will sell products and services. Britain will continue to sell car components abroad (though probably fewer of them if we get new border tariffs – which are entirely now possible, depending on the outcome of negotiations that Britain won’t necessarily have a ton of leverage for). But the markets are now suddenly seeing a whole bunch less potential here than they did yesterday. They are now expecting less jobs and less revenue, which means less tax revenue that will support fewer government programs, and so on. In other words, Britain’s prosperity is likely to take a hit.

That’s not scare tactics anymore, it’s our immediate future.

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One thought on “Brexit wins, why is the market crashing?

  1. Pingback: Why Brexit won: It’s not (just) what you think |

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