Key Takeaways

· Thursday’s “Brexit” vote, during which the U.K. will vote to stay or leave the EU, has had considerable impact on the markets recently.

· The pattern from similar recent votes suggests that the chances of the U.K. staying are greater than the polls suggest.

· The EU and U.K. are significant trading partners; should there be a leave vote, the long process for leaving the EU means that any impact on the economy will be months or years in the future.

This week’s vote in the United Kingdom (U.K.) on remaining in the European Union (EU) could have significant implications for both parties. Polling data suggest that the vote will be very close, though historically, in similar situations people vote retain the status quo in greater proportions than the polling suggests. There is no set process should the U.K. decide to leave; the process will require negotiation with the EU and internally in the U.K. The trade and financial connections between the U.K. and the EU are complex and significant to both parties. Although the U.K. runs a deficit on trade of goods with the EU, it has a large surplus in trade of services globally and is the EU’s primary financial services hub. Though the market impact of a “leave” vote would be immediate, actual changes in trade and trade policy would take place over months and years.

What is the timetable related to the Brexit vote?

On Thursday, June 23, 2016, citizens from the U.K. (England, Scotland, Wales, and Northern Ireland) will vote on whether to leave or remain in the EU. The results should be known by early Friday morning (June 24), and at least by the market open on Friday morning in the U.S. The financial markets would clearly breathe a sigh of relief in the event of a “remain” vote. However, this may not permanently settle the issue. A significant number of Britons will vote to leave the EU, but the movement would have very little political standing. Prime Minister David Cameron has staked his political career on the U.K. remaining in the EU. Maybe it will resurface periodically, as the other independence movements do, but a “remain” vote will likely close the issue for the next few years.

If the vote is to leave, the political and economic ramifications will create more uncertainty. Within the EU, the process is governed by Article 50 of the Treaty of Lisbon that created the current EU structure in 2009. The Article is just 260 words, effectively saying that there will be negotiations between the parties that can take up to two years. The complication arises because the negotiations would take place with the U.K. government, which is currently led by someone who has opposed the leave vote in the first place. It is quite likely that a new government would have to be installed in the U.K. before meaningful progress could be made. 

Recent votes on independence.

There have been two relatively recent votes on independence: Scotland’s attempt to leave the U.K. in September 2014, and the Quebec vote on secession from Canada in 1995 (this may not be recent by common terms, but these votes are so rare we believe it is worth including). In both cases, polling data immediately before the vote proved suspect. In both cases, the final vote for the status quo (staying in the current political configuration) was nearly 6% higher than polls predicted. In the case of Quebec, the polls predicted a “leave” vote, while the final vote was a narrow “stay.” In Scotland, the vote to remain in the U.K. was over 10% greater, compared to a 4% expected margin of victory that was expected. We also examined the data related to the Catalonian independence movements from Spain. In this case, polling data favoring independence was correct. However, in Spain the votes were non-binding and actual voter turnout was below 40%.