Brexit: Is It Moving Markets?

• Direct effects on the E.U.’s economic growth may be limited to a gradual downward drag of 0.2–0.3%, while also reducing inflation by 0.1% over one year. We believe the effects on the British economy could likely be more significant. In the medium term, we think the Lehman Brothers collapse in 2008 and the pound’s 1992 exit from the European Exchange Rate Mechanism make accurate reference points for possible worst-case effects on GDP. Those events had an estimated effect on Britain’s GDP of -3.2% and -2.4%, respectively.
(Data for the economic relationships described above: Bloomberg.)

We believe the United Kingdom’s referendum has ramifications that stretch beyond typical policy
concerns; indeed, as noted above, the referendum is casting a shadow over securities markets as well.

Britain’s dissatisfaction with the E.U.
British Prime Minister David Cameron has long been skeptical of the E.U. His Conservative
Party has shared the sentiment, leading him to pursue changes in the official terms of the U.K.’s membership in the Union. Working with E.U. officials, Cameron finalized a set of amendments on Feb. 19. The amendments were driven largely by the party’s belief that the U.K. has a brighter future if it has a looser association with the Union. This pessimism is based in part on:

• A lack of confidence in the Union’s relevance. Britain’s political integration into the E.U. is
relatively weak. Most of the recent decisions made by the European Parliament have had little to do with Britain; they have largely focused on issues such as financial rescues for weaker member states and stronger governance within the banking sector. Broader collaboration aimed at long-term growth has been limited by the E.U.’s fiscal constraints.

• The notion that Britain should limit benefits to migrant workers. Cameron’s reforms allow
Britain to restrict workplace-related benefits programs for migrants from other E.U. countries.

• Concern about membership costs. The U.K. currently pays £10.4 billion a year in fees to the E.U., and the sum may increase to £13.5 billion between 2016 and 2020.

Carefully consider the Funds’ investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds’ prospectuses and summary prospectuses, which may be obtained by visiting our fund literature page or calling 877 693-3546. Investors should read the prospectus and the summary prospectus carefully before investing.


Wen-Dar Chen is an international portfolio manager for Delaware Investments.