Courtesy of Stratfor & ETM Analytics:
After June 23, Britain will have a definitive answer to the question of whether it will stay in the union. But the outcome of the vote won't change the fact that the British economy is cyclically and structurally fragile. Nor will it solve, by itself, the problems created by a debt super-cycle, zero interest rate policy, regional stagnation and asset market bubble risk. Europe's banking system is frail, Brexit or not.
The vote does, however, affect perception. A Brexit could create sufficient uncertainty to spark panic in financial markets, even though it would be a mere catalyst rather than the ultimate cause. A victory for "remain," on the other hand, could calm the markets. The latter could offer opportunities to position for a bearish phase of the business cycle and for the negative structural consequences of EU entanglement, including having less flexibility to treat Europe's chronic illnesses.
A Brexit would be more difficult to exploit. Do markets panic, or do they wait patiently to watch how leaving the European Union will unfold? The initial reaction, most likely, will be some degree of panic. In one scenario, this panic persists only for a few days or weeks and then settles down as the slow, measured process of a Brexit begins. Politicians convince markets that it will be a gradual, amicable split. There may have to be a series of joint announcements with the European Union assuring that the transition will be slow, steady and tightly controlled. If panic persists for more than a few days or weeks, however, and if political assurances are unconvincing, then it could begin to expose British (and European) macro fragility rather quickly. The especially destabilizing factor to watch here is that as business cycle risk emerges, markets correct lower and growth slows, so a Brexit would be in line for receiving the bulk of the blame. That could spark further rounds of Brexit panic, causing something of a vicious cycle that precipitates a recession and credit crunch.
Such a recession would be the inevitable cyclical outcome hastened by a Brexit, rather than a fundamental consequence of it. The strategic opportunity here is a long-term one. There is a significant chance that Britain Inc. gets oversold. If the country can move toward sensible economic and financial sector reforms and retain an open, smart immigration policy, it could present attractive re-entry opportunities for investors, especially as a relative play to the medium- and long-term dysfunction expected to prevail in the European Union and eurozone.
Despite the narrative in the mainstream media, a Brexit may not fundamentally hurt the British economy. On the contrary, it offers a medium- to long-term call option on greater economic dynamism and a more efficient and autonomous crisis response mechanism. Also lost in the Brexit noise are the macroeconomic problems Britain faces regardless of the referendum.
