For most, the talk of a “Brexit” over the last few weeks was background noise. Well, to the surprise of the markets, it just happened. Let’s break down the latest crisis de jour.
First, to explain Brexit, we need to have a 30 second review of history. From World War II to the present, Europe has tried to work together, forming a variety of treaties and alliances, starting with coal and steel treaties and progressing from there. Fast forward a bunch of treaties, alliances and decades later and we get to the modern era. On November 1, 1993, the European Union was formed and is presently at its peak membership, with 28 nations (don’t try to match the yellow star count on the blue flag of Europe to the member nations, as unlike the U.S. flag, the stars are purely symbolic). The EU represents the strongest alliance among European nations in history (to be specific, this refers only to willing alliances). The idea was simple and can be summed up as, “Hey, let’s stop fighting with each other militarily, economically and socially and agree on some basic principles.” Today, the EU operates as a single market allowing for money, services, goods and people to flow freely from country to country. Sounds so nice.
In Many ways, this set up was wonderful for the United Kingdom. Every union needs a financial center, and the U.K. most certainly serves that role in the European Union. London’s largest industry is finance, and London serves as the largest financial exporter in the world. To give you an idea of London’s reach, it is also the leading issuer of international bonds and the center for international bank lending and money markets. More dollars are traded in London than New York and more Euros are traded in London than all of the rest of Europe’s cities combined. Banks around Europe and the world coordinate with London’s financial center to make the international monetary system work. This is all great for the U.K., which gets an enormous lift to its economy from its dominance in this area. Of course, if you are in London right now, you are having a classic “What just happened?” mom