Last Thursday saw a historic vote abroad: the United Kingdom (UK) voted to leave the 28 country European Union (EU). In effect, the British just had their “Tea Party” event. A few days before the vote, I wrote about the possibility of this happening.
Although there was certainly passion on both sides – the ‘stay’ or ‘leave’ camps, let’s separate facts from impressions and think about what this means for the protection industry (life insurance and annuities), our industry.
While many would say the vote was somewhat close – 52% to 48%, the ‘stay’ campaign was really marketed as a ‘stay and reform’ campaign meaning that even if you voted to stay in the EU, the expectation from the typical UK voter was that there would be reforms made within the EU to satisfy these voters. The vote was never about keeping the status quo. That’s an important distinction that many pundits don’t articulate.
So what really happened? In 1957, the Treaty of Rome created the European Economic Community (EEC), a regional organization aimed at integrating some European countries economically which included a common market and customs union. Ultimately, this led to the EU which allowed for the free movement of goods, capital, services, and people, under the direction of unelected foreign (EU) officials from Brussels. While immigration was one aspect for the push for Brexit (and the one heavily played up now in the press), the vote was, above all, a solid ‘No’ to one-size-fits-all regulations. Imagine each of our states relinquishing all of its decision-making to the Federal government.
Is the EU trying to create a European culture or maintain a Europe of different cultures? That has been a key distinction on what side the voting camps fell into. Consider some insane EU rules: fruit should be “free from abnormal curvature” (no crooked bananas or cucumbers), vacuums above 1,600 watts were banned, water can’t be marketed as ‘hydrating’ after Brussels scientists said it wasn’t so, restaurants using olive oil on their table would be forced to use individual tamper proof bottles instead of refilling the same one each time, menthol cigarettes would be banned, etc.
And over the past number of years, many poorer EU countries (Greece, Cyprus, Ireland, etc.) have maxed out their national credit cards and benefited from the wealthier EU countries providing financial relief causing pressure on both sides.
My expectation is that other countries may follow the UK lead and vote whether to stay in the EU or not. We could see the unraveling of the EU and the Euro.
The markets fell dramatically last Friday worldwide. Is this because the leave vote is bad for the markets? Not necessarily. It’s really because the markets didn’t expect this vote. The wealth managers thought it couldn’t happen and the markets hate uncertainty.
But concerning the United States, consider this:
If the EU is weakened or even fell apart, there would be a smaller piece of the world competing with the US for investors’ attention and assets. Back in 1992, there was a fear that the EU would become a true powerhouse that would steal investments from the US. To a certain degree, that happened for a few years and while the EU (and the Euro) remained strong, it was a threat to our economic dominance. Remember all the talk about the Euro becoming the currency of choice worldwide? Now that the EU is weakened, it should help the US. More money will flow to safety (US). More economic activity will accrue to US firms. True, in the short term some US firms that export to the EU may be hurt, but long-term it may be very good for the US.
As far as interest rates are concerned, be prepared for continued low rates as investment continues to flow here. Your clients should not expect interest rates to rise anytime soon. There has been a huge opportunity cost for clients who kept waiting for interest rates to rise. They need to realize that interest rates will remain low. Life insurance and annuity guarantees, in a volatile market, will remain so important that there is a huge opportunity to make sure your clients understand that what we provide can truly guarantee security.