By: James Philpot

Much has been rightly made of the recent U.K. vote to leave the European Union. If you are like me, when you see a Brexit news item you tell yourself you really should read about it. Then, a second or two later, you turn the page to check on your favorite stocks, sports team or soap opera. Here, for your convenience, is a brief guide to the what, why, and possible consequences of Brexit.

Exactly what happened? The EU is the most comprehensive of several treaties among European states regulating trade, defense, travel, immigration and economic/social policy. The EU’s 28 member states form a single market supporting the free movement of labor, capital, goods and services among member countries. The EU has its own government with authority to enact uniform laws concerning agriculture, trade and economic development. The EU allows member states to leave the union, and British voters, in heavy turnout, voted 52 percent to 48 percent to do so. Not every European country is a party to every European treaty, and it is worth noting that the U.K. was never part of the Euro Zone (single currency) or the Shengen Agreement (abolished passport and border controls among European countries).

Why leave the EU? British voters expressed several reasons for leaving the EU. The U.K. has a strong, historic sense of national identity apart from Europe. The Brexit vote reflects this sovereignty attitude and response to an unelected, unaccountable bureaucracy in Brussels issuing edicts that have the full force and effect of law in the U.K. Immigration and employment issues also played a part. The EU requires member states to allow citizens of any other EU country to enter and seek employment. It can be easier for an unskilled Romanian to gain permanent employment in the U.K. than it is for a skilled American or Australian. As a result, the U.K. has seen an influx of unskilled Europeans competing with Britons for jobs.

Fear of “economic contagion” also motivated Brexit. Contagion happens when—like a disease—economic troubles spread among countries. Strong and restrictive economic relationships between countries increase the likelihood of economic contagion. While still one of the strongest economies in Europe, the U.K. has shared in the continent’s chronic stagnant growth in income and rising unemployment.

Economic effects on the U.S. The day after the vote, the Dow Jones Industrial Average dropped 4 percent, a short-term response to increased uncertainty, fear that operating costs for U.S. firms servicing EU countries from the U.K. would increase, and bank losses on euro and pound market making. Since Brexit, both the euro and pound have depreciated against the U.S. dollar, leading us to expect a short-term increase in U.S. imports from and decrease in U.S. exports to the U.K. and EU due to the increased buying power of the dollar. Longer term, as trade between the U.K. and the EU becomes more expensive in the absence of free trade, we may see U.S. exports to the U.K./EU increase. That is, the U.K. will substitute U.S. imports to replace some discontinued EU imports; the EU may follow suit, boosting U.S. exports to the region.

Dr. James Philpot is a Certified Financial Planner® and is Associate Professor of Finance at Missouri State University. Statements in this column are intended for educational and informational use only, and are not to be construed as investment advice.

This article appeared in the July 9th, 2016 edition of the News-Leader and can be accessed online here.