Brexit Unleashes a Financial Hurricane on Global Markets
Despite advanced polling technologies, voters can still surprise the media and politicians. Britain’s referendum on whether to leave or stay in the European Union was widely predicted to validate the U.K.’s continued participation with its European neighbors, but the voters decided to risk leaving the EU in hopes that it would stimulate faster recovery from the 2008 global financial crisis as well as allowing the country to safeguard its own borders from terrorist incursions and unchecked refugees. The vote shocked financial markets when the independent thinkers of Churchill’s U.K. voted 52 percent to 48 percent to leave the union.
Global stocks dropped significantly in response to the anticipated economic turmoil that the change would cause according to a WPTV.com report. Equities and securities tanked on the London Exchange and other major exchanges by 3 to 4 percent, and the U.S. market lost $800 billion. The drops continued the following week as the pan-European Index fell an additional 4.1 percent. Worldwide, the drop in stocks totaled $2 trillion in just one day with no end to the slide in sight as companies and governments measure the long-term consequences and upheavals that Britain’s decision to leave the EU might bring.
Financial Crisis Results from Britain’s Decision to Leave the European Union
Financial markets hate uncertainty, and all the polls and pundits predicted that the June 23rd vote would uphold the status quo. The June 23rd vote was decisively in favor of leaving despite Scotland and Northern Ireland voting to stay by 62 percent and 55.8 percent respectively according to BBC.com. Shocked by the vote, the financial repercussions affected global markets including those in Asia, the United States and Europe in record-breaking downturns on Friday the 24th and Monday the 27th before regaining some ground on Tuesday. The Bank of England had expected to increase interest rates this year but could now find it necessary to inject money into the economy to bolster economic health according the PressHerald.com.
British Prime Minister David Cameron–who had based his reputation on getting a vote to stay in the EU–immediately resigned and called for elections. Even the opposition party leader supported staying, so there’s no clear consensus on who will assume leadership in the Conservative Party. The consequences of Brexit run deep because of the following uncertainties:
- Will other members seek to leave the EU?
- What sanctions will the EU impose on the U.K.?
- Britain will now need to negotiate separate trade and border agreements with each EU member, which causes uncertainty.
- Britain has no heir-apparent for the prime minister’s position, which nobody wants due to the incredible financial hardships that are expected to follow.
- Gold, silver and other commodities are increasing in value as is their custom during financial meltdowns of paper assets.
Brexit Consequences May be Wide-Ranging, Long-Term and Global in Scope
The immediate results included both financial and political bloodbaths. Conservative Prime Minister Cameron had survived the Scottish separation referendum and vowed to remain as Prime Minister if he lost the Brexit vote according to a report posted at NYTimes.com. However, Cameron quickly changed his mind and resigned due to the astonishing financial consequences of the vote that included:
- Politicians and bankers face amazing changes on both sides of the Atlantic and Pacific Oceans.
- The pound dropped to its lowest level against the U.S. dollar since 1985.
- Equities fell while gold jumped, and this could just be the beginning of financial repercussions over the next two years.
- Asian markets plunged 10 percent in a warning to other markets.
- European banks–which already were hurting due to minimal interest rates and slower recoveries from 2008–plunged 18 percent according to FT.com.
- The yen, which is usually a haven in times of currency speculation, soared 6.7 percent, which worried Tokyo officials enough to consider intervening.
- Economists predict that the economic costs to Britain will exceed any benefits that Brexit might generate.
- Investors in the United States, Germany and Japan are flocking to safe havens.
Britain Faces a Long Lame Duck Membership
Staging.hosted.AP.org reports that the U.S. Federal Reserve, which was also expected to raise interest rates this year, is now less likely to do so. Further economic complications depend on how long it will take to negotiate Britain’s exit, which will take at least two years because of contractual limits. Other concerns include how stiff the sanctions will be and how nimbly Britain can secure favorable trade agreements with other nations. Regardless of whether Britain is ultimately successful, it’s likely that other global markets will pay part of the price due to the increasingly global marketplace.
The political consequences could also create a chain effect that might affect U.S. presidential elections, convince other countries to abandon the EU and trigger further financial upheavals in global economies that were already weakened by low interest rates, high deficits, surplus spending and high unemployment rates. Unemployment is already at 10.2 percent in the countries that use the euro, which is little better than during the 2008 financial crisis. Further drops could easily trigger a recession or depression that would become global. Learn more about Brexit and the looming financial risks the world faces by visiting the PersonalMoneyStore.com.