What Brexit means for the UK and the EU

What Brexit means for the UK and the EU

The UK’s surprise decision at the Polls – Brexit

The end of polling in the UK’s referendum on continued participation in the European Union (EU) at 10pm London time on Thursday proved to be the high point in the expectations that a ‘remain’ vote would prevail.  At that moment a well-known betting organisation placed a 90%+ probability on the continuation of the political and economic bloc’s status quo.  A little over six hours later such hopes were completely dashed.

The 52%/48% victory for the ‘leave’ campaign reflects a widespread distrust of Europe-wide policy-making and regulatory intervention in the UK as well as a scepticism about immigration and a nationalism which prefers more complete rule from the UK’s Parliament.  The rejection of the preferred choice of the favoured choice of most of the UK’s political leadership and almost all countries of note has implications far beyond the UK.

Given the unanticipated nature of this decision it is not too surprising that the British Pound fell sharply – briefly to a 30+ year low against the US dollar – and the UK equity market followed suit.  Financial market volatility was augmented by the resignation of the UK Prime Minister who will stay in office just to oversee the election of his successor.  Fears that rating agencies will downgrade their AAA ratings on UK debt and that the Bank of England would have to enact some support mechanisms to help the Pound completed the scene.

The UK has a two year period of grace to negotiate its exit from the European Union and much uncertainty surrounds the practicalities around this move.  Leading European Union politicians have generally been quite coy on next steps so far although more clarity is expected over the weekend.  The UK will leave the European Union though and will have to strike new, bilateral trade deals.  There is inevitability uncertainty around this and the scope to have a direct impact on economic growth rates over the next few years is clear – after all most formal economic studies on the impact of a “Brexit” identified clear economic growth declines.

The decision will also impact European politics and potentially even the structure of the euro single currency zone.  Nationalist politicians across the European Continent are starting to demand their own referendums and the upcoming Spanish election this weekend could reflect a continuation of the electoral disquiet via a large vote for the anti-austerity party on the bill.  These are difficult times for Europe and policy-makers need to re-engage on a broader European vision for the future blending economic flexibility reforms and greater cross-border support.   We can not rule out more economic policy stimulus.

The same is true for the UK.  The country cannot just rely on a sharp fall in the value of the Pound to come to their aid.  If the UK wishes to take full advantage of exiting the European Union then it too must boost flexibility further – but how to do this without such a direct flow of immigrant labour (if tighter restrictions are imposed on entry which is likely) and also countering the feeling of anti-austerity disquiet at a time that fiscal and trade deficits are already high is not clear.  Now comes the harder part of policy implementation.

As today’s financial market moves show it is hard not to conclude that Europe (including the UK) has scored an old goal today with unclear repercussions over time.  The best companies will still prove able investments but for most international investors the general European markets have become that little bit harder to invest in.

This article is for information purposes only and should not be taken as advice.

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