As the last vote was cast Thursday night, and the exit polls predicted a narrow but still certain win for the “Remain” camp, David Cameron and the rest of the world reinforced their belief that Britain would make the wiser choice. Friday morning, after every vote was counted and the result was clear, disappointment, disbelief, and confusion had engulfed everyone that had been certain for a UK in the EU. The British had voted to exit the big European family and every prediction made before regarding the consequences of such a decision is apparently coming to fruition.
The decision of 51.9% of British citizens to leave the EU has caused turmoil everywhere in the globe. The pound fell 13% to a 30-year low, before recovering to $1.438, still down 7% in the day. Investors are trying to seek refuge in haven assets. According to the Financial Times, The 10 year US treasury yield fell 25 basis points, the German 10-year bund yield decreased to a record low of -0.18%, the UK Gilt yield reached a new low of 1.02%, down 39 basis points, while Italy’s 10-year yield fell 30 basis points to 1.53 %. In the meantime, gold rose 5%, proving once again that it is a safe investment in times of crisis. Predictably, markets were hit as well. The FTSE 100 Index decreased by 4.5%, in Japan shares were down 7%, whereas US stock index futures saw a fall of more than 5%. The Stoxx Europe 600 Index plunged 6.9%. The first bank to react was the Swiss National Bank, which began taking measures to stop its country’s currency from appreciating too much.
Many market participants were increasingly optimistic in the last two weeks before the referendum, so they had not hedged properly in case of a Brexit decision. Consequently, the losses will be very high. Real estate prices have already begun to fall. Commodities are following this trend as well, with Brent crude and copper down 5.3% and 2.1% respectively.
The Bank of England, after its previous warnings went unheard, has now the burden of ensuring stability. Governor Mark Carney was the first high ranking official to make a public statement, in which he assured every market participants that the Bank is doing everything it can to avoid a recession and a liquidity scarcity. How they will react with monetary policy is also a difficult issue. In cases of crisis the central bank proceeds with a cut in interest rates to stimulate the economy. However, with the pound already collapsing and the risk of inflation being very high, it may be that an interest rate increase is on the table. The latter option would also prevent capital flights. Assuring investors that nothing has fundamentally changed and there is no need for panic will be very hard; also because this is not true. Something that market participants are fully aware of.
Politically, the repercussions of the Leave decision are just as adverse as the financial ones. The Financial Times in one of its analyses considered it the biggest shakeup since the fall of the Berlin wall. This is a dangerous precedent that leaves the future of the Union uncertain. Will other countries follow in the footsteps of the UK? Parties in other countries, similar to Nigel Farage’s UKIP, are considering this a win for their movements. Political uncertainty can be found among the different countries of the UK. Of these countries, only Northern Ireland and Scotland voted to remain in the EU. Now, Northern Ireland has presented the idea of joining with the Republic of Ireland in order to continue remaining in the European Union. Meanwhile Scottish First Minister Nicola Sturgeon on Friday morning declared that her citizens voted to remain and she would consider every option in order to make sure the decision of her country is heard. Ms. Sturgeon confirmed that the possibility of a second referendum is on the table. Her party had vowed that in the case of fundamental changes in circumstances a referendum for independence could take place.
UK PM David Cameron resigned on Friday, demonstrating that Britain continues to remain the most democratic country in the world. Mr. Cameron respected the will of his people, even though he himself did not agree with it. The PM did not turn his back on the citizens that he had sworn to protect when he took office. He put at stake his political future and his legacy to ensure that the British citizens had their say and in the end he respected that decision and stepped down, in what constituted a rare display of honor, dignity and democracy. Now, history will be the judge of David Cameron’s legacy.
His party as well will face a challenge in October. They will have to choose Mr. Cameron’s successor as party leader and Prime Minister. Chancellor Osborne, one of the most vocal proponent of staying in the EU, is one candidate. He has shown great capability as the head of Britain’s Finances and is the most likely to succeed David Cameron. Boris Johnson, the former Mayor of London and one of the most prominent faces of the leave campaign, has expressed a desire to become the Tory leader.
Britain faces several paths ahead, after this controversial decision. It may follow the example of Switzerland, agreeing to a series of bilateral trade deals with the EU. It could have access to the single market from outside, similar to Norway. On the other hand, it could cut all ties with the EU and remain independent in all aspects.
Whichever road the UK chooses, the future does not look neither bright nor without difficulties. After the initial shock has worn off, everyone will realize the full extent and the real consequences of this verdict. Then, those who are rejoicing today may understand that they have bitten off more than they could chew. But will this regret even matter?
Nevertheless, Britain has survived a lot more throughout the centuries. To be sure, it will survive this as well. But at what cost?