Brexit: Britain’s Withdrawal from the European Union Sends Shockwaves Through the Financial World

A poster supporting Brexit from the European Union in Belfast, Northern Ireland. It notes that funds being spent on the EU could be used at home in the UK. Photo from Wikimedia Commons.

A poster supporting Brexit from the European Union in Belfast, Northern Ireland. It notes that funds being spent on the EU could be used at home in the UK. Photo from Wikimedia Commons.

Few believed that they would actually go through with it. But last Thursday, British voters chose to become the first nation to leave the 28-member European Union in a referendum that many believe will have worldwide repercussions. The results are already visible on financial markets, with sharp declines on Friday and Monday.

Since the end of World War II, integration has transformed the once-warring nations of the European continent into the world’s largest free-trade area. In 1999, the European Union (EU) debuted the euro currency, which quickly became one of the world’s leading currencies and, many believed, a prototype for regional unions in other parts of the world.

Yet on June 23, voters in Britain dealt a severe blow to the EU and globalization generally, when nearly 52% of the electorate there voted to leave the union. The next day, stock markets around the world fell as much as 8%, while British Prime Minister David Cameron chose to resign rather than lead his country in an unprecedented exit from the regional bloc.

The Roots of Brexit

When the predecessor organizations of the EU formed in the 1950s, Britain was not part of the European unity movement. It was not until 1973 that Prime Minister Edward Heath took the UK into the union.

Over the past 40 years, Britain’s relationship within Europe has been a contentious issue. Conservative Prime Minister Margaret Thatcher opposed membership in the EU during the 1980s, while Conservative John Major and Labour’s Tony Blair strongly favored continued membership.

Still, the UK never adopted the euro, electing instead to retain the pound sterling currency, though there has been discussion within Britain on eventually joining the currency union.

Britain’s opinion of the EU changed over the past decade, as the global financial crisis sparked debt debacles in several southern European countries, such as Greece, Spain and Portugal, thus hurting the value of the euro. More recently, the arrival of large numbers of migrants from the Middle East and concerns over terrorism have encouraged the politically far right, not only in Britain but also in other European countries, to support leaving the union in order to protect national borders.

The Mihaylo Voice

Robert Mead“I do wonder about how surprised markets should have been about the outcome of the vote.  While I personally thought the remain side would prevail, the polling was close enough and volatile enough that this was a very real potential outcome. Given that Prime Minister David Cameron has resigned effective in October and will leave acting on the vote for his successor means that the unsettled implications of the vote will hang over the region (and the markets) for a while yet.  Markets hate uncertainty.”

Robert W. Mead

Professor of Economics

Since 2013, there has been legislation in the British Parliament about holding a vote on whether to remain in the EU. While the leadership of both major parties, Conservative and Labour, largely opposed an exit, many far-right and populist politicians have supported independence.

In February, Cameron announced that the referendum would be held on June 23, though he supported remaining in the union.

The Brexit Domino Effect?

Many pundits believe that other countries in Europe will seek to leave the EU now that Britain has exited the union. Far-right leaders in France and The Netherlands have already called for referendums in their countries, for example.

Billionaire George Soros predicted that Brexit, if successful, would be the end of the EU.

But secession efforts outside of Europe are also hoping to benefit from Brexit, regardless of how realistic their proposals may be. Supporters of Texas’ independence from the U.S. are looking to Brexit as an impetus for their movement, as are backers of moves to form separate states within the U.S., such as the State of Jefferson in far northern California, which was recently defeated in a non-binding vote in Lassen County earlier this month.

The Euro currency was once hailed as a prototype for regional cooperation, but has been bedeviled by the persistent euro zone debt crisis and now the Brexit. Photo from Pixabay.

The Euro currency was once hailed as a prototype for regional cooperation, but has been bedeviled by the persistent euro zone debt crisis and now the Brexit. Photo from Pixabay.

Economic Repercussions

Most political observers did not expect Brexit to pass, which made the outcome of Thursday’s vote a shock to financial markets. Within hours of the results, the value of the British pound fell to values not seen since the 1980s; the price of gold rose; oil prices declined; and stock markets around the world fell between 3% and 8%.

Alan Greenspan, the former head of the U.S. Federal Reserve, believes that Brexit is the start of economic hard times in Europe, as a persistent downturn there has made many Europeans seek unorthodox political solutions. He considers it the most trying time for the global economy since he entered public service decades ago.

But many economists don’t foresee as much doom and gloom from Brexit. Instead, they believe that there will be repercussions, which will likely play out over years, as protectionism – nations and regions supporting barriers to free trade – gets a boost from the movement that Brexit may create in the EU and beyond. Gary Hufbauer of the Peterson Institute for International Economics believes that the slowdown in global trade since 2010 has already left the world’s GDP 2.7% smaller than it would be otherwise.

Mihaylo Economics

For more on the college’s economics degree programs, visit the Department of Economics at SGMH 3313 or online.

About dcoats

I'm Daniel Coats, a CSU Fullerton Communications graduate student
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