The counting of votes in the UK “Brexit” referendum is almost complete, and it looks like British voters unexpectedly have decided to leave the European Union (EU). Based on the results collected so far, it looks as though the “leave” camp attracted nearly 52% of the vote (51.8%), with the “remain” camp attracting just over 48% (48.2%). These shares may change as final votes are counted, but it looks as though the case for “Brexit” has prevailed by a margin of more than 1 million votes.
This outcome is a major shock to financial markets and the global economy. Indeed, the result runs counter to what the opinion polls had been telling us, which had predicted a narrow victory for “remain”. Equity markets have reacted very badly, with Australia’s share price index off 3.6%, and Japan’s market off more than 7%. There will likely be even worse outcomes when share markets in Europe and North America open in a few hours’ time. The pound has fallen more than 10% and is currently trading at its lowest level since 1985. The AUD has dipped nearly 4%, but the safe-haven US has soared nearly 12%.
The immediate future for Prime Minister David Cameron, who spearheaded the “remain” campaign, is highly uncertain. Some within the ruling Conservative Party will be calling for his resignation, while others will want him to stay on to shepherd the UK economy through what will be a period of great uncertainty. Business confidence in the UK and Europe, in particular, is likely to dive. Many UK firms already have postponed hiring and investment, and many consumers will be shocked and probably will postpone planned purchases.
For the rest of Europe, the UK vote to “Brexit” probably will embolden the thus far largely clandestine push by representatives of other European countries, including the Netherlands and Italy, to have similar votes. Even more broadly, this is another major economic and financial shock that the world economy just didn’t need right now. There is enough uncertainty about China’s growth outlook, the threat of deflation, the impact of negative interest rates and a host of other things, and now this.
Beyond possible political change and extreme financial market volatility, which currently rivals that seen during the darkest days of the GFC, what happens next? In the very near term, policy makers will have to ensure there is sufficient market liquidity to guard against a repeat of the dysfunction experienced during the GFC in 2008-09, including by our own Reserve Bank. There is likely to be a procession of policy makers making reassuring statements in public about “business as usual”, as best as is possible in the circumstances.
Longer term, the British leadership has no choice now but to start negotiations with the rest of Europe to fashion the UK’s exit from the EU by exercising Article 50 of the Lisbon Treaty, but this may not be done for some time. Indeed, in the same way that the UK’s entry to Europe took years to engineer, its exit will similarly take years, perhaps even three to four. For now, then, not much will change in the UK’s formal relationship with the rest of Europe, but the relationship has been forever fractured by today’s vote.
Scotland voted to “remain” in the EU, Wales voted to “leave”. Incidentally, UK voter turnout overnight was unexpectedly high at above 72%, well up on the 66% reported in last year’s general election. This suggests that many previously uninterested voters were energised to vote this time around, and the majority have decided to fundamentally change the future of both the UK and Europe.