Britain’s vote to exit the European Union (EU) may end an era of expanding European integration, creating ripple effects felt throughout the world. After the vote, Prime Minister David Cameron announced that he will resign by October, pending election of a new Conservative Party leader. The stage is set for a summer leadership election, with former London Mayor and Brexit supporter Boris Johnson the early favorite. The Brexit vote creates new uncertainty in Scotland, as Scottish First Minister Nicola Sturgeon opened the door for a possible second referendum on Scottish independence.
Vladimir Putin may be the most satisfied world leader after the Brexit vote, as the refugee crisis created in part by Russian military activity in Syria weakened an already-fragile European unity. Immigration was a major issue in the Brexit vote – as concerns about EU rules that require free movement of people between member states may have been more important to voters than worries about the impact of leaving the common market in trade. The debate about immigration in the U.K. foreshadows continuing controversy that will play out in the U.S. and other countries in the coming months.
The vote will trigger the first exit in history from the European Union, but isn’t legally binding until ratified by the British Parliament. The 2007 Treaty of Lisbon provides the constitutional basis for the EU, and provides for a two-year period for renegotiating trade and other agreements should a member depart.
The “clock” starts once the U.K. formally notifies the EU of its departure plans.
The negotiation process is likely to be contentious, as the EU will have an incentive to “talk tough” in order to discourage other countries from following the U.K. Interestingly, however, European politicians including Germany’s Angela Merkel are pushing for early talks while U.K. leaders are signaling that they want to take more time before starting negotiations.
Given the fluid political situation and tensions within the Eurozone, the speed and tone of discussions may change direction in the coming days.
Investment Reaction and Implications
I watched the voting results from my bedroom as my wife and cat tried to sleep through the noise from the television and my simultaneous typing on laptop and ipad! When it became apparent that “Leave” proponents were winning the vote, European markets and currencies plunged.
The U.K.’s FTSE stock market index declined in its worst day since January, the British pound fell sharply, and global equity markets dropped in sympathy. The market move reversed a rally in the days preceding the vote, as polls and betting odds had pointed to a narrow vote in favor of “Remain.”
In context, however, the FTSE index is higher than it was at the February lows, and the pound is not far below the February lows. Market volatility is becoming an unfortunate fact of life in our muted growth environment. (See Brexit: 3 Points to Allay Client Fears.)