On June 23rd, 2016, the United Kingdom voted to leave the European Union. While the actual cessation of membership in the EU will unlikely to happen before 2018, the news itself has led many investors, especially those in the United States to sell their stocks in fear of a plummeting market.
While there have been various talks about Britain leaving the European Union in the past, it was hard to conceptualize that the actual act may be put into place. The referendum, a vote in which everyone of voting age can take part in, was held on June 23rd where the ‘leave’ won by 52% to 48%. The referendum turnout was 71.8%, with more than 30 million people voting. But to understand the overall gravity of this move, we have to understand the importance of the European Union.
The European Union, often known as the EU, is an economic and political partnership involving twenty-eight European countries. It began after World War II to foster an efficient and effective economic co-operation, with the idea that countries that trade together are more likely to avoid going to war with one another. Since World War II, the EU has grown to become a single market, allowing goods and people to move around as if the member states were one single country. This was also attributed with the EU’s own currency, the Euro where it is heavily and traditionally used by its members.
Now for the U.K. to leave the EU, it has to invoke an agreement called Articles 50 of the Lisbon Treaty, which gives the two sides two years to agree on the terms of the split. While the U.K. government itself has campaigned against leaving the EU, warning the Brexit would kill U.K. jobs and plunge the country into a recession and create currency turbulence, the people and the powers above have made it adamantly clear about the split.
As for the economic warning for the Brexit, there was a dramatic fall in the value of the pound against the dollar and in share prices in the immediate aftermath of the vote. Britain also lost its top AAA credit rating, meaning the cost of government borrowing will be higher. While international relations and investments are still up in the air, the share prices in the U.K. had seemed to recover. Still, the overall ramifications this can have are something that the general public cannot ignore. Not only has the value of the pound have fallen greatly, but also the day-to-day spending impact is likely to be more significant. Even if the pound regains some of its value, currency experts have already expected it to remain at least 10% below where it was on June 23rd. Now the price rises may not kick in immediately.
While many people are asking if there can be a second referendum, the chances for that voting to happen seem highly unlikely. As for now, all we can do is watch and wait to see the over impacts Brexit can have on the rest of the world.