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Brexit: A European Divorce

Published on: 24/06/2016

Voters in the United Kingdom made history today by becoming the first country to ever leave the European Union. As the results of the EU Referendum held in the kingdom on June 23 started filing in early on June 24 the world braced itself for a disaster of global proportions.

Consequences for Europe

This has massive implications for the European Union. For one thing, it loses one of its strongest, richest states, meaning more responsibility will fall on the shoulders of remaining leaders such as Germany. In addition, as we have pointed out before, the United Kingdom is important to military defense, something quite important in these days of tensions between Europe and Russia, as well as the refugee crisis and fears of terrorist attacks across the world.

Brexit can also serve as a precedent for other countries who envision leaving the EU as something good. Greece, who has been struggling for many years now with the EU-imposed austerity measures, already had one referendum that failed – it may feel encouraged to hold one more that finds more success now. Far-right politicians from the Netherlands have also spoken out about independence from the EU (the Dutch have a history of disagreement with the EU’s immigration and free labour policies).

The UK in Trouble

Clearly the United Kingdom itself would suffer greatly from a separation from the European Union. It will lose the easy access to the world’s largest single market economy it currently has. Of course, trade with Europe would still be possible, but at what costs? Trade agreements and regulations will have to be negotiated with each member state individually, which could take years to settle – and the deal will never be better than what the UK has enjoyed as a member.

In fact, the United Kingdom will legally have a period of 2 years for negotiations once they officially announce their leave. During this time they can set up rules and guidelines with the EU. However, Europe will be hard-pressed to treat them with a firm hand in order to discourage the rest of its members from following the UK’s example. If the negotiations are not completed by the end of this period, the EU would drive an even harder bargain afterwards.

Another implication of the Brexit vote is the Kingdom’s own dissolution. Scotland asked for its independence in a referendum not two years ago – it remained in the Kingdom mainly because of the EU benefits it could offer it. Now that that is no longer the case – and considering that Scotland voted with a staggering majority to Remain, it appears the Kingdom does not accurately reflect the mood in the north. Northern Ireland has also expressed a disappointment in the results and a desire for a break-up. It seems that the UK may lose more than just its European partners.

While the people’s vote cannot be used as an official decision, the government is expected to abide by it and announce it officially at the end of this weekend amid talks with European leaders at the European Council.

UK Prime Minister David Cameron (who was an avid Remain supporter) handed in his resignation earlier today. More resignations might follow.

The Markets

Despite the preliminary polls showing even results to stay vs. to leave, traders seemed to expect that the Brits will make the choice to remain in the EU. The exit results have thrown the markets in a state of high volatility. British stocks are down, and the pound itself has dropped more than 12% in just a few hours to $1.33, a level it hadn’t touched for three decades. The euro also fell dramatically, as Europe’s stability is threatened.

Expect the volatility to continue as the situation unravels. We may not see a stable pound sterling for a while, as the UK enters its 2-year negotiation period with Europe. If things shape up particularly bad for the Kingdom, it may yet decide to stay at any point during those negotiations, so as of now we are in a state of near complete uncertainty.

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