Brexit: What It Is And How It Happened
Brexit is a shortened version of “British Exit.” The British Exit was a political movement that advocated for the United Kingdom to remove itself from the European Union (EU). The country had already separated itself financially by using the British pound as its currency, yet the economic instability of the EU as a whole highlighted by the debt levels of Italy and Greece had many British citizens concerned that they would have to absorb some of the fallout should the situation deteriorate further.
Beyond finances, citizens believed that potential immigration from Muslim peoples fleeing Middle Eastern countries posed a threat to national security even though it had cancelled its open borders policy with a number of EU nations. The Brexit movement gained widespread popularity which resulted in a referendum to be voted on July 23, 2016.
How The Votes Added Up
The major concern of the exit strategy was the potential (or predicted) it would have not only on British financial markets, but world markets. The referendum passed after a voter turnout of 72.2 percent, with 51.9 percent voting to leave. The breakdown by country who voted to leave:
Northern Ireland 44.2%
In retrospect, three major reasons have been advanced as to why Brexit passed, albeit narrowly.
1) The economic reason is simple and easy to understand. Instead of anchoring itself to the sinking economic ship of the EU, which largely ignored the economic problems of southern European members, citizens decided to take their chances as an independent economy. Even though the U.K. withdrew from the EU the thinking was that trade with EU countries would not be negatively impacted, and EU countries needed a financial center in London. This assessment was correct.
2) Immigration has been mentioned as another catalyst for Brexit. The flood of refugees into European countries was already creating economic and security problems, and British citizens believed that they would be influenced into taking on more of the refugees than desired by the EU. That had the potential to deprive individual countries of their right to determine their internal culture in favor of EU nationalism.
3) A reason that connects internal politics and money is essential to understanding the perspective of the average British citizen. Though the financial experts successfully predicted a significant negative impact on the stock market, the average Brit had little interest in the whining of those who have been accumulating wealth and leaving the majority of people behind. A collapse in the markets would have little effect on those who voted to leave. In effect, even if their judgment of the impact Brexit had on the economy was incorrect, they stood to lose little if anything at all.
Connected to this was the pervasive attitude of those voting to leave that there was a class of political elitists who opposed Brexit because they had little interest in reform. They would be insulated from the storm of immigrants who would continue to keep the economy stagnant and infect the cultural changes that would eventually come. Some consider it to be a direct revolt against the political and financial elite.
How Did Brexit Become an International Event?
As predicted, the day after the referendum passed, stock markets around the world saw sharp declines in stock prices. Here is a summary of the major world stock markets the day after Brexit was passed.
Dow Jones Industrials, United States -610.32
Mexican Bolsa, Mexico -1260.10
Bovespa, Brazil -1454.56
Borsa Italiana, Italy -2242.36
IBEX, Spain -1097.60
Nikkei, Japan -1286/33
The one day event would erase over $2 trillion USD in wealth around the world.
But the repercussions extended beyond the markets. There was pressure from both EU and non-EU countries to move quickly to complete the U.K. exit in order to bring about stabilizing the world economy sooner than later. Internally, a political crisis immediately followed the passage of Brexit, and its socioeconomic effects would be significant as projections of high and rapid inflation negatively impact the poor. The global effects of the chaos would continue to rattle international markets.
Oil prices declined about $5 a barrel in preparation of a slowdown in world economic activity. In contrast, the natural response to a global economic crisis had the price of gold rise 5 percent.
What Have Been Some of the Consequences of Brexit?
Not even a year has passed since the passage of Brexit, so measuring its effect can only be done from a short term perspective. That said, there are a number of reports that assess the current impact on the U.K. economy.
The U.K. will lose far more economically acting alone in trading than if it had maintained its EU membership according to the Institute for Fiscal Studies. Pre-vote estimates had projected a trading benefit, but thus fat those estimates have been wrong.
Britain is headed towards a mild recession in the coming fiscal quarters. This is the conclusion made by a survey of top economists.
The British housing market has experienced stagnant growth over the past few months, which will slow the growth of British youths looking to become property owners.
Paying for the country’s defense could cost as much as £760 million more than budgeted, resulting in the Ministry of Defense budget going into the red. This is the result of the exchange rate with the American dollar being at its lowest in more than three decades.
The Brexit vote was intended in part to negatively impact the wealthy elite and to a degree it has accomplished this purpose. However, it is projected that the hiring in construction and business service sectors is expected to slow considerably, a consequence that was obviously missed.
The Traders Viewpoint
Based on the accumulated evidence, traders have more to be optimistic about it if they look outside of the U.K. The United States has had its own Brexit of sorts, but its markets have fared reasonable well despite the initial fallout of its stock exchange indices. Politically, the fallout of Brexit has yet to settle.
Oil prices had fallen considerably after Brexit, but now demand is increasing and appears to be back on the rise. The Bank of England has scrapped its plans to close the budget deficit by the year 2020, which is a clear indication of what can be expected over the next 5 years.