In theory, nothing has really changed for now, as EU laws will continue to apply, and the U.K. stays a member of the single market. But of course EU leaders will now have to re-negotiate the future relations between the U.K. and the rest of the EU. Coming to an agreement will take time, and amid the uncertainty, economic growth is likely to suffer on both sides of the channel.
It does not appear that the leave campaign has a 100-day plan on how they will move forward. After celebrating over the weekend, the government now needs to pick a new leader and determine the correct direction for the country to move toward. The uncertainty will likely flow over into the currency markets and not only effect the pound but also trading partners. The uncertainty on the markets has pushed the pound lower by more than 9% in the past two days.
The longer the crisis drags on, the more likely further policy action from the ECB will be needed, especially as the Brexit vote also rekindled Eurozone break up fears and sparked a renewed sharp widening of spreads. The ECB’s bond buying program should help to stabilize markets and contain the impact for now. And the ECB still has the OMT program – finally cleared by the German top court – to fall back on if all other measures fail. But whether and how far the impact spreads also will depend on how the political players across the Eurozone react to the Brexit vote, and not to mention to what extent protest parties across the EU jump on the “Exit” band wagon. What is clear is that forecasts for both growth and inflation will have to be rewritten now and that will mean data releases this week are already outdated.
EU rules and regulations will continue to apply for at least another two years and three months. PM Cameron said he will step down by October while also stating that it will be up to the new prime minister to invoke Article 50 of the Lisbon Treaty, which will kick-start the formal and irrevocable two-year disentanglement of the UK from the EU. There is also a proposal to delay the invocation of Article 50 until after French and German elections next year, though this looks unlikely. Some pundits even suggest that reaching agreement on the terms of the UK’s exit will be untenable in practical terms, while others suggest that the UK would put itself in a weak negotiating position if it were to simply ignore Article 50 by unilaterally rewriting laws.
As for the integrity of the UK, the leader of the Scottish National Party has said that another independence referendum is “highly likely.” The signs are that the EU, under current post-Brexit circumstances, may be receptive to a breakaway Scotland, although it would still not want to encourage other wannabe breakaway states, such as Catalonia. There is also talk of Northern Ireland doing the same as it too voted to remain in the EU, while the prospect of a hard customs border between the north and south of Ireland has instantly become a contentious issue. There is even an outlandish idea that Europe-loving London might break away and re-join the EU in the form of a city state. These ideas will just continue to generate chaos in the currency markets.
