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Brexit vote was a turning point in global politics

UREPORT
By Ndirangu Ngunjiri | June 27th 2016

Many observers were stunned when the United Kingdom voted to leave the European Union (EU) by a margin of 51.9 to 48.1 per cent.

Though Remain campaign won by comfortable margins in Scotland, London, and Northern Ireland, the Leave camp dominated elsewhere.

Polling had indicated that concern about immigration was the leading motivation for likely leave voters, while Remain supporters were more focused on the economic ramifications of a so-called Brexit.

The result caught many investors off guard. The sterling pound rose in anticipation of a Remain victory. As the initial results came in, however, the pound reversed course and fell below $1.33, its lowest level since 1985, making Friday the currency’s worst day on record.

The pound’s slide is likely related to the Bank of England’s (BoE) policy dilemma.

The BoE has not announced whether it will target growth or inflation, but with interest rates at 0.5 per cent, the central bank has little room to maneuver. The BoE has warned that it may be unable to prevent a recession.

Chancellor of the Exchequer George Osborne also warned that UK housing prices could fall by 10 per cent to 18 per cent as European demand falls.

Risk assets are down globally as investors flock to perceived safe havens such as gold, bonds, and the yen.

UK banks were down amid concerns about London’s ability to remain Europe’s financial capital.

Countries that rely on trade with the UK, like Ireland, or hold many British assets, like the Netherlands, may be particularly exposed. Investors pulling out of Europe’s weaker economies could indicate concerns about the future of EU and other potential exit movements.

UNCERTAIN PROCESS

After the immediate turmoil, the UK’s official departure could be a long and uncertain process. Article 50 of the Lisbon Treaty governs a departure from the union, but provides few guidelines.

The UK will remain a member of the EU until it negotiates the terms of its exit with the remaining EU member countries. Triggering Article 50 starts a two-year countdown to an exit. Some experts say the two sides will take much longer to reach a deal and could extend the negotiations beyond that window.

There is no way of escaping a long series of negotiations during which the UK must iron out trade agreements with the EU and other nations. The current UK government wants to wait for new leadership before pulling the trigger on Article 50.

Prime Minister David Cameron, who led the remain campaign, announced he will step down by the next Conservative Party conference in October, and a general election could follow.

But EU is calling for quicker action in order to avoid destabilising the process, as any delay would unnecessarily prolong uncertainty. A post-Brexit deal could keep the UK in the single market, though many leave voters would object if UK borders stay open.

 

Although it may be in the EU’s best interest to reach a favourable deal with one of its largest trading partners, with so much at stake, the divorce may be acrimonious.

Brexit will have political and economic consequences.

There are political parties in the Netherlands, France, and elsewhere that are agitating for their own votes to exit the union. Scotland may hold a second independence referendum in an effort to join the EU.

A majority of voters in Northern Ireland also supported remaining, and there are already calls for a vote on a united Ireland.

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