The votes are in: The UK leaves the European Union

Headlines about ‘Brexit’ have been top of news over the past several weeks, and in a past blog post, we addressed how the British referendum will affect the economy. As of last night, the votes are in, determining the fate of the UK and the European Union.

In a very close vote (approximately 51 to 49), the British people voted to exit the European Union. This was a surprise. I think this vote was more of a statement about the movement of people rather than the movement of goods and services between Britain and the rest of Europe. The prime motivation for the Brexit crowd was that the British people felt they had lost control of their borders with regard to the movement of refugees and others between nations within the Eurozone. The British pound has fallen about 11 percent in early trading, and US stock markets are expected to decline approximately three percent on the news. There will be much turmoil in worldwide currency and debt markets over the next week or so, but we do not believe that this marks a material change in the economic outlook for the United States. I expect no material disruption in trade between the US and Britain as a result of this vote. Britain’s extrication from the Eurozone will be negotiated over the next two years, so the process will take a while to play out.

One key will be how leadership of the EU attempts to penalize Britain for voting to exit. Leadership of the EU does not want the British to be able to get away with maintaining trade with Eurozone members after this vote because that could lead to other Eurozone nations attempting to repeat the Brexit. Britain has some high cards in this game however, because Britain maintains a trade deficit with the rest of Europe. That is, Britain buys more from the rest of Europe than the other way around, and the rest of the Euro nations do not want to lose Britain as a customer. Therefore, we expect the negotiations to favor the UK in many aspects. Finally, Britain’s Prime Minister Cameron has resigned as a result of Brexit. We doubt a Labor party candidate will replace him, as the labor party in Britain is in just as much disarray as the conservatives.