UK Votes to Leave EU, Markets Panic as Pound Tumbles
LONDON - British voters took the unprecedented step Thursday as they cast ballots to formally withdraw from the European Union.
The results immediately led to the toppling of Prime Minister David Cameron's Tory government, sent the pound sterling to its lowest exchange rate in over 30 years and plunged the global financial markets.
With 100 per cent of the 382 voting precincts reporting, supporters of a Brexit (or British Exit) led with 51.9 per cent of the vote. Turnout was high, as 72.2 per cent of eligible voters took part in the referendum, the UK's electoral commission said.
Nigel Farage, the leader of the far-right UK Independence Party (UKIP) and one of the most strident supporters of a "leave" vote said the day's events would "go down in history as our independence day".
Farage was instrumental in helping UKIP tap into a dangerous cocktail of homegrown resentment towards continental Europe and its recent refugee crisis, as well as Britain's decades-old distrust of European institutions. This translated into a largely manufactured desire to solve the UK's perceived problems by calling for it to turn its back on its largest and most important trading partner.
Heavy criticism aimed at Farage and the Brexit movement pointed to their frequent dubious claims over a weak economy - unemployment currently sits at a record low of 5 per cent – and claims that Britain needed to declare its independence from the EU’s overbearing authority. The European Union, while closely integrated, is not a federated superstate with legislative powers over its 28 constituent members. Members of the union are fully independent states who act in close cooperation with each other both politically and economically.
The UK had a particularly advantageous relationship with the rest of the EU as it maintained its monetary independence by retaining the pound and full control over its borders due to London’s decision to opt out of the Schengen visa zone, which allows for the freedom of movement across most of continental Europe.
Post-World War II European Order Under Threat as UK Leadership in Question
The move has left the international community deeply shaken as the vote shatters the EU's ambitious post-World War II project of peaceful continental unity. Formal withdrawal from the union could take up to two years as the unprecedented divorce will force the UK to renegotiate trade, political and business treaties with the remaining 27 EU members.
Cameron, who led the vote to keep Britain in the EU, announced at a press conference early Friday that he would step down as prime minister by October. He also announced that the new prime minister would then decide whether to invoke Article 50, which would formally initiate the UK's departure from the EU.
Invoking Article 50 may prove difficult in the months ahead as no roadmap for the process of withdrawal of a key member currently exists.
"I will do everything I can as prime minister to steady the ship over the coming weeks and months, but I do not think it would be right for me to try and be the captain that steers the country to its next destination," Cameron said in a speech outside 10 Downing Street.
Speculation over Cameron's successor will dominate the political conversation in the coming weeks. Most experts believe former London Mayor Boris Johnson, the man who spearheaded the Brexit vote, has the inside track to take over the Conservative Party and most likely be named prime minister within the next four months.
In his statement following the referendum, Johnson was quick to praise Cameron for having fulfilled his promise to the British people by putting the European question to vote and emphasized that Britain's relationship with the EU would remain close.
Labour MPs, who largely banked on a "remain" vote, submitted a motion of no confidence for controversial party leader Jeremy Corbyn. Corbyn has come under heavy criticism for what many say was a half-hearted call for Labour voters to unite behind the "remain" campaign.
Critics in Corbyn's own party have said he should resign because the EU referendum had been a "test of leadership" that he had "failed".
Polls ahead of the vote had pointed to a close race, but most indicated that the "remain" vote would eek out a slim victory after gaining significant public momentum in the final days of campaigning.
The results rocked the international markets and left investors from Hong Kong to New York stunned by the results. Stock markets around the world cratered at Friday's opening, with key indexes dropping by 10 per cent in Europe and over 8 per cent in Japan and the United Kingdom.
The US stock market suffered its worst drop in 10 months on Friday as shock over the UK’s exit rocked Wall Street. The Standard & Poor's 500 fell 3.6 per cent and the Nasdaq composite, fell 4.1 per cent. The losses dropped both stock measures back into negative territory for the first time this year.
The drop erased over USD 800 billion in U.S. market value, as measured by the Wilshire 5000 index.
The Chicago Board Options Exchange Volatility Index (VIX), which measures fear or volatility in the global financial markets, surged by 37 per cent in 24 hours to 23.62 as stocks and currencies plummeted. When the VIX climbs above 20 it indicates that investors are on edge about the stability of the financial market.
Pound Battered in Wake of Brexit
The value of the pound sterling tumbled to its lowest level since the Margaret Thatcher-era in 1985, dropping by more than 10 per cent in 24 hours from USD 1.50 to USD 1.33 early Friday morning. The precipitous drop was tied to concerns that Britain's decision to quit the single EU market would severely cripple the UK economy and strip London of its status as the world's preeminent financial capital.
Late Friday, credit ratings agency Moody's downgraded the UK Government's bond rating from stable to negative in light of Britain's decision to quit the EU. Moody’s added that Britain's economic growth will be weaker and its economic policymaking will be significantly diminished and the government's fiscal strength reduced.
"The agency expects a negative impact on the economy unless the UK government manages to negotiate a trade deal that largely replicates its current access to the single European market."
News of the pound's drop pushed gold to trade at a two-year high as investors fled risky pound-denominated assets and turned to the US dollar and Japanese yen. The depth of the pound's fall was clearly felt when the markets opened early Friday as France overtook the UK as the world's fifth largest economy. As recently as January, Britain's Center for Economic and Business Research published a forecast that the UK would surpass Japan as the world's fourth largest economy by 2030.
The Bank of England's President Mark Carney on Friday pledged to "take all necessary steps" to stabilize the pound and keep the markets from reacting too violently. Carney said the Bank had earmarked GBP 250 billion (USD 344 billion) for potential stability measures. The move, however, may force the Bank of England to raise interest rates to halt a further collapse of the pound if a sudden injection of liquidity is required.
According to the New York Times, the vote is likely to prompt multinational banks to shift significant numbers of jobs from Britain to competing financial centers in the EU including Paris, Berlin, Frankfurt, Dublin and Amsterdam.
Experts also assume that the European Council will quickly move to restrict the trading of euro-denominated assets in Britain, which could have a catastrophic effect on Britain's economy as the trading euro-denominated assets remain one of the country's biggest money makers. In the lead-up to the vote, some of the world's largest banks, including JPMorgan Chase and Citigroup warned that a Brexit would likely force them to transfer their headquarters in the City of London to elsewhere on the continent.
Uncertainty in Britain and Abroad as Vote Takes International Community into uncharted Waters
The referendum revealed deep divisions in Britain, as Scotland and Northern Ireland voted unanimously to remain within the EU, but England and the majority of Wales cast their ballots for a Brexit. Aside for the economic powerhouse of London, voting districts in England's heartland almost universally voted to opt out of the EU.
In addition to the political and economic uncertainty the vote has cast over the future of the EU, fears that the referendum could lead to the dissolution of the United Kingdom have begun to make headway. Scotland and Northern Ireland could demand referendums on independence as both the Scottish Nationalist Party and Northern Ireland's Sinn Fein (the political wing of the IRA) said Friday that the results have fundamentally changed the political dynamic in Britain, which would need to be reviewed as they do not represent the wishes of Scottish and Ulster voters.
Scottish First Minister Nicola Sturgeon and current London Mayor Sadiq Khan have both indicated that they intend to meet with European Council President Donald Tusk to assure the EU that they intend to maintain pre-referendum ties with the single market.
In a televised speech, Sturgeon said she would begin the process of preparing for a new referendum on Scottish independence.
Nationalist and far-right leaders in France and the Netherlands were quick to celebrate the results. Russia, in a prepared statement from the Kremlin, said the results indicate that the UK needed to use the occasion to review its relations with Moscow. The presumptive nominee for the US' Republican Party, Donald Trump, called the election a "tremendous vote by the British people ... They decided to take back their country. I'm very happy."
Russian President Vladimir Putin, France's neo-Fascist political leader Marie Le Pen and The Netherlands' ultra-nationalist Geert Wilders have been vocal supporters of a Brexit. Speaking to CNN International, Moscow Mayor and close Putin ally Sergey Sobyanin said the UK's departure from the EU would remove the main impediment to lifting the current sanctions that were imposed on Russia for its 2014 invasion of Ukraine.
Putin's spokesman Dmitry Peskov told reporters in Moscow, "We have a very heavy burden of uneasy ties with Great Britain. We hope that with the new realities and a new government in London, an understanding of good relations with our country will prevail."
Britain will become the first country to leave the EU voluntarily, a move that has no precedent and poses substantial risks to the world's largest economy. The EU is the world's largest economy as well as its main trading bloc. It is also the UK's main trading partner, accounting for 45 per cent of British exports and 53 per cent of the country's imports.
Complicated Divorce in the Months Ahead
A lengthy process of negotiations will now have to follow, as Britain will be forced to sit down with the remaining members of the EU, as well as countries outside of Europe, to agree on trade tariffs and foreign policy. As a member of the EU, the UK enjoyed the ability to cooperate with fellow member states without having to renegotiate separate trade deals. The system also applied to the EU's negotiated treaties with partner nations, including the US, Japan and China. By withdrawing from the European Union, Britain will forfeit its right to export their products to the EU tariff-free.
Reactions from the majority of world leaders expressed dismay over the results of the vote. Though all expressed respect for the outcome, most warned of a period of deep instability in the wake of the Brexit.
German Chancellor Angela Merkel expressed "great regret" over Britain's decision to sever ties with the European Union, but called for the EU's remaining members to maintain "a close relationship" with the UK and urged the citizens of Europe and the United Kingdom to remain "calm and composed" as the parties enter into discussions on London's future association with Europe.
Merkel, French President Francois Hollande and Italian Prime Minister Matteo Renzi will convene for an emergency meeting in the EU capital Brussels to discuss the situation early next week. European leaders now fear wider contagion in the EU as far-right Eurosceptic parties in France, the Netherlands and Denmark will be buoyed by the British vote and could demand similar referenda in their respective countries.
To counter the demands of radical fringe political parties, the EU's heads of state have insisted that the UK move swiftly to negotiate their departure, saying any delay would prolong uncertainty that could lead far deeper market uncertainty and to the total collapse of the European Union.
By Nicholas Waller