U.K. votes to exit EU

In a historic referendum, the U.K. voted to leave the EU. The so-called Brexit received 51.9% of the votes compared to the Remain campaign’s 48.1%, giving way to a future of unknown consequences in the heart of the EU. Within the U.K., Wales was especially supportive of the Leave side, while Scotland and Northern Ireland opted for Remain, although with a lower than expected turnout.

This means the EU’s second largest economy will be leaving after 43 years as a Member State. The initial consequences have already been felt in the pound, which plummeted to 1985 levels – a decline of 9%. Asian stock markets were the first to react. Tokyo stocks fell more than 8% and the U.S. and European stock futures suggest other stock markets will also see major declines. In Madrid, the Spanish Ibex fell more than 7% in early trade.

David Cameron resigns

The results of the referendum led U.K. Prime Minister David Cameron to resign at a press conference outside Downing Street. The Prime Minister supported remaining in the EU in a very close campaign.

The Conservative Party leader assured that “there will be a new Prime Minister in October.” David Cameron feels that: "The British people have voted to leave the EU and their will must be respected.”

The future of the opposition leader, Jeremy Corbyn, is also at stake, as he also supported Remain. Anti-European UKIP leader Nigel Farage declared that “independence day” had arrived.

Negotiations will now begin to determine the U.K.’s new status in the EU. This situation is included in Article 50 of the Lisbon Treaty, which establishes a two year transition that can be extended if the parties agree. Until then, its current status will remain.

Immediate consequences

Nearly all analysts coincide in the negative impact this will have on growth in both areas, but more so in the U.K. than in Europe.

According to OECD estimates, the U.K.’s exit from the EU will cost the British -3.3% of GDP in the medium term, while it will have a limited impact of -0.9% in the EU. However, in a worst case scenario, a “disorderly” exit could increase the impact to -7.7% over the long-term.

Provided current trade relations do not change, the main consequences will come in the form of greater uncertainty and the negative impact this will have on investment in the short-term.

According to the OECD, this uncertainty could lead the EU to grow 0.5% less in 2016 and 2017, while the impact would be somewhat greater for the U.K. in the short-term, but endure for a much longer period of time.

Tasks for the U.K.

• The U.K. now has to renegotiate its trade agreements, not only with the EU, but also with other countries with which it had trade agreements through the EU (for example, Mexico, South Africa, or South Korea). This process could last two years, extending the period of uncertainty and penalizing foreign investment in the U.K.

• The U.K. has been a major recipient of foreign investment. In fact, in 2014 it received 15% more than the total amount of foreign direct investment in the EU – an advantage of being a member of the Union. From now on, many non-EU companies based in the U.K. will see the loss of the commercial advantage as a major inconvenience, calling into question the U.K.’s viability as a preferred recipient of the world’s investments.

• Furthermore, British exports to the EU represent nearly 13% of the U.K.’s GDP while EU exports to the U.K. represent only 3.1% of the euro zone’s GDP.

Effects for the European Union

• Most studies report that the impact will be more limited in the EU.

• Euro zone growth will be most affected by the cost of uncertainty, especially in the short-term. The loss of the U.K.’s contribution to EU budgets will also have a negative impact, as other Member States must make up the difference.

• The political cost will also be relevant in the EU. The U.K. leaving could exacerbate nationalist and anti-European movements gaining ground in some countries due to the effects of the economic crisis and migratory movements.