The process of joining or leaving a union, is always a complicated one. Britain is currently in the process of exiting the European Union. This operation has been coined, the ‘Brexit referendum.’ The pound is the first victim of this movement, as its value has started to plummet.
Prime Minister, David Cameron struck the deal during a Brussels summit in front of his six-member Cabinet. Cameron and the cabinet were joined by Boris Johnson. Johnson made the announcement to the media just before yesterday’s evening news.
Britain’s actions may be unprecedented within the EU, which contains 28 member countries, including, Austria, Belguim, and Czech Republic among others. If Britain was to successfully leave the union, several candidate countries can jump into its place. Current candidates include, Turkey and Serbia. A full list of candidate countries can be found here.
The likely assumption is the European Union would rather hold on to Britain, as the process to join the EU is a lengthy one. To qualify, countries must meet the ‘Copenhagen criteria’ and include a stable democracy and a free-market economy. The economy is first and foremost on the mind of many countries currently in the EU.
Financial markets were the first to react to the news, as traders dodged out ahead of the campaign. Currently, the FTSE 100 remains unmoved by the Brexit news. It finished up 87.50 points at 6037.73 because of a rally in oil price. The yield on ten-year government bonds slightly fell to 1.39 percent.
Some of these fallings can have a positive impact, though. As long as the pound doesn’t plummet at an alarming rate, it could be beneficial for the UK economy, as it makes exports cheaper. This could boost trade amongst other countries. Investors are told to not overreact when the economy is affected by political unrest. Most of these changes to the market are short-term issues.
Analyst at Caxton FX, Nicholas Laser-Ebisch says he understands concerns, “The pound has fallen across the board as Prime Minister David Cameron has announced the set date for the UK’s referendum. Now that there is a definite date set, UK and worldwide investors have become increasingly nervous about the possibility of an out-vote. Now that it is headline news, it is at the forefront of people’s minds which will be a major factor determining the value of the UK’s currency.” His full comments can be found here.
While he understands investor’s concerns, he stresses that this is normal for the market in uneasy times like these. He stresses that the economy can make interpretations and predictions based on nothing but a hunch. Laser-Ebisch advises investors to hold tight. He continued by saying, “this initial reaction is a result of major institutions and investors adjusting their portfolios to account for the risk of a possible Brexit. It is possible that a EU exit would be good for the UK in the long run.”
While Britain continues to experience times of political tension, the markets will respond with tentativeness as well. It is likely that this is just a minor bump in the road for an economy that could be set up to thrive in the future.