British authorities are already moving to reassure the world that the Brexit vote to leave the European Union won’t be so bad for the economy.
“There is plenty to do now to help make this decision work, to stabilize our economy, to reassure our allies and to continue the program we were all elected on last year,” British Defence Secretary Michael Fallon said following the referendum vote.
Unlike a vote to remain, however, the vote to depart Europe seems likely to cause a chain of cascading events that could destabilize financial markets for months or years to come.
But that’s not what many had predicted.
Before the vote, experts including CIBC economist Benjamin Tal predicted that, stay or leave, the Brexit vote would not have a lasting impact.
Flash in the pan?
“Markets will realize that beyond the rhetoric, Brexit is nothing more than another Y2K,” Tal wrote in a market advisory only one week ago.
Y2K, for those of you too young to remember, was the sky-is-falling prediction that the world’s computers would reset themselves when the year changed from 1999 to 2000. Planes would fall out of the sky, markets would crumble. Laughable. After the fact.
The Y2K comparison makes Brexit sound like a one-time market flurry over absolutely nothing. After the few market gyrations we saw Friday, goes that view, the world will reset at a new equilibrium.
Boris Johnson, one-time London mayor, one of the architects of the winning Brexit vote and a prospective candidate to replace David Cameron as prime minister when he steps down in October, was sounding statesman-like after the vote.
He reassured British voters that the country would be “no less European” and had a “prosperous future.”
‘Nothing will change’
“It is vital to stress that there is now no need for haste,” said Johnson. “Nothing will change over the short term except that work will have to begin on how to give effect to the will of the people and to extricate this country from the supranational system.”
It is that process of extrication that makes Brexit a horrible gift that keeps giving, a suppurating wound on world financial markets.
Yes, on Day 1, markets have suffered. The pound and euro tumbled and all the currencies they trade with zoomed or crashed in proportion to their links to the uncertain future of those currencies.
But unlike Y2K, Brexit will not be a one-day wonder.
And that is only one long-term ramification of Friday’s vote.
The extrication of Britain from Europe will likely be more in the character of the Greek financial collapse, a seemingly endless process where each event and each piece of news has the power to set off a new round of financial fears.
And like the Greek crisis, each piece of bad news will compound fears in markets that were nervous for other reasons.
“The markets seem in little doubt that the United Kingdom vote bodes ill for the eurozone,” Howard Archer, chief U.K. and European economist for IHS Global Insight, wrote on Friday.
During a subway conversation on the way to work Friday, a neighbour who works in the financial sector said Canadian banks had already sent teams to London to try to begin to deal with the potential fallout.
Already the list of “known unknowns” is growing so long it is only possible to mention a few here. When will Article 50 go into effect? That is the untried European law governing the removal of an EU member state. British politicians have said there is no rush. Europeans have begged to differ.
Even once the timing of Article 50 is agreed, each step in the process will only create a series of further financial uncertainties.
An initial concern for Canadian bankers who use London as their access point to Europe could be the status of their European employees in Britain.
Presumably the British government will quickly move to grant them long-term residency status. But even then, will Canadian or other international banks be willing to pay the premium of London rents if the city begins to lose status as Europe’s financial hub?
My chum on the subway joked he would love to be a lawyer in Britain just now as institutions rush to rewrite and renegotiate Britain’s national laws once covered by European provisions.
Each one of those legal changes will mean companies operating in Britain will have to re-examine and probably rewrite their own internal compliance rules.
And then there’s the potential mpact on the eurozone economy as a whole.
“The United Kingdom’s decision to leave the European Union will likely weigh down markedly on eurozone economic activity through to 2018 in a number of ways — notably through weighing down on business and consumer confidence, undermining investment and lowering exports,” Archer wrote. “There could also be a tightening of credit conditions.”
The Scottish question
Also in the future is the new status of Scotland.
Having voted overwhelmingly to remain a member of the European Union, the Brexit vote could give new impetus to Scottish separatism, with First Minister Nicola Sturgeon already indicating the option of a second referendum “is on the table.” Certainly Scots will have to choose between being fully united with Europe or remaining part of the United Kingdom.
When that vote might happen and how it would eventually play out will have at least as large an effect on British institutions as London’s divorce from Brussels.
The unknown unknowns extend from next week into a even lengthier future. The new status of the British pound (with or without Scotland) will likely have confusing long-term effects on global finance.
There could be the impetus given to other anti-EU members encouraged by Brexit. EU finances must change without the contributions of its third-largest member. The eventual collapse of the union or wrenching changes to the euro currency area would all likely lead to new waves of uncertainty.
Will the Europeans have to defend themselves against an increasingly xenophobic administration in London?
The Brexit vote is not an end. It is only the beginning of what will feel like an endless financial car crash.
Follow Don on Twitter @don_pittis
More analysis by Don Pittis
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