THE British vote to exit the European Union was a great exercise in democracy but shocked the financial markets. Traders failed to ‘Mind the Gap’ between what they expected would happen and what was possible. There was an immediate heavy selloff in the pound and share markets worldwide.
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Britain’s credit rating was put on negative watch for a probable downgrade and its international trade with Europe looks likely to be retarded. Investors rushed to safe haven assets like the yen and Swiss franc, and US and German Government bonds.
The vote has opened divisions and posed more questions than it answered. Scotland voted 62 to 38 to Remain and now wants another referendum to become independent of Great Britain and stay in the EU. Northern Ireland voted 56 to 44 to Remain. It is considering leaving the United Kingdom to rejoin Ireland.
In Europe Austria and Denmark may now push to exit the EU also. In a worst case scenario both the United Kingdom and the EU could fall apart.
People with more international exposure such as the young, the well-educated and Londoners voted to remain part of a unified Europe and by implication, a more connected world. Older people, the less educated, and lower earners voted to exit Europe fearing threats to their security and jobs.
Can the British including the Scottish and the Irish now ‘Keep Calm and Carry On’ while they resolve the newly exposed issues? Can the modern Brits do as well as their grandparents did during the dark days of World War II?
It shouldn’t be difficult for us in Australia to ‘Keep Calm and Carry On’. The decision should have little effect on us and if any it should be positive.
Some Australian companies that use London as a gateway to export to Europe may be inconvenienced. However if Britain’s trade with Europe is curtailed it may increase trade with other countries including Australia.
The British exit from the EU will be gradual so any changes that we notice will also be gradual. How the exit will be put into effect is yet to be worked out and is likely to take several years.
Britain is not a major trading partner of Australia as it once was. Our main trading partners are now China, Japan, Asia and the US. Britain’s exit from the EU will have little effect on those countries and even less on our trade with them. Their prospects mostly look sound.
Financial markets are bound to experience volatility in the short term but should settle down soon. There is no threat to the profitability of Australian companies so their share prices should not be affected longer term.
