Brexit Impact: Short-Term Volatility, Long-Term Uncertainty

Atlanta, GA — Financial analysts at Atlanta-based international companies like Coca-Cola, The Home Depot, Newell Rubbermaid and others are probably having a pretty bad day in the wake of Great Britain's referendum to leave the European Union.

"You know that companies like these have financial analysts poring over market numbers, trying to figure out what's going to happen to the British pound and the euro," said Thomas Smith of Emory's Goizueta Business School. "I kind of feel bad for them."

U.S. markets recoiled Friday over the vote by Britain to leave the European Union, opening this morning sharply down and fueling uncertainty over the decision's impact on business and financial markets in the United States and across the world.

The so-called "Brexit" unleashed financial and political turbulence on Europe and a secondary wave headed straight for American shores.

"This is a historic moment, just like the Berlin Wall coming down," said Michael Merlin, managing director at Hansberger & Merlin at Morgan Stanley in Atlanta. "This was a vote for patriotism and pride for the citizenry; two-thirds of voters who were 65 and over were in favor of leaving the EU.

"And it was a vote against a lot of things, mainly the perceived autocratic and autonomous decisions coming out of Brussels, the EU capital."

That vote's impact crashed here in the U.S. on Friday morning, sending the Dow Jones plunging more than 500 points, while the S&P 500 lost 2.6 percent and the Nasdaq dropped 3.6 percent.

"Markets always react to their age-old nemesis, which is uncertainty," Merlin said, "and no one was expecting this."

Smith said the vote's impact on Atlanta will be small, but there are larger issues to consider.

"Locally, the United Kingdom isn't a very significant trading partner. It's not like this was a referendum in Germany, which is huge to Atlanta," Smith said. "The real impact is the uncertainty that's been created in the global economic market because you don't know what's going to happen to these currencies."

Will Great Britain's exit from the EU create similar movements across the continent?

"I predicted a while back that if Great Britain left the EU, it would place a great deal of pressure on other countries to relieve Greece's debt," Smith said. "Greece might see this as a easy way to get out of its debt crisis; if Britain did it, why can't Greece? And then you have other countries maybe asking the same thing.

"That wasn't the goal of the European Union; its goal was to have free flow of capital, trade and labor between all of the countries that shared a common land mass."

"The United Kingdom was one of the largest, most successful economies in the EU, and that support for weaker countries may have been damaged," Merlin said. "There will be a strong response from the EU and its central bank."

The long-term impact is a vast question mark. British Prime Minister David Cameron resigned the morning after the vote. Already there is talk of other countries following the United Kingdom's lead. And there's the simple fact that — having never had a country leave the E.U. — there is no blueprint for how the U.K. will extricate itself from its longtime partnership. It could mean recession for a fragile European economy, and the U.K. Treasury has predicted spending cuts, tax hikes and a potential spike in unemployment as it renegotiates the terms of trade and travel.

On Saturday, British Consul General Jeremy Pilmore-Bedford, whose office is headquartered in Atlanta, issued the following statement:

The British people have voted to leave the European Union and the Prime Minister has been clear that their will must be respected and delivered.

Friends and supporters on both sides of the Atlantic have been clear: the Special Relationship will continue to be vital to global prosperity and security. US President Barack Obama and the PM have already spoken today about the outcome of the referendum.

President Obama has said, “the people of the United Kingdom have spoken, and we respect their decision. The special relationship between the United States and the United Kingdom is enduring and the United Kingdom’s membership in NATO remains a vital cornerstone of U.S. foreign, security, and economic policy.”

And US House Speaker Paul Ryan has said, “The UK is an indispensable ally of the United States, and that special relationship is unaffected by this vote.”

Foreign secretary Philip Hammond has said, “We will remain an important partner for the United States and a good friend with the United States. Of course, we have a close security and intelligence and defence relationship that will endure.”

As the PM has said, Britain’s economy is fundamentally strong and the Bank has set out the steps they are taking to reassure financial markets.

It is important to understand that – as the PM has said - there will be no immediate changes, in the circumstances of British citizens living in the EU nor for European citizens in the UK, nor in the way our people can travel, in the way our goods can move or the way our services can be sold.

We must now prepare for a negotiation to exit the EU, involving all the devolved administrations to ensure that the interests of all parts of the United Kingdom are protected and advanced.

The Prime Minister has been clear that he thinks the country requires fresh leadership to deliver this and consequently this negotiation will need to begin under a new Prime Minister, who should also take the decision about when to trigger article 50 and start the formal process of leaving the EU.

There is no precise timetable - the PM’s aim is to have a new PM in place by the start of the Conservative Party Conference in October.

In the meantime, the Government will continue working to deliver our agenda and take to forward the important legislation that we set before Parliament in the Queen’s Speech.

>> Photo via Wikimedia Commons

Michael Merlin