British voters chose Thursday to leave the European Union, a decision that could undermine global growth, upend world politics and create volatility in markets worldwide including the United States.
Officials in the U.S. government, and at the Federal Reserve in particular, will be weighing options for responding to any possible turbulence that might result from the “Brexit” vote, a historic development that could reshape global affairs.
Fed Chairwoman Janet Yellen warned earlier this week that “the financial market reaction to the uncertainties that would be unleashed by that decision could result in a kind of risk-off sentiment” that could, among other consequences, push up the dollar and lead to falling stock prices.
Even if the long-term impact on the U.S. is limited, in the “short-term, everyone expects a lot of volatility, huge volatility in all sorts of markets,” said Stan Bokov, chief operating officer of the trading social media platform TradingView.
Before Thursday’s vote, bank analysts had estimated that a vote to leave the EU could drive down the pound by as much as 10 to 15 percent, with an accompanying drop in British stocks.
Experts saw two effects from the “leave” vote: An immediate injection of uncertainty into financial markets and a much more drawn-out, ambiguous effect on the overall economy and global politics.
Overnight, the potential for indirect, cascading financial market effects from a major adjustment in European financial markets will be, and has been, a major concern for U.S. officials.
Yellen warned that a vote to exit would be a “unique event that has no close parallel. It’s hard to know what the consequences would be.”
Concerns over the possible fallout of a Brexit vote played a role in the Fed’s decision not to raise interest rates in June, Yellen acknowledged earlier this month. Significant global market turbulence likely would postpone rate hikes even further into the future, as Fed policymakers would hope that easier money would limit the effects of stock market gyrations on the real economy.
“A leave vote would almost certainly make the Fed stay very dovish,” said Desmond Lachman, a former IMF official and scholar at the American Enterprise Institute, a conservative Washington think tank. Not only would the central bank delay tightening money, but in the case of severe turbulence, it also might consider opening swap lines with foreign central banks to help them with currency pressures.
In the longer term, the direct impact of the vote on the U.S. likely will be limited. Among the bigger effects that U.S. leaders have warned about would be the U.K. being cut out of discussions over the Transatlantic Trade and Investment Partnership, a trade deal under negotiations between the U.S. and the European Union. During an April trip to London, President Obama, who advocated that the British vote “remain,” warned that a vote to exit would result in the United Kingdom being sent to the “back of the queue” for a trade deal.
Yet it would be at least two years before the U.K. actually exits the European Union, if it does at all. Some analysts think it might not happen, even with the exit vote.
The vote could be recast, as was a 2008 Irish referendum against ratifying an EU-related treaty. Or it could be circumvented by the government, as were referendums against ratifying EU treaties in France and the Netherlands in 2005. Either way, Bokov said, expectations were for the referendum not to prove decisive immediately.
Some analysts, however, see a much more uncertain and unnerving set of consequences further out in the future.
If the U.K. does indeed leave the EU, it would have to renegotiate a series of trade and regulatory agreements it agreed to as part of the union, starting with World Trade Organization agreements and extending to a litany of other deals.
That could prove problematic for U.S. businesses accustomed to using the U.K. as the “front door” to Europe, said James Moore Jr., managing director of the Business, Society, and Public Policy Initiative at Georgetown’s McDonough School of Business.
Even more concerning is the prospect that Britain’s departure could increase the existing strains on Europe’s cohesion.
One likely result would be another effort by Scotland to leave the U.K. and seek to join the EU on its own.
Other separatist areas, such as Catalonia in Spain, would seek autonomy as well.
France and the Netherlands, Moore suggested, also could seek an exit from the EU. For Europe’s adversaries, he said “the notion of divide and conquer is very attractive,” citing Russia in particular.
Such a sequence of events could upend world affairs, not to mention threaten the EU, America’s top trading partner.
In terms of the potential repercussions for the U.S. that policymakers must sort through, the Brexit vote is unprecedented, Moore said. “There just hasn’t been an event like this.”
