Britain’s vote to exit the European Union leaves the country nursing an enormous financial hangover.
Shares in the country’s biggest companies slumped Friday, bank stocks crashed, and the pound suffered its biggest one-day fall on record. Growth forecasts for this year and next were slashed.
Things could get much worse for the world’s fifth biggest economy unless it gets to grips with three big questions:
1. What kind of exit deal can it get from the EU?
Although stunned by the Brexit vote, European leaders want formal divorce talks to start right away.
But with Britain in limbo politically for three months following the resignation of British Prime Minister David Cameron, that’s unlikely to happen.
Boris Johnson, a leader of the Leave campaign and frontrunner to succeed Cameron, is in no hurry to trigger Article 50 of the EU treaty that will start a required two-year countdown to Britain’s unprecedented departure.
This matters because the EU is by far the U.K.’s biggest trading partner. Big companies and banks in the U.K. that do a lot of business in Europe face a very uncertain future.
The Handelsblatt newspaper said Germany would likely insist that there could be “no automatic access” for the U.K. to sell goods and services to 440 million people in the EU. If the U.K. were allowed free access to European markets without being an EU member, that could encourage other countries to leave, the newspaper said, citing plans prepared by the country’s finance officials.
Just how much both sides are prepared to compromise is very unclear. And it’s that uncertainty that could turn out to be a “growth killer,” WPP CEO Martin Sorrell told CNNMoney’s Nina dos Santos.
2. How will it cope with its financial ‘black holes’?
The messy period ahead is likely to hurt business and consumer confidence, leading to much slower growth, stagnation or even recession. And the economy could end up being smaller over the long term as investment and jobs that would have come to the U.K. end up in the EU.
The independent Institute for Fiscal Studies estimated before the vote that the budget hole arising from weaker growth would be far bigger than the savings the U.K. could make by not contributing to EU finances.
“In the long run taxes would have to rise, spending fall and/or public borrowing would have to rise,” the IFS said.
Moody’s said Friday it may cut the U.K.’s credit rating — potentially making it more expensive for the government to borrow money — because of the economic and political uncertainty unleashed by the Brexit vote.
The U.K. has the second highest budget deficit in the G7 after Japan, and the highest current account deficit — that means it has to borrow more from the rest of the world to fund its imports than any other major advanced economy.
If investors start pulling money out of the U.K., further pressuring the pound, “this would raise questions over the funding of the U.K.’s large current account deficit… and more fundamentally over the role of [the pound] as one of the few global reserve currencies,” Moody’s warned.
3. How can the ‘Brexiteers’ deliver on their promises?
The referendum campaign was unlike an election in that both sides were backed by politicians from many parties. But it was similar in the way campaigners threw around reckless promises that some are now regretting.
The official Vote Leave campaign, for instance, claimed the EU was costing the U.K. £350 million a week, “enough to build a brand new, fully staffed … hospital every week.” It continued to make that claim despite being repeatedly admonished by the independent statistics watchdog for misleading voters.
Nigel Farage, leader of the U.K. Independence Party who campaigned for Brexit (but wasn’t part of the Vote Leave group), said implying that money sent to the EU could be spent on the health service in future was a mistake.
“No I can’t [guarantee it], and I would never have made that claim. That was one of the mistakes that I think the Leave campaign made,” he said on British TV.
Whoever succeeds Cameron as prime minister will also face demands to make good on other pledges. Brexiteers told Britain’s farmers and poor regions such as Cornwall that they wouldn’t lose out financially once EU subsidies and infrastructure funds are cut off. They made similar commitments to support U.K. universities and scientists — the second biggest beneficiaries of research grants from the EU.
Cornwall, in southwest England, voted in favor of leaving the EU. Local officials are already seeking confirmation from the government that the county won’t be worse off as a result.
Many voters say they backed Brexit to reduce immigration, running at record levels. But they may be disappointed on that score too because the EU is likely to insist on some free movement of workers in return for market access.