For those who follow world news, the vote in Britain to leave the European Union was a significant event. Prior to the vote, expectations were going back and forth whether the exit would be approved.
On the day of the vote expectations were shifting more to Britain staying in the European Union and markets were rallying. However, when the results became known, world markets had a major selloff.
Many investors are probably wondering what the significance of this vote might mean.
In essence Britain will become more independent from the rest of the European community. To some extent this has already been the case, as Britain already has a separate currency.
The negative reaction in world financial markets has more to do with this event creating uncertainty. This whole process will take some time, as Britain will not leave the European Union instantaneously.
This event will impact Europe more significantly versus our country. That is why the market selloff was much more significant in Europe versus the United States.
The United States is still impacted from a financial perspective, as the banking system is interconnected throughout the world. From a trade perspective our country will not see significant changes.
The concern to world markets is that this event in Britain will cause countries to become more isolated. Studies have shown greater levels of trade between counties leads to greater prosperity. Of course not everyone benefits equally from trade, and some people are harmed, but on a whole countries benefit from more trade.
Most likely this vote in Britain is a message, that British citizens want to be more independent of policies from the rest of Europe. It is highly unlikely that economic activity between Britain and the rest of Europe will change in a major way.
Whenever there is a shock to the financial system market volatility will increase for a period time. In addition there is a flight to safety, as investors become risk averse, and yields on U.S. Treasuries fall.
With regards to the U.S. economy this vote in Britain should have little impact. Companies that have a major presence in Europe might be affected some, as our currency strengthened against the Euro and the British Pound.
While this vote certainly means that Britain will formally exit from the European Union, the rest of Europe and Britain can still attempt to negotiate their differences. Just because they will no longer be formally united does not mean that they cannot cooperate with each other.
The greater risk to the world economy is if additional countries attempt to become more isolated. This is probably doubtful, as the forces of technology tend to create a more interconnected world.
For now would expect little impact on the U.S. economy. The European economy could be impacted negatively, but it is too early to tell how significant it might be. For a U.S. investor expect a somewhat higher level of volatility for a period of time, but long term negative ramifications are not likely.
