Market meltdown as UK votes for Brexit

Britain's bitterly contested referendum on whether to quit the European Union has now been decided, with the UK voting to leave the EU.

The pound was hammered as the ‘Brexit’ vote came through, losing 20% of its value in a few hours. Fears of the implications of the vote have seen huge falls in most stock markets and commodities.

UNSW Business School academics are available to discuss the economic implications.

Professor Richard Holden says: “Leaving the EU would be very bad economically. Possibly catastrophic. Anyone who says that such an event would not be a big deal has either overdosed on happy pills, or is terribly ignorant.”

He says that in the radically interconnected financial world in which we now live, shocks propagate quickly, and often savagely. “What investors believe other investors believe is the key to confidence. And these ‘higher-order’ beliefs can be disrupted by seemingly small events.”

He warns that Brexit would not be a small event. “We can expect a run on sterling – it has fallen by the largest amount in history. Just look at the plummeting pound, a flight to safety that hammers the Aussie dollar, and causes stock markets to tank across the globe,” says Holden, an ARC Future Fellow

“The price of gold is soaring as a safe haven, while commodities have fallen sharply on fear of a slowdown in economic activity,” says Professor Fariborz Moshirian, Director of the Institute of Global Finance at UNSW. “This result has a huge risk for the Eurozone economy. It is recovering from quantitive easing, and it could derail ECB policy. In terms of the global economy, it would give an edge to Russia, and Russia might benefit hugely in terms of its influence.

“The psychology of the markets could be negative and bearish. It will reduce international trade activities. The alliance between the EU and the US could come into question. The strength of free trade both in the US and in the EU could be jeopardy. Another issue is the Japanese economy which is just floating along right now.

Moshirian says there is also a huge question over private sector investment. "Private investment might slow down due to uncertainly, and that would impact on the level of employment in Australia. Also having a massive impact is the huge fall in the price of oil. Iron ore is also slumping. Make no mistake, the fallout from this decision will be felt for years to come.”

Moshirian also warns “the next question is which country will be next to leave the EU. Hungary? Poland? Who knows”.

Tim Harcourt, the J.W. Nevile Fellow in Economics at the UNSW Business School, says “The vote to leave will shake the EU, where the UK is the second-largest economy and one of its main military powers.”

However, he predicts the UK will be far less impacted than some have forecasted. “The EU has distorted rather than created trade and the UK would do just fine with its major trading partners without the EU straight jacket of protection and subsidies, both in and outside Europe, for example with the USA, Canada, Australia and the Kiwis. This vote may also allow the UK to focus on trade relations with successful economies away from Europe, like Australia.”