What is 'Brexit'
Brexit is an abbreviation for "British exit," which refers to the June 23, 2016, referendum whereby British citizens voted to exit the European Union. The referendum roiled global markets, including currencies, causing the British pound to fall to its lowest level in decades. Prime Minister David Cameron, who supported the United Kingdom remaining in the European Union, resigned on July 13 as a result. Home Secretary Theresa May, leader of the Conservative Party, became Prime Minister.
BREAKING DOWN 'Brexit'
Supporters of Brexit based their opinions on a variety of factors, from the global competitiveness of British businesses to the European debt crisis to concerns about immigration. Britain had already opted out of the European Union's monetary union – meaning that it uses the pound instead of the euro – and the Schengen Area, meaning that it does not share open borders with a number of other European nations. "Out" campaigners argued that Brussels' bureaucracy is a drag on the British economy and that European Union laws and regulations threaten British sovereignty.
Mohamed El-Erian, the chief economic adviser at Allianz, wrote in a Bloomberg editorial that a British vote to leave the European Union is likely to impose major instability on top of economic fragility and artificial financial markets.
Popular support for Brexit varied over time, but the June 23rd vote demonstrated that British citizens believed that Great Britain can survive without the economic cooperation, trade agreements and partnerships that benefited the country for the past several years. As a member of the United Kingdom, Scotland would be part of Brexit, but First Minister Nicola Sturgeon said in a statement on the Scottish National Party’s website that she plans to explore all options to remain in the European Union, including having its own referendum.
Fulfilling various negative predictions, the leave vote severely impacted markets worldwide. The British pound crashed by more than 11% against the dollar – its biggest-ever one-day fall – and London’s FTSE and Stoxx Europe 600 fell by 8% on the news. Both Barclays and Lloyds Banking Group saw their shares plummet more than 30 percent before rebounding slightly. Germany’s Deutsche Bank was down about 14%, the Bank of Ireland and two of Italy’s largest banks were all down by more than 20%. Shares in Greece’s big banks were down around 30%.
In the U.S., stock markets were down 3% across the board, with investors rushing to safe-haven assets such as bonds, gold and the Japanese yen. Morgan Stanley and Citigroup were down nearly 10%, with Bank of America, JPMorgan Chase and Goldman Sachs all trading down by between 5% and 7%. Oil prices also trended downwards by 5.2%. In a CNBC interview, former Federal Reserve Chairman Alan Greenspan said the fallout was worse than 1987, calling it the "worst period I recall since I've been in public service. The global economy is in real serious trouble. This has a corrosive effect that will not go away," he added.
The effect exacerbated friction among EU members that has been ongoing since the inception of the euro currency. Many participants in the common currency have long voiced concerns about the value of the euro being tied to the German economy and smaller, slowing economies are struggling from a currency that is artificially high. "I always thought we're going to start with the euro because the euro is a very serious problem in that the southern part of the euro zone is being funded by the northern part," Greenspan said on CNBC.