The British referendum to leave the European Union has led to global economic instability and uncertainties, which investors don’t want to see at a time when the world economy is literally struggling to grow.
In a stunning and historic move on Thursday, voters in the United Kingdom through a majority opted to leave the European Union – a decision colloquially dubbed the Brexit – making the UK the first country to voluntarily withdraw from the 28-member political and economic bloc.
Its impact has already sent shockwaves through the global market; the British pound plunged more than 11%, hitting a 31-year low against the dollar, while gold investments skyrocketed to a two-year high.
Britain accounts for just 3.9% of the world’s output; so it is not big enough to impact the global economy in the way the US or China can.
But then, America’s economy has been sluggish of late and there are grave worries about China’s ability to escape the shadow of its mountainous debts.
Brexit is seen as a referendum on globalisation, combining the economic impact of EU trade regulations with the fearful refrain about immigration, which, for many pro-Brexiters, is bolstered by the Schengen visa agreement that allows those who have gained entry to a European Union member state to move freely among other EU countries.
Brexit supporters cited the EU’s onerous regulations, dissatisfaction with Britain’s recovery after the 2008 recession and concerns over immigrant access to Britain’s strained resources as their top reasons for leaving.
“The historic vote in the UK to leave the European Union is bound to have repercussions far beyond the European continent,” wrote Dr Christian Koch of the Geneva-based Gulf Research Centre Foundation in Gulf Times yesterday.
This includes implications for the GCC states, which will now find themselves having to deal with a more fractured Europe.
On all fronts, the GCC states will find themselves having to deal with sets of European actors rather than a relatively coherent EU position.
British Prime Minister David Cameron announced the referendum earlier this year after promising members of his Conservative Party that he would hold an “in-out” vote on the UK’s status in the EU if he won re-election.
Leading up to the vote, polls suggested voters would likely stay in the EU, but in a huge upset on Thursday night, “Leave the European Union” scored a narrow victory – 52 to 48%. According to The Economist,  the reaction in financial markets to Britain’s vote to leave the European Union was “rather less euphoric”.
“Investors hate uncertainty and the result of the referendum gives rise to a surfeit of it,” it said.
Analysts say Brexit’s more significant impact on the world economy may be through financial markets, which can cause consumers to curb spending by hitting people’s wealth, or make businesses more cautious about investing and hiring staff.
Brexit could also affect interest rates, if market volatility makes the United States Federal Reserve more reluctant to raise interest rates, as some believe it will.