Why Brexit Is So Bad for the Global Economy

The regulations and trade negotiations will be a nightmare to sort out, but the scariest part right now is the uncertainty.

Eric Vidal / Reuters

Great Britain’s decision to extricate itself from the EU has consequences that are at once far-reaching and unknown. By Friday morning, no market was immune. Great Britain’s currency, the pound, had fallen to its lowest levels since 1985, and the FTSE (an index of the London stock exchange) and DAX (a German stock index) plummeted. In the U.S., markets opened in the red, gold (a commodity that many investors flee to at times of uncertainty) was up, and traders around the globe prepared for a volatile day amid the question of what the future will look like with the U.K. untethered from the European Union.

The health of an economy is significantly influenced by the policies and regulations that govern its financial systems. But the problem here goes far beyond a change in regulations: The bottom line is that no one really knows what will happen in either Great Britain or the EU—and that is in and of itself an economic problem. Markets don’t respond well to uncertainty. It’s understandable, then, that Great Britain’s historic move to shed its formal integration with Europe after almost six decades and the resignation of its prime minister all at one time would send markets into a bit of a frenzy.

While the country won’t have to face the daunting task of creating a new currency (a point of serious concern during Grexit and the Scottish referendum), many of its political and economic policies remain intertwined with the larger European body. Great Britain will be the first country to actually leave the European Union, and the first to have to make sense of the relatively brief guidance on how to do so provided by Article 50 of the Treaty of Lisbon, which helped form the union. The severing of this tie means that important tenets of governing, like major laws, regulations and trade arrangements will need to be updated or renegotiated independently, both within the EU and with trade partners outside. Then there’s the fact that Great Britain will need a new leader to oversee these new changes, since Prime Minister David Cameron—who called for the vote in the first place—stepped down after its conclusion. That, too could make the road to stability a long, arduous one.

Part of the explanation for the markets’ reaction Friday morning is the fact that many didn’t anticipate that the vote would actually swing in the direction of those advocating leaving the EU. And market’s also don’t like surprises.

All of that said, the markets have so far not been nearly as volatile as they were during periods of actual economic crisis, such as the financial meltdown of 2008. That’s somewhat comforting to those who feared that a rift between Britain and the EU would cause a major downturn for the global economy. But still, the reaction has been significant. As of Friday morning, $171 billion was lost in the decline of the FTSE. And as Justin Wolfers noted, American markets moved more on the news of Brexit than they have on news of U.S. presidential elections over the past 60 years. (Of course there are those who may outright benefit from the melee, betting against safety and stability by doing things like shorting British currency or U.K.-based banks.)

There’s reason to fear that the spiral and volatility, at least for the U.K., will not end anytime soon. With stock markets and currency already taking a beating, some are worried that property markets will be next. Additionally some major economic players and investors, such as global investment banks, may shift their global strategies by moving jobs out of the U.K. after publicly supporting the campaign to stay attached to the EU. No one can forecast how the separation will play out, politically or economically—and that alone is something to worry about.

Bourree Lam contributed reporting to this article.