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British EU exit vote still leaves U.K. with tough choices

Newspaper headlines reflected the shock over the British

Newspaper headlines reflected the shock over the British exit vote late last month. The question now is, what's next? Credit: AFP / Getty Images / OLI SCARFF

After British voters shocked the world by choosing to withdraw the U.K. from the European Union, the big question became: What happens next? As has been widely reported, the “leave” win means that the British government must invoke Article 50 of the Treaty of Lisbon, which outlines the legal process by which a state can withdraw from the EU. But when will that happen?

Prime Minister David Cameron announced that he would step down in October and said that the next prime minister should initiate the Article 50 process. Once that’s done, the withdrawal negotiations would begin. At a minimum, it would take two years, but that could be extended by unanimous agreement among the remaining 27 member nations. During the process, the U.K. would obey EU treaties and laws, but not take part in any decision-making.

The biggest issue is how trade would be handled between Europe and the rest of the world. There are three exit options, based on current models. The first is a total exit, under which the U.K. leaves the EU and no longer benefits from any part of the single market. Then there is the Norwegian model, whereby the U.K. leaves the EU but joins the European Economic Area (EEA). Finally, there is the Swiss model, in which the U.K. negotiates various bilateral agreements with the EU to obtain access to the market in specific sectors, rather than the market as a whole.

Leaders of the Leave movement did not advocate a specific exit ramp during their campaign, so it is unclear which model they will follow. Their choice will impact U.S. companies that have a large presence in the U.K., especially in the financial services sector, which has relied on U.K. membership in the EU to manage legal, compliance and infrastructure issues.

At the end of the first post-Brexit trading day, the damage was not too bad, considering the magnitude of the news. Global stock markets were down, U.S. and German government bond prices jumped and yields fell. Gold added 4.6 percent. Investors are worried about the impact of the Brexit on the European economy and likely understand that a protracted and nasty divorce could push the U.K. and Europe into a recession. If that were to occur, it could slow down global and U.S. growth.

Over the past eight years, global central banks have been able to soothe markets with interest rate cuts (sometimes going negative) and unconventional tools like bond buying (“quantitative easing”). This time around, though, the central bank toolbox may come under pressure. Global interest rates are already close to zero, and bond buying may not do the trick if the Brexit shock causes individuals and businesses to shut down and do nothing for a while.

Some economists and traders are concerned that because the world was not prepared for Brexit, there could be a domino effect, whereby other nations will choose to leave the EU (aka, Frexit, Italeave, Czexit). Even a coordinated central bank intervention could not fight off the power that a fraying European Union might create throughout the world.

Very few traders, economists or bankers thought that Brexit would occur; as a result, they are still in a bit of shock. The short, intermediate and long-term implications of Brexit are simply unknowable at this point. Like the weather in London, it looks we will be forced to live with lots of clouds, occasional storms and, hopefully, an occasional ray of sunshine.

Jill Schlesinger, a certified financial planner, is a CBS News business analyst. She welcomes emailed comments and questions.


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