UK votes to leave the EU

The Brexit camp has won the referendum on UK’s European Union (EU) membership. The financial markets, which anticipated a “remain” victory, reacted negatively: GBP and the equity markets were particularly hard hit, even though the initial reaction has since eased somewhat (see chart). All major central banks (Bank of England as well as the Bank of Japan, the European Central Bank and the Federal Reserve) have declared to be ready to ensure markets’ liquidity. The UK vote paves the way for potentially long negotiations on exit conditions and the new relationship with the EU. Article 50 of the Lisbon Treaty provides for the possibility of a 2-year period, but an extension could be granted if the European Council, in agreement with the member state concerned, decides unanimously to do so. The negotiations will begin once the UK government sends the European Council notification that it intends to leave the EU. Before that can happen, a new executive team will have to be formed after David Cameron announced his resignation as Prime Minister. The UK has likely entered a prolonged period of uncertainty that will weigh on its economy (see Focus 1).

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