On Thursday, British citizens voted to leave the European Union. On Friday morning, those of us in the Western Hemisphere woke up to a barrage of information about the potential implications of the historic breakup.
To help you sort through the news, we broke down how “Brexit” will affect different areas of the world and your life.
The Brexit vote caused major U.S. stock indexes to plummet Friday following a large-scale global sell-off. The drop in stocks means Americans will feel a pinch in their 401(k) plans. But because retirement plans are long-haul investments, experts advise leaving your funds in place and waiting until markets recover. Mortgage rates also have plunged to the lowest level in three years with increasing uncertainty about the global economy in recent weeks, meaning it’s a good time to refinance.
In the wake of Brexit, the British pound fell to its lowest level against the dollar since 1985. This means Americans’ cash will go further in Britain. The same is true for countries that use the euro, although the euro isn’t as depressed as the pound. Getting elsewhere in Europe from Britain may become more of a challenge because Britain no longer will have access to the European Common Aviation Area, which makes flights between the U.K. and Europe cheaper. It’s unclear how U.K. carriers will adjust their rates and routes in response, but nothing is likely to change until Britain’s exit is formally negotiated over the next two years.
- U.S.: U.S. stocks have dropped, but the U.K. vote likely will not cause a U.S. recession. Its effect on consumer and business confidence could hinder U.S. recovery from slow growth last year because of China’s slowdown and falling oil prices. Concerning interest rates, the stronger value of the dollar and expectations of reduced demand because of the slowdown in Europe means the Federal Reserve likely will refrain from raising rates as anticipated. Another big risk for the U.S. is trade. With the dollar strengthening against the pound and euro, it will be more difficult for American manufacturers to sell goods abroad.
- U.K.: The pound fell to a 31-year low, plunging more than 10% and prompting the ratings agency Standard and Poor’s to withdraw Britain’s AAA economic rating, meaning the country will have to pay higher borrowing costs. As Brexit raises questions about Britain’s future trade and relationship with the rest of Europe, many economists predict the country will slide into recession.
- Europe: The exit of the EU’s second-largest economy is a big blow to European leaders and global financial markets. More than $100 billion in assets was quickly wiped out in financial markets following the “Leave” decision. Confidence in the EU, the world’s largest free-trade bloc, will be eroded, crippling economic growth.
- The U.K.: It will take up to two years for Britain to officially exit the EU, and so its political and trade arrangements with the rest of Europe will not change immediately. Stronger impact has been felt within the U.K. itself. British Prime Minister David Cameron, who supported remaining in the EU, resigned following the announcement of the vote’s outcome, and now Britain’s ruling Conservative Party will need to choose a new leader. The outcome also triggered calls in Scotland — which voted strongly to remain in the EU — for a referendum for independence, like the one that took place in 2014 and resulted in a narrowly won decision to stay in Britain. A similar desire to exit the U.K. in favor of EU membership has been expressed in Northern Ireland.
- The EU: Opinion polls in some countries, such as the Netherlands and Denmark show majorities in favor of leaving the EU. The British vote also seems to have galvanized far-right and anti-EU movements in France and Germany, the EU’s last two largest remaining powers. This rise in anti-establishment sentiment will have an interesting effect on national elections in 2017.
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