The United Kingdom voted to leave the European Union on Thursday. And global financial markets, reacting to the decision, started this morning with sharp drops in London and around the world, meaning that the vote to "Brexit" caused a tremendous loss of wealth not only in the UK but throughout Europe and Asia.
London’s FTSE 100 index opened to an 8.7 percent drop, and the FTSE 250 index, which is considered a better barometer for the British economy, fell 12 percent.
The British pound is now worth just $1.37 against the dollar — an 8 percent drop and its lowest value in 30 years.
And the economic ripples have reached far beyond London. The DAX, the most widely used German stock index, has fallen 7 percent. France’s CAC index has fallen 8.6 percent. The IBEX, representing Spain, is down 11 percent:
It’s not just Europe. Japan’s Nikkei index is down 8 percent, and other Asian markets have fallen, although less dramatically. The United States is likely to be next. Trading hasn’t yet opened, but Dow Jones futures dropped 3 percent last night:
The big British banks were faring even worse. Stock in Lloyd’s and Barclays, two of the UK’s major financial institutions, were down nearly 20 percent.
Why markets are freaking out over Brexit
Before the vote, economists predicted that leaving the European Union would be economically catastrophic for Britain. The British government estimated that the economy could shrink by up to 8 percent by 2030. Some of the biggest British banks said they’d have to shift some of their operations to other financial centers such as Paris or New York.
The governor of the Bank of England has promised to do whatever it takes to shore up financial markets, perhaps through quantitative easing or lower interest rates, the Guardian reported.
But the global impact so far is happening largely because Britain’s vote to leave is creating a tremendous amount of uncertainty — no one can say for sure how long leaving the EU will take, what kind of trade deals the UK will end up negotiating, or what the impact will be on British businesses. The European Union is the United States’ biggest trading partner, and an economic slowdown there would affect Americans as well.
It’s possible that markets will stabilize some as the day goes on. But for now, the news is bad. Bloomberg reported this morning that the investment firm T. Rowe Price estimates that a global recession is now more likely than not.