On June 23, British voters, in a bitterly contested referendum, chose to leave the European Union (EU). The vote, by a margin of 51.9 to 48.1 percent, set the stage for a multi-year period of negotiations that will allow Great Britain to revise the terms of its participation in the EU and possibly lead to a complete withdrawal from the organization. The results brought a quick resignation on the part of British Prime Minister David Cameron and will have wide reaching financial, political and diplomatic consequences around the world.
What exactly does the British vote to leave the EU mean and what doesn't it mean?
First, the referendum is non-binding. London is under no legal obligation to re-negotiate its status within the EU, much less immediately withdraw from the organization. No government, however, can ignore the political will of a majority of its voters, so some follow-up action by the British government is inevitable. At the very least expect new British parliamentary elections before the end of the year.
Secondly, under Article 50 of the 1993 treaty of European Union (Maastricht Treaty) and the 2009 Treaty of Lisbon, a member state must give a formal notice to the European Council that it wishes to withdraw. That notice triggers a two-year negotiation period during which the terms of that withdrawal and the subsequent association, if any, are to be worked out. Any resulting agreement must be ratified by each of the EU's members.
Moreover, the British government is under no obligation to give immediate notice of its desire to withdraw. Leaders of the "yes" vote to leave have already declared that there is no need to immediately give notice to the European Council. The results of the referendum will likely trigger an intense and prolonged round of discussions and informal negotiations between Britain, the EU Council and the community's member governments. In short, Great Britain's status within the EU is unlikely to change before 2019, and it may well be 2020, or even later before the future status of Great Britain in the EU is resolved.
The referendum, however, will have immediate and significant consequences both in Great Britain and around the world. Overnight the British currency, the pound sterling, plunged 10 percent against the US dollar. This was the most significant movement in the pound in the last 45 years and likely ushers in a period of profound weakness and volatility in the British currency's exchange rate. The euro, the EU's common currency, also dropped against the dollar, by a more muted, although, still significant three percent.
Britain's central bankers are now faced with an unenviable task. Raise interest rates to defend the pound's exchange rate and further aggravate the period of economic weakness if not outright recession that is widely expected to follow. Alternatively, cutting interest rates, attempting to stimulate the economy, may mitigate the expected economic downturn, but at the cost of further weakness and volatility in the pound, as well as heightened domestic inflation.
More importantly, the British vote will have wide ranging repercussions on other Euro-skeptic parties on the European continent. France's most outspoken, anti-EU party, the National Front, has already called for a similar referendum in France. Other Euro-skeptic parties will be emboldened by the British referendum and will be closely watching the progression of the British-EU negotiations as a possible template for them to follow.
Moreover, Scotland, which voted overwhelmingly to stay in the EU, will now likely want to reconsider its own independence from Great Britain. Depending on how negotiations between London and Brussels progress, another Scottish referendum on independence is probably inevitable. Northern Ireland, which also voted overwhelmingly to stay in the EU, may also seek some form of independence from Great Britain. It's possible that the ultimate consequences of the Brexit vote will be to return the British state to its pre-eighteenth century boundaries. There, "will always be an England" but not necessarily a Great Britain.
The other consequences of the Brexit vote will be wide and varied and, as of yet, not entirely clear. The prospect of a US interest rate hike will probably be deferred into 2017, or at least until the economic repercussions of the British vote are more clear. The flight to quality by investors will likely aggravate economic weakness in the developing world, and put additional strains on the fragile economies of the EU's Mediterranean members. An Italian banking crisis may be an unforeseen consequence of the British vote.
The Kremlin is a big winner from the Brexit vote. Faced with a period of economic weakness, the EU's resolve to continue sanctions against Russia may well be set aside. The nations of Eastern Europe now find themselves betwixt an EU consumed by its biggest political crisis in the last half century and an aggressive Kremlin determined to regain its political and diplomatic clout in the "near abroad," the former Soviet republics and satellite states in Eastern Europe.
NATO is currently conducting its biggest military exercises in Eastern Europe since the end of the Cold War. Military exercises notwithstanding, will a weakened and self-absorbed EU have the wherewithal to stand up to Russian aggression? Will NATO and the United States step into the diplomatic vacuum? These are vital questions to East European governments from the Baltic States to Bulgaria.
Bolstered by the majority of yes votes, albeit by less than a 4 percent plurality, a new British government may well succeed in negotiating a new relationship between Great Britain and the EU - one that preserves British access to a European wide common market without necessarily having to conform to Brussels's bureaucratic and administrative controls. Such an outcome, this is the most likely one, would go a long way in mitigating the consequences of a British exit from the EU.
The Brexit vote does not herald the possible beginning of a EU breakup, not by any means. It does mean, however, that the inexorable march toward greater EU integration and administrative centralization in Brussels is coming to a halt for the foreseeable future. It also means that both Great Britain, and the EU specifically and the global economy in general, are in for a period of prolonged uncertainty and instability that will not be resolved anytime soon.