There is no doubt that the United Kingdom’s (UK) exit from the European Union (EU) will have long-term economic consequences for the entire world. Friday’s response to the news that Britain voted to exit the EU (also known as “Brexit”), however, created an enormous market response.
According to the International Monetary Fund’s (IMF) Managing Director, Christine Lagarde, the financial markets "vastly underestimated" the consequences of Brexit. “There was a violent, brutal, immediate massive move, the pound went down by 10 percent," Lagarde said while speaking at the Aspen Ideas Festival in Colorado on Sunday.
Amis the chaos of this massive upheaval, however, there was some good news. Lagarde praised the central bankers, saying they "did their job" by making sure their respective economies had ample liquidity, and by working with policymakers to reassure those in the market that things were under control. “And it was under control,” she added.
After Friday, no markets experienced liquidity issues like the ones that occurred in 2008 during the height of the financial crisis. The situation is far from over, though, and Lagarde said that how markets react going forward depends on what the UK and the EU do next in the process of finalizing Britain’s departure.
"At this point in time, policy makers both in the UK and in Europe are holding that level of uncertainty in their hands. How they come out in the next few days is going to really drive the direction in which risk will go…We have strongly encouraged to actually proceed with this transition in the most efficient, predictable way in order to reduce the level of uncertainty which will in itself determine the level of risk.”
Lagarde went on to say that policymakers and multilateral institutions (like the IMF) would need to work together in a cooperative manner in order to handle the fallout of Brexit. Although the nation voted at a referendum to exit the EU, it still has to follow through on the formal “divorce proceedings.”
In fact, there is still time for the UK to back out of its vote to leave the EU. The UK Parliament’s website received over 2 million signatures on a petition for a do-over of the Brexit referendum over the weekend, at one point getting so much traffic that the site crashed. Under UK law, any petition on the Parliament’s website that receives more than 100,000 signatures must be taken up for debate.