LONDON –– Britain’s vote to leave the European Union sent new shockwaves through financial markets, with the pound falling despite the country’s leaders’ attempts to ease the political and economic turmoil it has unleashed.
Minister of Finance George Osborne said on Monday the British economy was strong enough to cope with the volatility caused by Thursday’s referendum, the biggest blow since World War Two to the European goal of forging greater unity.
But his words failed to stop sterling sinking to its lowest level against the American currency for 31 years, continuing the slide that began last week when Britons confounded investors’ expectations by voting to end 43 years of EU membership.
European bank shares had their worst two-day fall on record and world stocks, as measured by MSCI were on track for their worst two-day fall since the aftermath of the collapse of Lehman Brothers in late 2008. With the ruling Conservatives looking for a new leader after Prime Minister David Cameron’s resignation on Friday and lawmakers from the opposition Labour party stepping up a rebellion against their leader, Britain sank deeper into political and economic chaos.
“There’s no political leadership in the UK right when markets need the reassurance of direction,” said Luke Hickmore of Aberdeen Asset Management, expressing the view of many in the City of London financial center.
Cameron says he will stay on until October as a caretaker and that his successor should trigger the formal process of leaving the EU. His Conservative Party in parliament recommended choosing a successor by early September.
The prime minister sought to calm fears over the fallout of the referendum and said parliament should not try to block Britain’s departure. A majority of parliamentarians, like him, had argued that Britain should stay in the EU.
“I am clear, and the cabinet agreed this morning, that the decision must be accepted,” Cameron told parliament, which also faces a public petition for a new referendum.
But his refusal to start formal moves to pull the country out of the EU has prompted many European leaders to demand quicker action by Britain, the EU’s second largest economy after Germany, to leave the 28-country bloc.
“It should be implemented quickly. We cannot remain in an uncertain and indefinite situation,” France’s Minister of Finance Michel Sapin said on France 2 television.
Guenther Oettinger, a German member of the EU’s executive European Commission, said delay would hurt Europe as well as Britain.
“Every day of uncertainty prevents investors from putting their funds into Britain, and also other European markets,” he told Deutschlandfunk radio.
Cameron will join EU leaders for dinner in Brussels on Tuesday, the eve of an EU summit from which Britain will be excluded. EU lawmakers want him to announce Britain’s departure then, but a senior EU official said that was unrealistic.
While European leaders would like swift negotiations to end the uncertainty, which is fuelling euroskeptic forces in their own countries, they say they cannot begin until Britain formally notifies the EU it is planning to exit.
The leaders of France, Germany and Italy met in Berlin on Monday to plan their next moves and said Europe needed to respond to its people’s concerns by setting clear goals to improve security, the economy and prospects for young people.
German Chancellor Angela Merkel, who has appeared to take a softer line on Britain’s decision than some European leaders, said she had “neither a brake nor an accelerator” to control events, adding: “We just don’t want an impasse”.
Making clear the exit negotiations would not be easy, Volker Kauder, who leads Merkel’s conservatives in parliament, told ARD television: “There will be no special treatment, there will be no gifts.”
The shockwaves are being felt across the globe at a time when economies are still fragile from the 2008 economic crisis, interest rates are close to zero and central banks have fewer tools than normal to revive demand if countries enter recession.
Financial markets misjudged the referendum, betting on the status quo despite abundant signs that the vote would be close.
When reality dawned, the reaction was brutal. Sterling fell as much as 11 per cent against the dollar on Friday for its worst day in modern history, while $2.8 trillion was wiped off the value of world stocks –– the biggest daily loss ever.
By Monday afternoon, sterling had shed around 3.6 per cent against the dollar to $1.3209, despite an attempt by Osborne to ease concerns by saying he was working closely with the Bank of England and officials in other leading economies.
“Our economy is about as strong as it could be to confront the challenge our country now faces,” he told reporters. “It is inevitable after Thursday’s vote that Britain’s economy is going to have to adjust to the new situation we find ourselves in.”
US Treasury Secretary Jack Lew also tried to restore calm, telling CNBC television it had been “an orderly impact so far” though he later added: “We have resilience built into our economy, but we’re not cut off from the world.”
Visiting Brussels, US Secretary of State John Kerry said it was important that “nobody loses their head” as the EU and Britain deal with the fallout from the referendum.
Later, in London, he urged both sides to be driven by common sense rather than a desire to get even, saying the impact on the US economy would depend on how the negotiations go.