11 September 2001. 15 September 2008. To that list of huge stock market plunges, it looks as if historians will soon add 24 June 2016: the day the markets went into freefall when Britain voted to leave the European Union.
The City wasn’t even waiting for the final result to be announced. It was selling sterling long before the sun came up, driving the pound down to levels against the dollar not seen for 30 years.
The response was hardly a surprise. Markets in the final few days of the campaign had been rising in anticipation of a late swing to the remain side, a view confirmed by the last flurry of opinion polls. Shares and the pound were primed for a collapse in the event of a leave vote.
Earlier in the week, the legendary speculator, George Soros, predicted that Brexit would lead to a Black Friday in which the pound would lose 20% of its value. Sterling was nearly halfway towards meeting that forecast before dawn broke over the trading rooms of Canary Wharf.
Expect action from the Bank of England to calm the markets. Having highlighted the risks of a leave vote, it will now be the job of Threadneedle Street and the Treasury to show that they are in charge of events. That may be difficult in the short term, because while the overnight sell-off was in part the result of traders being caught with their trousers down, it was not the only factor. There were four other reasons for the dramatic reaction.
Firstly, Britain is facing a political crisis. It is hard to see how David Cameron can survive the referendum result. George Osborne threatened to deliver an austerity budget if the electorate refused to listen to his warnings. The chancellor is unlikely to be around for long enough to deliver it.
Secondly, Britain is facing a constitutional crisis. Scotland voted decisively for remain, while England outside of London voted for leave. It will not be long before the Scottish National party is demanding another referendum so that an independent Scotland would be able to stay in the European Union.
Thirdly, Britain’s vote has massive implications for Europe. It will embolden other separatist movements across the continent and could lead to other countries voting to leave. Clearly, there will also be consequences for the eurozone, which dodged a bullet last year when Greece remained within monetary union. Brexit will have far bigger consequences, so watch shares in Germany and France tumble on Friday. The pound will fall much further against the dollar than it will against the wounded euro.
Fourthly, Britain now has to decide what sort of arrangement it wants to have with the EU. Does it want to remain part of the single market even if that means accepting free movement of labour? Or does it want to go for a complete go-it-alone approach, which would give the new government a freer hand on immigration?
The result speaks volumes about the state of modern Britain. For the better off, a vote to remain was the obvious thing to do. For the less well-off, a vote to leave was their chance to protest about badly paid jobs, zero-hour contracts, bullying employers, and a sense that they had been forgotten.
These economic problems are deep-seated and of long-standing. Most of them have little to do with Europe. But the referendum has given millions of unhappy people a chance to protest. This is a country divided by wealth, geography and class.
