Brexit and the Flash Crash, What Happened Last Week?

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Source: Adobe Stock/Sulupress

There were dire warnings in the run up to the June 23 referendum on Britain and overall U.K.’s future in the European Union (E.U.) and there have been dire warnings since.

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Prior to Brexit, the leaders around the world, including Barack Obama, lined up to issue warnings and even veiled threats of the consequences of an exit vote. The International Monetary Fund and World Bank warned of the risk of a stock market crash and sharp recession if the U.K. decided to leave.

Even the U.K.’s own Treasury issued a report and numerous briefing notes to warn of the same dire outcome. Well, for better or worse, the British people went ahead and voted to leave anyway, and guess what? The stock market soared and growth has continued.

The Forecast… Wasn’t Armageddon

This week, the IMF predicted 1.8% growth this year for the U.K. and 1.1% next against a softening global growth background. According to the BBC, Economists for Brexit, a group of eight influential economists which supported the Leave campaign ahead of the E.U. referendum, criticized even this relatively optimistic forecast from the IMF arguing that pre-Brexit forecasts had already been proven wrong.

“The IMF, together with countless other institutions, forecasted a state of Armageddon which hasn’t even come close to materializing in the UK,” said Graeme Leach, member of Economists for Brexit and chief executive of Macronomics. He added: “The U.K. economy seems to be strengthening, not weakening. Just today, construction PMI was positive, ahead of many gloomy forecasts. Consumer spending is strong, with retail sales up 6% and car sales also growing.”

The group is predicting growth of 2.6% this year and next, unchanged from its pre-referendum forecast.

To be fair, though, the warnings of a stock market crash and recession were always overblown, at least in the immediate aftermath of the referendum. So far, nothing much has changed. The pound fell sharply the day after the referendum from the mid $1.40’s to $1.32 and has more or less stayed steady since. There has been much speculation but no real changes to anything.

Is Brexit Responsible for the Crash?

Until last week that is…

The pound dropped 6% in minutes to $1.18 before recovering slightly and is currently trading around $1.235. Some have attributed the prompt fall to some suspicious trades, or maybe an algorithm error, the authorities are said to be investigating.

Or could it be that reality is maybe setting in? Up until now no one really knew what the post-Brexit landscape would look like, but following the Conservative Party Conference this week where new Prime Minister Theresa May rather foolishly got up and said she would seek to regain control of immigration and refuse to submit to rulings of the European Court of Justice: pandering to the aspirations of hardcore party members rather than a global audience, European leaders have hardened their position in response making a positive bargaining process less likely and harder to achieve.

Some are attributing the sharp fall to a speech made by the ever helpful Francois Hollande in Paris at a dinner attended by Jean-Claude Juncker, E.U. commission president, and Michel Barnier, the E.U.’s top Brexit negotiator, last week. The French president urged the bloc to lead tough negotiations with the UK to avoid contagion and protect the fundamental principles of the single market the Financial Times reports.

“The U.K. has decided to do a Brexit, I believe even a hard Brexit. Well, then we must go all the way through the U.K.’s willingness to leave the E.U. We have to have this firmness,” President Hollande said. “If not, we would jeopardize the fundamental principles of the E.U. Other countries would want to leave the E.U. to get the supposed advantages without the obligations.”

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The Socialist leader insisted: “There must be a threat, there must be a risk, there must be a price. Otherwise we will be in a negotiation that cannot end well.”

Presumably, he means not well for the E.U., it would be very well for individual countries if the E.U. reverted to what it was originally intended for, simply a free market, but that wasn’t what Hollande meant: he meant to the ideological dream of a federal Europe, even if its not what most people want.

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