How “Amexit” sent shockwaves through the financial markets

By THE DATA TEAM

BRITAIN'S decision to leave the European Union has sent shockwaves across the financial community. On June 24th, the day after the referendum, shares in Britain's FTSE 100 stock index fell by 3% and the pound hit a 31-year low against the dollar. London's status as Europe's financial capital is now under question and many fear Britain's role in the world has been permanently diminished.

Difficult divorces are not new in Albion. The Kingdom of Great Britain saw a different kind of Brexit 240 years ago: the American revolution. On July 4th, 1776 America's newly-formed Continental Congress ratified the Declaration of Independence, formally separating ties with the British crown. While the geopolitical consequences of Amexit are clear, relatively little attention has been paid to the economic ramifications.

Wars as it turns out can be costly: trade flows to and from Britain slowed and government debt rose from 106% of GDP to over 150% by the end of the war. Investors were worried: yields on consols (government bonds with no expiration date) shot up two percentage points, while share prices fell and would not recover until five years after the war. Breaking up is hard to do.