Brexit will unsettle markets for a while

THE domestic and global consequences of the UK's "Brexit" decision are likely to prove to be on a similar scale to Winston Churchill's mistaken decision to return Britain to the gold standard at the wrong exchange rate in April 1925, or Margaret Thatcher's fateful approval for Britain to join the exchange rate mechanism in October 1990.

The UK is running a current account deficit of a record 7 per cent of GDP. Its banking system is among the largest in the world as a multiple of GDP. Financing a very large external deficit and maintaining the UK's foreign deposit base depends on maintaining domestic and foreign investor confidence. Yet the Brexit vote is bound to result in considerable economic uncertainty over several years as the UK negotiates a formal exit and works out terms for its complex trade relations with Europe.

The UK's European partners will have little incentive to provide favourable terms, for fear of encouraging other EU members like France, Italy or the Netherlands to emulate the UK and head for the European door.