LONDON (Reuters) - Britain plunged deeper into political crisis on Sunday after its vote to leave the European Union last Thursday, leaving world officials and financial markets confused about how to handle the political and economic fallout.
Britain’s Prime Minister David Cameron is expected to stay on in a caretaker role until the UK Conservative Party elects a new leader in about three months, after he resigned on Friday.
But he has refused to invoke Article 50 of the EU’s Lisbon Treaty, which allows for two years of exit negotiations, leaving little clarity about how or when Britain will begin negotiations with the EU on a new relationship.
In the referendum, voters ignored Cameron’s appeals to stay in the EU by 52 percent to 48 percent, delivering the biggest blow since World War Two to the European project of forging greater unity.
Cameron is expected to meet the other 27 EU leaders at a summit in Brussels on Tuesday.
British Finance Minister George Osborne, who had warned during the campaign that a “Brexit” would cause financial market volatility, scheduled a statement for 7 a.m. London time(0600 GMT) on Monday to provide reassurance about “financial and economic stability”.
Boris Johnson, the leading “Leave” campaigner, former London mayor and favorite to become the next Conservative prime minister, sought to calm fears about Britain’s economic future, saying it would continue to have access to the EU single market.
But Johnson did not explain how he planned to secure free trade with Europe without sacrificing some of the main promises that “Leave” campaigners made to voters, notably that Britain would be able to cut immigration and free itself from regulations set in Brussels. .
Cameron’s Conservatives have been at war with each other for years over whether to quit the EU. But the vote to leave a bloc that Britain joined 43 years ago also pushed the UK Labour party into chaos over the weekend.
Senior Labour Party parliamentarians withdrew backing for their leader after traditional supporters rejected the party’s pro-EU stand in droves.
Scotland’s leader promised she would do whatever it takes to keep her strongly pro-EU country in the bloc, including potentially vetoing legislation on a British exit.
French President Francois Hollande declared there was no going back on “Brexit”, saying: “What was once unthinkable has become irreversible”.
Hollande said France and Germany must use their strong friendship to seize the initiative, warning that “separated, we run the risk of divisions, dissension and quarrels”.
He and Chancellor Angela Merkel discussed the issue by phone and an aide said they were in “full agreement on how to handle the situation”.
The EU is preparing to move its European Banking Authority from London following Britain’s vote to leave the Union, EU officials said on Sunday, setting up a race led by Paris and Frankfurt to host the regulator.
The move underlines how the City of London can expect to be frozen out of EU financial regulation, and possibly from Europe’s capital markets, depending on the terms of Brexit.
While those who argued for Britain to leave the EU said the financial industry would thrive without EU shackles, some of its biggest employers, including JPMorgan (JPM.N), are scouring Europe to find new locations for their traders, bankers and financial licenses.
The United States, which had made clear it wanted Britain to stay in the EU, also showed signs of unease. U.S. Secretary of State John Kerry will visit Brussels and London on Monday. A senior official said Kerry would stress the importance of other EU members not following Britain to further weaken the bloc.
Speaking in Aspen, Colorado, on Sunday, the International Monetary Fund managing director, Christine Lagarde, acknowledged that financial markets “vastly underestimated” the outcome of the Brexit vote, but said “central bankers did the job they were prepared to do just in case, which was to put a lot of liquidity on the markets”.
Lagarde said that how markets react going forward depends on what steps UK and European policymakers take to deal with the separation vote and limit uncertainty.
“At this point in time, policymakers both in the UK and in Europe are holding that level of uncertainty in their hands. How they come out in the next few days is going to really drive the direction in which risk will go,” Lagarde said.
Japan will ensure liquidity in the yen and in foreign currencies if needed by tapping currency swap lines established among six central banks, Bank of Japan Deputy Governor Hiroshi Nakaso said on Monday.
Central bankers gather in Portugal on Monday for a previously scheduled conference hosted by the European Central Bank and a speech by ECB President Mario Draghi is expected around 1530 GMT. The Federal Reserve chair, Janet Yellen, Bank of England Governor Mark Carney and China’s central bank Governor Zhou Xiaochuan are expected to attend.
The British pound fell as much as 10 percent against the U.S. dollar on Friday to levels last seen in 1985, while more than $2 trillion was wiped off the value of world stocks, the biggest daily loss in history, according to Standard & Poor’s Dow Jones Indices.
As world financial markets reopened for the week, the British pound fell another 2.0 percent in early trade on Monday and U.S. S&P 500 stock index futures, the world’s most traded stock futures, fell 0.7 percent.
The euro EUR= also came under further pressure, falling 0.8 percent against the U.S. dollar, as investors fret Brexit could stoke the anti-establishment mood in Europe.
“(There will be) sell-off in the euro as talk of other exit referenda builds,” said Jerome Booth, chairman of New Sparta Asset Management in London.
“This sell-off will be more profound and long-lasting and will be not just against the dollar and yen but also against the pound. It will also raise fears of significant loss of values for holders of Euro-zone government bonds”.
Among the many questions the Brexit vote has triggered are just how much UK and European economies will slow down, how they will negotiate their new trade relationship.
The United Kingdom is likely to enter recession within the year as a result of last week’s vote, a decision that will also stunt global economic growth, Goldman Sachs’ top economists said on Sunday.
“We now expect the (UK) economy to enter a mild recession by early 2017,” Goldman economists Jan Hatzius and Sven Jari Stehn wrote in a note for clients.
They expect the political, economic and regulatory uncertainty following the vote to chop a cumulative 2.75 percent off UK gross domestic product in the next 18 months.
Goldman now expects eurozone GDP over the next two years to average 1.25 percent versus 1.5 percent before the Brexit vote.
For the U.S. economy, the bank now expects GDP growth in the second half of 2016 to come in at 2.0 percent versus a forecast of 2.25 percent previously.
Additional reporting by Elizabeth Piper, Kylie MacLellan, William James, Ingrid Melander, Christine Kim, Donny Kwok, William Schomberg, Minami Funakoshi, Francois Murphy, Warren Strobel, and David Lawder; Writing by Kevin Liffey and Clive McKeef; Editing by Dan Grebler