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Why the 'Brexit' Result is Important for Americans

The fallout from Brexit means a sudden need to reset tons of global investment channels could have a freezing effect on Europe and the U.S.
Traders work on the floor of the New York Stock Exchange shortly after the opening of the markets in New York
Traders work on the floor of the New York Stock Exchange shortly after the opening of the markets, October 2015. REUTERS/Lucas JacksonREUTERS
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Federal Reserve Chair Janet Yellen said earlier this month that a British exit from the EU "could have consequences in turn for the U.S. economic outlook."

Now that the leave camp has won, the process of a British exit from the EU will begin, but some estimates say the negotiations could take more than two years. If Brits had voted to stay, then markets would have been free to breath a sigh of relief.

Image: Yellen holds a news conference following the Federal Open Market Committee meeting in Washington
Federal Reserve Chair Janet Yellen holds a news conference following the Federal Open Market Committee meeting in Washington September 17, 2015.JONATHAN ERNST / Reuters

The U.K.'s Treasury itself reported that its analysis showed the nation "would be permanently poorer" if it left the EU and adopted any of a number of likely alternatives. "Productivity and GDP per person would be lower in all these alternative scenarios, as the costs would substantially outweigh any potential benefit of leaving the EU," a summary of the report said.

As the overall economy weakens, the British government would see weaker tax receipts than otherwise, and those losses would vastly outweigh the benefits of reduced contributions to the EU, according to the analysis.

The general thinking is that many international corporations, notably those based in the U.S. and China, invest in U.K. operations partly so they can readily access the free-trade corridors the U.K. enjoys with the rest of the European Union. So since the leave camp won, many of those companies could see drastically reduced profits.

The sudden need to reset tons of global investment channels — against the background of the ambiguous and extended period of the U.K.'s exit negotiations — could have a freezing effect on the whole region.

"Negotiations on post-exit arrangements would likely be protracted, resulting in an extended period of heightened uncertainty that could weigh heavily on confidence and investment, all the while increasing financial market volatility," the IMF said in an April report.

"A U.K. exit from Europe's single market would also likely disrupt and reduce mutual trade and financial flows, curtailing key benefits from economic cooperation and integration, such as those resulting from economies of scale and efficient specialization.

"Depending on how you measure it, the EU as a whole ranges from the first to the third largest economy in the world. And in terms of trade, the bloc easily topped the U.S. and China in both imports and exports. So a slowdown there would mean a global slowdown. One that could last months — if not years.

In Europe, the EU could run into economic trouble for a couple of reasons. The lengthy and as-yet ambiguous exit negotiations could cripple investment, as mentioned above, but they could also lead to more exits. Nationalist groups across Europe will be watching the referendum closely to see if they can use the results into their advantage.

Elsewhere, the economic risks are best understood as a function of uncertainty. EU uncertainty: If financiers and companies are concerned that they may get cut out of free-trade channels, they may find safer (which is to say, less productive) uses for their money. And British uncertainty: All those billions of dollars already invested in the U.K. and invested abroad by British entities could be in limbo as London rushes to negotiate new non-EU trade deals with key partners.

In the U.S., billions, if not trillions, of dollars could be called into question by a British exit: In 2014, American direct investment into the EU totaled about 1.81 trillion euros, and about 1.99 trillion euros flowed in the opposite direction, according to the European Commission.

If even a small percentage of that is disrupted, it could reverberate across the globe.Similar concerns apply for Chinese, Indian, Japanese and other international companies and investors.

And then there's the issue of currencies: With all of that uncertainty rushing around, a British exit will likely result in a massive rebalancing of currencies. Investors will (and have already begun to) dive out of the British pound and into cash that's perceived as safe — the Swiss franc, the Japanese yen, the U.S. dollar.

The euro could also see some weakening if investors are worried about the fate of the EU. While being a safe haven could sound like a boon for the U.S. economy, such a large, sudden currency swing could have significant negative implications for American multinational corporations.The fallout from those currency moves could be another source of short- and medium-term economic tumult.