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After Brexit resignations, it's 'starting to look like August 1914'

In this Friday, Aug. 31, 2018 file photo Britain’s Secretary of State for Exiting the European Union Dominic Raab, left, and EU chief Brexit negotiator Michel Barnier at EU headquarters in Brussels. (AP Photo/Virginia Mayo, File)

Market watchers are beginning to worry that the uncertainty coming from Europe is portending more than just individual country uncertainty. The British pound fell sharply on Thursday as Brexit uncertainty spiked after the resignation of multiple ministers, including Brexit minister, Dominic Raab.

“A no-deal exit for the UK from the European Union would be a disaster for all sides,” Joseph Trevisani, senior analyst at FXStreet, told Yahoo Finance. “We are not there yet, but the miscalculations are starting to look like August 1914.”

In August 1914, German forces invaded Belgium and declared war on France. The Belgian government, in response, invoked the 1839 Treaty of London bringing Britain into the conflict, and effectively beginning World War I.

Trevisani says that while a war within Europe is not brewing now, many of the same elements that existed in the run-up to the first world war are present, such as growing opposition to the European Union and antipathy between multiple major countries. Most recently, Italy’s government defied the EU by releasing a budget that pushes the country’s budget deficit to 2.4% of the country’s gross domestic product. EU rules dictate that no country can have a deficit no greater than 2% of GDP.

As such, Trevisani added, the uncertainty of Brexit and its possible failure will have wide-ranging consequences.

“If the government falls, does Brexit fall with it?” he said. “If the Tories remove [UK Prime Minister] Theresa May the remaining government will be so weak that they will inevitably fall into a general election, which [opposition party] Labour could very well win.”

Unfortunately for the European Union and the euro currency, Labour Party Leader Jeremy Corbyn is a skeptic of the EU himself.

“Incredibly high level of uncertainty”

“The pound is no longer trading on the basis of a soft Brexit vs hard Brexit, but rather on the incredibly high level of uncertainty. This shift in sentiment is unlikely to change any time soon,” said Hamish Muress, currency analyst at OFX, in a note to clients.

The British pound (GBPUSD=XGBPEUR=X) fell by around 2% against the U.S. dollar to $1.27. Shortly after Raab resigned, Esther McVey, the secretary of state for work and pensions, also quit.

“Raab’s resignation has sent shockwaves through the market and will have come as a surprise to Theresa May,” Muress said. “While we expected resignations, Raab was seen by many as a key ally to May’s premiership. This has highlighted how difficult the situation is for Theresa May, and with [Northern Ireland’s Democratic Unionist Party] teetering on the edge, a leadership challenge could be imminent.”

Brexit, Britain’s vote to leave the EU in June 2016, was the first major domino to fall from the facade of European unity and the so-called post-war order that has existed largely unchallenged since the end of World War II. Since then euroskeptic politicians in Hungary, Greece, Poland and now Britain and Italy have taken power, and growing anti-EU sentiment has powered nationalist parties to parliament in Germany, the Netherlands, Spain and France, the economic bloc’s largest countries.

“I think it’s coming,” Jacob Shapiro, director of analysis for Geopolitical Futures, said about the end of the European Union. “Whenever the next crisis from the United States comes. If I could tell you when that was … I’d be living on a small island in South Pacific. But I will say all the signs are there.”

Dion Rabouin is a global markets reporter for Yahoo Finance. Follow him on Twitter: @DionRabouin.

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