We’ve already discussed at length how Brexit could affect the U.K. economy and GBP pairs so this time let’s take a look at the other party in this divorce: the EU and the euro.
Here’s why some market analysts think that the euro might be worse off than the pound after this breakup.
Brexit: First of many exits?
Some say that the U.K.’s decision to leave the EU is just the tip of the iceberg, as this could set a precedent for other nations who are also unhappy with the union. Rumor has it that France, Italy, the Netherlands, Austria, Denmark, Sweden, Finland, and Hungary could also call it quits as well.
If some top officials from these nations are to be believed, it turns out that they’ve had a bit of “Bad Blood” with Brussels for quite some time. For instance, France’s Front National leader Marine Le Pen and Italy’s VP of the Lower House of Parliament Luigi di Maio have said that they will hold their own referendums because the EU at its current state is bound to fail.
Hungarian Prime Minister Viktor Orban has reiterated that Brexit is a signal that the EU needs to change its ways while the Netherlands just recently rejected a Ukraine-EU treaty to forge stronger political and economic ties.
Even German Chancellor Angela Merkel herself admitted that Brexit is a watershed for the European unification process. After all, the Brits aren’t the only ones who are grumbling about certain policies, most notably on immigration, being imposed by Brussels.
Potential ECB easing
While Bank of England Governor Mark Carney gave a statement almost immediately after the EU referendum results were announced, citing that the U.K. central bank has enough monetary policy tools to weather any economic shocks, European Central Bank head Mario Draghi has actually said that “further stimulus is in the pipeline.”
This suggests that the ECB is more prepared to ease monetary policy through further rate cuts or additional QE compared to the BOE which might take its own sweet time in assessing how the U.K. economy is dealing with the Brexit.
Besides, the BOE might be preoccupied with EU negotiations for the next few months, trying to come up with an agreement that would still be beneficial for the U.K. in terms of trade and employment.
The majority of the U.K.’s top import-export partners are EU nations (Germany, France, Italy, the Netherlands, Belgium, and Spain), so an unfavorable trade deal would likely wreak more havoc for whoever is left in the region.
Besides, smaller eurozone nations such as Spain and Portugal are either dealing with their own political risks or haven’t fully recovered from the debt crisis, which means that there are still plenty of weak spots.
As it is, peripheral eurozone government bond yields have already started rising on risk aversion, possibly signaling that a fresh round of financial problems may be coming to the region.
Great. Now what?
As I’ve discussed in my previous article on how the EU negotiations might play out, this divorce process could be a lengthy and messy one, provided that the U.K. does invoke Article 50 of the Treaty on European Union.
This basically means that whoever replaces former PM David Cameron must officially notify the European Council of its intention to leave the union first.
In his statement following the Brexit vote, EU Commission President Jean-Claude Juncker did note that the U.K. will remain a member of the EU until the negotiations are over, and this can go beyond the two-year time limit in case the U.K. requests an extension.
For now, better keep close tabs on Brexit-related updates as usual since the real drama might just be starting!