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Brexit – A deep breach in the European Unity

Philippe WAECHTER, Natixis AM - Viernes, 24 de Junio

The United Kingdom is in a process of leaving the European Union. There is no ambiguity on the results of the referendum. It’s a terrible disruption for Europe as its unity is called into question. But it’s also a deep change in perspective for young people who are the future of the UK: 75% of the 18-24 wanted to remain. Therefore conflicts of generation will be a real issue in coming years. What has changed with the result is a deep break in expectations as the relationships of the UK with the rest of the world will follow a new profile. With the European Union the access tot the single market will no more be the reference as we can anticipate trade barriers that have to be defined. In relationship with the rest of the world, British trade was imbedded in EU agreements. These latter will no longer be the reference for the UK. In other words, the fifth most powerful economy in the world will have to define new economic relationships with the world. It creates a risk of fracture and will create large uncertainty. That’s why a recession is probable in the UK in coming months. At the same time, the banking sector activity which is the strength of the City will see a large part of its business in Euro moving to the rest of Europe.


 

 

These effects are the source of the change in expectations and of the dramatic adjustment seen on financial markets. We have to anticipate large movements on exchange rate but also on equity and on bonds. That’s the reason why MarK Carney the head of the Bank of England said the central bank will intervene to stabilize the economy and the financial markets and to cushion the spillover effect. It will be helped by other central banks as it is in the interest of no one to see to much volatility.

The other important issue is on the political ground. David Cameron has announced that he will quit the 10 Downing Street at fall. He cannot be the representative of the UK to negotiate its departure from the EU. Therefore general elections are expected to define a real majority. This latter will go through traditional parties as Brexit was an option that was defended by some members of the two large political parties.Political equilibrium is not guaranteed rapidly and this will also be a source of concern.

The other important point is the political response that will be provide by Europe. If there is no strong reactions from European leaders we can expect that many Eurosceptic political parties could call for a referendum and that every future political campaign in Europe could be focused on this issue.

So the time schedule is the following: first, strong and deep adjustment on financial market, second central banks interventions and third convergence to an hypothetical political equilibrium in the UK and in Europe. During all this period of uncertainty expectations from the rest of the world on Europe will durably be negative. The answer must be on political ground to revive the utopia of an unified Europe even without the UK.




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