The Brexit result was unexpected and has put into doubt the entire European project. Indeed, the result raises as many questions within the remainder of the European Union as it does for the UK. Although Britain has always been a reluctant participant, it is one of the largest economies, and how the remaining members cope with the financial and political consequences will have lasting repercussions.
The short-term focus will be on the terms of the negotiations. If the outcome is too tough on the UK, the EU itself will feel the pain. However, should it be too light 'exiteers' across the bloc will seize on the prospect of a pain-free exit. Anti-EU nationalist parties are on the rise in most countries – with the Netherlands, Poland, France and Austria perhaps highest on the market’s mind. The UK process will potentially be seen as a role model and politicians will not want to make it look easy.
The market is likely to try and force a resolution from politicians sooner rather than later, with the fear of the unknown a key cause of market volatility. Fundamental flaws in the economic and political structure of the EU, and in particular in the Eurozone, need to be addressed before markets will fully believe in the survivability of the project. Perhaps most at risk will once again be peripheral markets – including Italy, Spain, Greece and Portugal – due to their weak starting point and potential for capital flight. On the other hand, countries such as Switzerland, France and Ireland could be set to benefit from a relatively stable economic base and the potential to win some business from the UK.
We will be watching closely to see how events unfold. The EU has long been a specialist at late night compromise, and more grand bargains trying to pull the continent closer together are likely. This is certainly not yet the end for the EU, and recent economic data coming from the zone has been relatively positive. Nevertheless, the stakes have just been raised and the future of Europe is in the balance.
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