Brexit: The future of Europe is in the balance

 

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.

 

Past performance is not a guide to future performance. The value of investments can fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.

This information is for professional advisers only. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and are subject to change at any time without notice. The contents of this article are not intended as investment advice. The Canada Life Investments blog page features images licensed from Getty Images International. These images shall not be downloaded, republished, retransmitted, reproduced or otherwise used in any way. Aside from the above, and unless otherwise stated, Canada Life retains copyright in and/or has a right to use all contents of this website (including text and graphics) and such contents shall not be copied, distributed, extracted or modified without the express prior written consent of Canada Life unless for private, non-commercial use.

Duncan Mackay

Duncan Mackay

Fund Manager, Japanese Equities

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