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Experts warn that the Brexit vote comes with a worse scenario than just the UK leaving the EU
Experts warn that the Brexit vote comes with a worse scenario than just the UK leaving the EU
June 23, 2016
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Anti-capitalist
protesters rest in the central square in Frankfurt's old town March 18,
2015, after the inauguration of the European Central Bank (ECB) new
headquarters. Anti-capitalist protesters clashed with riot police near
the new headquarters of the European Central Bank (ECB) in Frankfurt on
Wednesday and set fire to barricades and cars, casting a pall over the
ceremonial opening of the billion-euro skyscraper. REUTERS/Kai
Pfaffenbach (GERMANY - Tags: BUSINESS CIVIL UNREST)
In isolation, Britain voting to exit the European Union isn’t expected to have too profound of an effect on global markets.
However,
the big risk is actually the likelihood of contagion — the UK’s
successful exit could encourage other EU countries such as Spain,
France, Greece, etc. to follow the UK's lead and leave. This would have
negative economic effects for both Europe and the rest of the world, due
to the turmoil it would cause.
The first thing to note about this possibility is that there would likely be a waiting period after the Brexit vote.
This is because other eurosceptic countries would want to see what
happens to the UK, and what sort of trade deal they end up getting,
before they have their own referendums. This would take a minimum of two
years, but may take even longer. Canada initiated negotiations for a
free trade agreement with the EU back in 2009, and it has still not been
ratified.
Morgan Stanley maps out the 4 possible Europe wide repercussions in the chart below:
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Repercussions of the Brexit vote. (Image: Morgan Stanley)
The
absolute worst possible outcome is where Europe breaks up, and the euro
itself ceases to exist, which is in the bottom left corner. In such a
scenario, Morgan Stanley sees European markets falling as much as
25%-30%, and the euro weakening significantly. However, this is a
worst-case scenario.
Morgan
Stanley isn't alone warning about this possibility. Bond fund manager
Jeffrey Gundlach, whose base-case scenario is for Britain to vote
"remain," says that a "leave" vote would be "the beginning of the end of the euro zone."
View photos
There are lots of Europeans who aren't too crazy about the EU. (Image: Pew Research Center)
The
risk for Brexit emboldening euroscepticism is also very real — Pew
Research found the unfavorability rating for the EU in multiple
countries is already worryingly high.
France
is especially problematic, given that it is the second largest economy
in the EU. The other two big economies, Germany and Spain, are also
essentially even in terms of favorability.
"The
potential for additional referendums could be more disconcerting if it
threw the notion of a unified European economy into doubt," Citigroup
analyst Tobias Levkovich said. "In this respect, the Brexit vote itself
is less important than a series of follow-on votes around the
Continent."
Despite
this, Pew did find that a very large majority, around 70%, of the
overall EU population still believes that Brexit would be bad for the
EU. People may disapprove of how the EU is doing right now, but that
doesn’t necessarily mean they want to leave it just yet.
Given
that actual referendums aren’t likely to take place until people see
more the longer-term results of Brexit, tracking negative sentiment
towards the EU over the coming months (regardless of which way the vote
goes) is critical for all investors.
In fact, Levkovich believes increasing euroscepticism would likely be a big negative for American investor sentiment as well, even though the US’s direct sales exposure to Europe is not incredibly high.
So,
while there are plenty of ways to downplay the Brexit vote, there seems
to be no shortage of uncertainties that are being born out of it.
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