AXA IM: The die is cast: The future of the EU is in question

The UK people have made their decision, with a 51.9% vote in favour of leaving the European Union. Prime Minister (PM) Cameron has announced he will resign once the Conservative Party has chosen a new leader. The next PM will have to ‘deliver the instruction’ given by the popular vote and activate Art. 50 of the EU Treaty in order to initiate the exit negotiations. For the rest of the European Union, we believe political implications are more important than short term economic and financial impact: the hard times are yet to come. Within countries, political equilibria will shift further. Between countries, there will be attempts to show unity and initiative, but public opinions and the markets will be reluctant to give the benefit of the doubts to leaders that have been largely impotent, when facing the rise of populism and nationalism. At this stage, all options are open, from impotency leading to the fragmentation of the EU and, to far reaching reforms that might give a new life to the European project. Future developments will be the result of interactions between politics and economic developments. Financial markets will try to anticipate these complex interactions, but since they are highly uncertain, may change views relatively often. To some extent, financial markets’ reaction may influence political reactions, in case of acute tensions, on periphery debt, or some key sectors of the economy, such as banks.

As for the former, if well targeted, they will reduce financial market volatility and limit the extent of contagion across countries and thus mitigate the impact on real economies. Here is a wrap-up of our thoughts, based on our pre-vote analysis.

Lesen Sie den vollständigen Beitrag als PDF hier.