What Uncertainty Does Brexit Bring to the EU Currency Market?


On the brink of a break?

Fears that Britain could be on the verge of an exit from Europe are beginning to have wider repercussions on the EU currency market, with analysts predicting another tumble in both the sterling and the euro.

According to a recent YouGov poll, almost a half of Britons would vote to leave the European Union in the coming referendum, further contributing to the political uncertainty.

Concerns over foreign investment in Britain.

The sterling has dropped 8 per cent since last November, and it is likely that a diminishing business confidence will lead to further struggles for its currency as Britain continues to deliberate about its future in Europe.

The heavy reliance on foreign investment is of primary concern to Britain. With overseas investment in UK government bonds totalling an estimated 427 billion British pounds, the withdrawal of foreign investors could have disastrous consequences on the nation’s ability to reduce its current account deficit, which stands at 3.3 per cent of GDP.

This reflects policy makers’ lack of room for manoeuvre, as the British economy and the sterling are challenged with low wage growth, a stagnating industrial sector, and a 12­year low in oil prices, amid the backdrop of a slowdown in global growth, especially in China.

Even with a sliding currency, the Bank of England has confirmed it is unlikely to raise interest rates until 2017.

Doomed already? Brexit consequences for the EU

Many large European banks have been quick to point out that the future of the Euro looks equally, if not more bleak, as speculation over Britain’s EU membership continues.

Whilst the Eurozone GDP is expected to continue rising this year, its growth is only predicted at 1.7 per cent, compared to the US dollars’s 2.6 per cent.

Indeed, the stimulus package from the European Central Bank was possibly the only thing preventing of another financial crisis in Europe. Plummeting business confidence, high unemployment (10.4 per cent), and falling incomes remain a real cause for concern in the Eurozone.

Further, there is a renewed anxiety about the strength of European banks, which in the last three months has seen the shares of both the French Société Générale and the German Deutsche Bank fall by over 30 per cent.

Therefore, the potential fears over a Brexit ­ which could result in a diminished European influence on global decision­making, the loss of its largest financial centre in London, and an era of Franco­German domination over Europolitics ­ sentence the Euro to unwelcome uncertainty.

Float or sink?

Of course, should Britain decide to leave Europe, the potential implications on its currency market would rest heavily on the success of the nation’s subsequent independence.
Were a self­governing Britain to prosper, many other member countries might be tempted to follow suit, putting increased pressure on the already volatile EU currency market.

Alternatively, the reduced level of foreign investment could lead to an economic downturn in Britain, and this in turn would lead to increased pressure among the Scots for a second referendum on Scottish independence. The potential effects of a Brexit on the currency market, therefore, are manifold.

A big fuss over nothing?

The bookies clearly expect a late swing in favour of preserving the status quo and voting to remain in Europe, putting odds of a Brexit at just 30 per cent. But whilst the British economy could potentially thrive either way, it appears the severe Brexit consequences for the EU would seriously dent the currency market following a departure.

Sadly, whatever happens in the summer, so long as the British public remains undecided on the issue, both sterling and euro will suffer.

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