Brexit raises questions over EU’s future

Europe

In Europe, June was dominated first by speculation over the possible outcome of the UK’s referendum on its future membership of the European Union (EU), and then by the unexpected news that a slim majority of UK voters had opted to quit Europe. The shock result plunged global financial markets into a state of heightened uncertainty and raised questions over the longer-term outlook for a united Europe.

In response, a joint statement from European Parliament President Martin Schulz, European Council President Donald Tusk, and Dutch Prime Minister Mark Rutte described Brexit as “an unprecedented situation”, but vowed that “the Union of 27 Member States will continue”. A subsequent speech by European Commission President Jean-Claude Juncker urged the UK to provide clarification on its future plans.

Investors drew reassurance from the European Central Bank’s (ECB’s) promise to “stand ready to provide additional liquidity, if needed, in euro and foreign currencies”. Credit ratings agency Standard & Poor’s (S&P) downgraded the EU’s credit rating from “AA+” to “AA”, maintaining its outlook as “stable”. S&P cited the effects of “weakening political cohesion” and warned that, in future, “revenue forecasting, long-term capital planning, and adjustments to key financial buffers… will in our view be subject to greater uncertainty”.

In Italy, the FTSE MIB Index dropped by 10.1% over June, losing 12.5% on the day that Brexit was confirmed, and falling by 24.4% since the beginning of 2016. Meanwhile, the Athens Composite Index plunged 13.4% immediately after the referendum’s result, and by 16.2% over June as a whole. Elsewhere, the Dax Index fell by 5.7% over the month, while the CAC 40 Index declined by 6%. Since the start of the year, the two indices have fallen by 9.9% and 8.6% respectively.

Economic activity in the eurozone appeared to lose pace in June, undermined not only by concerns ahead of the referendum, but also by broader worries over inflationary weakness. On a more encouraging note, the rate of inflation in the eurozone is expected to have moved into positive territory in June, rising from -0.1% in May to 0.1%. Looking further ahead, the ECB expects inflation in the eurozone to pick up this year, according to ECB President Mario Draghi. The ECB upgraded its forecast for inflation in 2016 to 0.2%; nevertheless, this remains substantially below its target inflation rate of below, but close to, 2%.