{"id":53977,"date":"2016-07-05T02:12:00","date_gmt":"2016-07-05T00:12:00","guid":{"rendered":"http:\/\/beta.next-finance.net\/opinion\/maybe-brexit-wont-break-britain-and-the-world\/"},"modified":"2019-12-31T00:55:10","modified_gmt":"2019-12-30T23:55:10","slug":"maybe-brexit-wont-break-britain-and-the-world","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/opinion\/maybe-brexit-wont-break-britain-and-the-world\/","title":{"rendered":"Maybe Brexit won\u2019t break Britain (and the world)"},"content":{"rendered":"

The British electorate\u2019s decision to leave the European Union
\nin the June referendum has roiled markets worldwide. It has
\nclouded prospects for the UK and world economies, and threatens
\nthe future of the European project. Investors are obviously right
\nto feel concerned. But they should also know that there are some
\nsilver linings to the Brexit clouds. And these could support riskier
\nasset classes over the medium term.<\/strong> <\/em><\/p>\n

The biggest worry is that the UK\u2019s looming divorce from the EU will encourage
\nother electorates in Europe to demand their own \u2018leave or remain\u2019 referenda.<\/p>\n

After all, populist, anti-EU movements are gaining strength in France, Italy,
\nSweden and even Germany.<\/p>\n

Yet there are reasons to believe that the EU\u2019s key decision-makers, who are
\nclearly aware of popular discontent with mainstream politics, might see fit to
\nmoderate some of the conditions that have heaped pain on the populations of
\nweaker member countries.<\/p>\n

The European Commission has already turned a blind eye to fiscal slippage
\nin countries like Italy, Spain and France. So the UK referendum might yet
\nconvince the German government to relent on some of its austerity demands
\non peripheral countries. There could even be scope for officially-sanctioned
\nfiscal easing as a way of mitigating Brexit\u2019s impact.<\/p>\n

Italy\u2019s creaking banking system is seen as another potential victim of Brexit,
\nbut here too there are signs that policymakers are adopting a more pragmatic
\napproach. The Italian government is in talks with EU regulators in a bid to
\novercome restrictions preventing a state-funded re-capitalisation of its debtladen
\nbanks. Giving Rome the green light to press ahead with a EUR40billion
\ncash injection, invoking \u201cspecial circmustances\u201d, would go some way to
\nreversing recent market panic.<\/p>\n

Spain\u2019s general election result is also cause for mild optimism. The vote,
\nwhich followed soon after the British referendum and in which mainstream
\npolitical parties did much better than expected, suggests Brexit might well
\nmake restive electorates a little less prone to rebellion.<\/p>\n

As for the UK, while we expect Brexit to have a negative impact on growth,
\npossibly dragging the economy into a recession, the fallout could well prove less
\nsevere than some think over the long run. For one thing, UK-EU negotiations
\nover a new trading relationship might not result in an acrimonious split.<\/p>\n

Indeed, some commentators think Article 50, which lays
\nout the process that would ultimately lead to Britain\u2019s
\nwithdrawal from the EU, might never be invoked.<\/p>\n

What\u2019s more, a new UK government, expected to be
\nin place by September\/October, could well provide
\nsignificant fiscal stimulus, say, by quickly approving
\nmajor infrastructure projects, or by implementing probusiness
\npolicies (a cut in corporate tax rates, for example),
\nas a way of supporting the economy.<\/p>\n

At the same time, major central banks are likely to offer
\nsupport where needed. The Bank of England has plenty
\nof ammunition at its disposal \u2013 it could cut rates or restart
\nQuantitative Easing, though sterling\u2019s fall will also be very
\nstimulative for exporters. The European Central Bank,
\nmeanwhile, could trim rates at the margin or announce
\nan extension of its asset purchase programme.<\/p>\n

Most important of all will be the US Federal Reserve\u2019s
\nresponse. Only recently there were expectations that the
\nFed would hike its funds rate twice this year, by half a
\npercentage point in total. Now, the market is forecasting
\nno move until 2018. That may place a break on the
\nappreciation of the US dollar, which would help exportdependent
\nemerging markets.<\/p>\n

Even before their post-Brexit selloff, European equities
\nwere at their cheapest valuations relative to the US since
\nat least the mid-1990s. They could rally strongly if there\u2019s
\na move back into riskier asset classes once the dust settles.<\/p>\n

Clearly, Brexit is a reminder investors have to start paying
\nmore attention to political risks. US elections this autumn,
\nFrench and German ones next year each have the capacity
\nto reignite market turmoil. But investors shouldn\u2019t only
\ndiscount worst case outcomes.<\/p>\n

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