Over the next few days I will summarize some of our thinking at O’Brien Greene about the fallout from Britain’s vote to leave the EU. Let me begin with one observation.
The EU needs Britain more than Britain needs the EU, and the “leave” vote is a greater threat to the economic and political future of the EU than it is to the UK.
This is evident in how financial markets have responded thus far to the vote. Last week London-listed stocks as measured by the FTSE 100 Index (affectionately known as the “Footsie”), closed up for the week. That’s right. Even after Friday’s sell-off in response to the “Leave” victory, London-listed stocks were up over the previous five days. Compare the performance of UK FTSE 100 stocks (in light blue) to German stocks (the DAX Index, in dark blue) and Euro stocks generally (the Stoxx 600 Index, in yellow) shown below.
Unlike the UK stock market, both German stocks specifically and European stocks generally sold off last week.
No doubt Brexit will raise tough problems for the UK, including the possible secession of Scotland (and even Northern Ireland), but as far as financial market indicators go, Brexit is looking worse for the Europeans than for the British. This comparative weakness wasn’t just last week. Today the trend continued with the Stoxx Euro 600 Index declining 4.11%, while the FTSE 100 was off only 2.55%.
Furthermore, although today S&P downgraded Britain’s credit rating, bond investors haven’t shown any worries about the reliability of British sovereign debt. Demand for the U.K. 10-year Gilt surged after the Brexit vote, as yields declined from above 1.4% to below one percent.
The Financial Times, which was a rather cloying cheerleader for the “Remain” campaign, recognizes the seriousness of the blow to Europe that Brexit amounts to:
The EU is at bay. Once Britain leaves, the EU loses its biggest military spender, a UN Security Council seat, its second biggest economy and one of its most vocal champions of world trade and liberal economics…. Looming large will be the danger of far-right politicians making further gains, from Geert Wilders in the Netherlands to Marine Le Pen, who wants France to have its own referendum.