Macroscope | Eurexit is the real danger now
More EU member nations could be tempted to the follow the UK’s example
After Britain’s landmark decision to quit the European Union, global markets have been in celebratory mood. Call it what you will, short squeeze, bear market rally or just unalloyed joy that the world has not come to an end just yet, but markets are not out of the woods by any stretch of the imagination.
The million dollar question is whether the rally in equities, bonds and risk assets in general has any meaningful staying power, or whether it is doomed to peter out as reality sinks in on Brexit’s repercussions for Britain, Europe and the rest of the world. It is the fear of another pandemic of political, economic and financial risks that is the challenge facing investors now.
It is fair to say that global markets have every right to be pumped up, considering the glut of cheap and easy money currently washing around the world economy at the moment. In reality, markets are in denial. The global economy is in a weak and fragile state right now and the Brexit earthquake opens up fissures to a whole new set of future risks for investors.
Brexit may well mark the beginning of the end for the euro currency and be the trigger for renewed global turmoil ahead
Cheap money and investor irrational exuberance might have done their bit for the bull market in risk assets since 2009, but they seem to be doing precious little for the global real economy right now. World economic confidence remains on the ropes, with the latest purchasing manager surveys showing overall sentiment flat and lacklustre and critically weaker than two years ago.
Europe looks particularly vulnerable. Tensions are still riding high after the global and euro zone crises over the last eight years. Only thanks to superhuman efforts by the European Central Bank, through QE and negative interest rates, has Europe managed to avoid a deeper disaster. But economic confidence is only hanging by a slender thread and still very susceptible to shocks.
Britain quitting Europe could be the game changer. European politics are a powder keg ready to explode and Brexit will have ignited a dangerous spark. There are a slew of EU countries in political trouble. Fears about globalisation, austerity, unemployment, economic stagnation, wealth inequality and worries over migration are surfacing in growing political discontent with traditional centrist parties in Europe.