Could Brexit be the end for the euro?

Does the UK’s decision to leave the EU mark a watershed moment for the euro as well, one from which it may never recover?

Euro notes
Source: Bloomberg

It is almost impossible to work out the full list of consequences that arise as a result of the UK’s referendum. One thing is certain, however. It is likely to give support to Eurosceptic movements across the continent. This has major consequences for the entire EU, but also for the eurozone, the group of countries that have opted to use a common currency.

Much of course depends on whether the UK secures advantageous (or, at least, not disadvantageous) terms for its departure, should a departure actually occur. If it is forced out on terms that damage the City of London, for example, other countries may think twice before risking economic turmoil of their own.

However, if the UK is somehow able to force a deal on Brussels that preserves many, if not all, of Brexiteer demands, we could see other nations start to edge towards the door.

For hard-pressed eurozone members like Italy, Greece or Spain, and even for more successful members such as the Netherlands, an exit may seem like a tempting prospect. A chance to set their own monetary policy, rather than follow an European Central Bank dictated one that is more likely to suit Germany, would undoubtedly appeal.

A YouGov poll of northern European nations indicated that 69% of Swedes thought it likely that a Brexit would result in other nations leaving, along with 66% of Danes and 57% of non-EU Norway. Northern European states also tend to be healthier economically, which would give them greater bargaining power when compared to states such as Italy and Greece.

There is also the possibility that political events elsewhere in Europe may boost the cause of sceptics. Italy is set to hold a referendum in the autumn on constitutional changes proposed by Prime Minister Matteo Renzi. Mr Renzi has suggested he may step down if he does not emerge victorious, which would clear the way for populist, anti-EU parties to make a run for the premiership.

Brexit will be a tough problem to crack for all concerned, but it would be even worse if a euro member decided to leave (or was ejected). The EU may survive Brexit, but the euro might not last if a country was seen to leave and then prosper outside the currency bloc.

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