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.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Find articles by analysts

This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.