Fitch: ‘Brexit’ would increase downside risks to EU sovereigns

A British exit from the EU would weigh on the economies of other EU countries and increase political risks in Europe, Fitch Ratings says.

The economic impact of Brexit would be lower for the EU than for the UK, but would still be palpable, the rating agency stated  in a recent report.

It would reduce EU exports to the UK, although the extent would depend on the nature of any UK-EU trade deal and the degree and duration of sterling depreciation.

The most exposed countries would be Ireland, Malta, Belgium, the Netherlands, Cyprus and Luxembourg, all of whose exports of goods and services to the UK are at least 8% of GDP.

Although EU countries could gain from the shift of some foreign direct investment from the UK to the EU, countries such as Luxembourg, Malta, Belgium and Germany, with a large stock of foreign direct investment and financial assets in the UK, would suffer losses in the euro value of those assets if there were a permanent depreciation of sterling.

Moreover the banking sectors of Ireland, Malta, Luxembourg, Spain, France and Germany have sizeable links to that of the UK.

On the other hand, as Brexit would reduce the UK’s contribution to the EU budget (a net €7.1bn in 2014 after rebates) potentially to zero, other net contributors would have to increase payments, or net recipients accept lower EU expenditure.

Brexit would also create a precedent for countries leaving the EU, Fitch said.

It could boost anti-EU or other populist political parties, and make EU leaders more reluctant to implement unpopular policies with long-term economic benefits.

Negotiating the terms of the UK’s exit could exhaust the EU’s time and energy and open up new fronts of disagreement. Brexit could shift the centre of gravity of the EU, making it more dominated by the eurozone core, poorer, more protectionist and less economically liberal. If the UK were to thrive outside of the EU, it might encourage other countries to follow suit.

Brexit could also precipitate Scotland leaving the UK, which might intensify secessionist pressures in other parts of the EU, such as Catalonia in Spain.

Fears of other countries leaving could widen bond spreads for “peripheral” countries, potentially increasing the average cost of debt and making it more challenging to reduce government debt/GDP ratios, Fitch said.

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