Brexit Lessons: What EU Countries Can Do to Protect Their Wealth in the Wake of This Economic ChangeBanking / Brexit / Economics / Financial Planning / Investing
What EU Countries Can Do to Protect Their Wealth
Until June 2016, the European Union (EU) consisted of 28 countries known as member states, among them Ireland, Denmark, Sweden, Italy, Germany and the UK. Amidst economic and political unrest, the UK voted that month to separate from the EU. The actual process to leave takes two years, and will not begin until 2017, leaving the terms of the separation unknown.
One thing is certain: the UK is far from the only country that will be affected by this change. Indeed, not only do the rest of the EU countries have to be aware of the potential for economic backlash, but other countries outside of the EU may be affected by limitations on trade with the UK.
What Can They Do?
Here are how some key EU member states can attempt to keep their currency strong and prevent possible economic collapse in the wake of Brexit.
Brexit is not the first economic struggle EU countries have had in recent years. Back in 2008, much of the world experienced the fallout of an economic collapse that hit the EU especially hard. While many countries never fully recovered, Shawn Tully at Fortune says others clawed their way back, Ireland being an example.
The country’s GDP held strong for 2015 (“at an incredible 8% clip, edging out even China,” says Tully) but is likely poised to drop in the wake of Brexit, mostly because of the volume of trade between the UK and Ireland.
Although the Ireland-UK export numbers may not seem impressive, with 16 percent of Irish exports going to the UK compared 40 percent to the remainder of the EU, Robbie Kelleher at Davy Group, an Irish wealth management company, says they actually are. This is because a high proportion of these exports
“…are from indigenous Irish industries where the real economic value added is considerably higher. Perhaps a better indicator of the economic relationship between the two economies is the fact that more than one-third of Irish imports come from the UK.”
While Tully doesn’t expect relations between the countries to devolve to those that led to the 1998 Good Friday peace accord, he worries
“Britain might close the jagged, 300-mile frontier to control immigration from inside and outside the EU” and “the UK could even ban the 30,000 Irish workers who commute daily to jobs [in the UK.]”
The value of the sterling has already dropped post-Brexit, so what should Ireland do?
Ireland should branch out and focus more on its trading relations with the US and rest of the EU, says Daniel Varian at Irish finance company Alpha Wealth. He also notes
“the financial services industry could receive a real boost in Ireland post-Brexit. It may become increasingly difficult to obtain licenses to provide services on the European mainland.”
Ireland’s trading relationship with the UK may be notable, but for Denmark, that relationship is more crucial. According to Peter Levring at Bloomberg, Denmark provides major sources of fuel and machinery to the UK and smaller but still significant sources of drugs, butter and pork.
Politically, Levring notes how Lars Løkke Rasmussen, Denmark’s prime minister, was quite close with David Cameron, the UK’s former prime minister who held the role until the Brexit vote and has been replaced by Theresa May. Rasmussen and Cameron supported each other on policies regarding banking regulations and immigration; that political relationship is not guaranteed to continue unaltered with May.
Following Brexit, there was concern Denmark would follow in the UK’s footsteps and jump ship. James Mackintosh at The Wall Street Journal calls the country “a Eurosceptic nation.” However, if the country were to exit the EU, it seems the time to do it would have been hot off the heels of the UK’s exit.
In fact, a July 2016 poll reported by Cynthia Kroet at Politico shows
“69 percent of those surveyed support Danish membership of the EU, up from 59.8 percent a week before the vote.”
It appears Danish EU support rose significantly once the UK actually did decide to leave.
Lars Rohde, governor of Denmark’s central bank, exuded confidence immediately following the Brexit vote as regarding the stability of the krone.
“There is no reason why the decision of the British to leave the European Union should affect the exchange rate between the Danish crown and the Euro,”
he said as reported by The Local Denmark. “The National Bank of Denmark will do what is necessary to maintain a stable exchange rate if pressure is felt on the crown.”
Denmark wasn’t the only country that considered leaving the EU. Carter Dougherty at International Business Times wrote about the potential of Swexit, which would be Sweden’s EU exit. Dougherty made his point by noting that since the UK’s separation,
“Swedes reason they could end up on the defensive within the EU, and perhaps would be better off outside it.”
More recently, in July 2016, Gabriel Samuels with the UK’s Independent noted how, much like Denmark, Sweden changed its mind once the UK actually left. He cites a Novus study, which found
“a total of 63 percent of Swedes asked said they would vote to remain if a referendum on Sweden’s EU membership were held today, up from 53 percent in June.”
However, Sweden may have a good reason to have contemplated leaving the EU. Like many European countries in the economic collapse of 2008, it took a hit. While it’s doing better than it was, a drop in krona value post-Brexit hasn’t helped matters any.
In Sweden, note Bloomberg’s Amanda Billner and Johan Carlstrom, “the economy will expand 3.6 percent this year.” They add that the country has decided to put off “a planned rate increase — the first since 2011 — to the second half of next year and predicted [bank] ratings will remain zero until mid-2018” to fight the krona decline. However, experts believe the krona value may fluctuate as the Brexit situation further unfolds.
Another country experiencing tumultuous banking troubles after Brexit is Italy. As Francesco Guarascio at Reuters writes:
“Rome says it’s concerned that Italian banks, which hold 360 million euros ($400 billion) of bad loans, a third of the euro zone’s total, risk attack by hedge funds betting that market turmoil could tip them into full-blown crisis.”
Even before Brexit, Italian banks were in trouble, writes Don Quijones at financial resource Wolf Street. Banco Populare, the country’s fifth biggest bank, saw a one-month drop in value of 35 percent in June 2016, bringing the total loss since the beginning of the year to 75 percent. Italy’s largest bank, UniCredit, experienced a drop of more than 20 percent by mid-June, and 64 percent over the last year.
Understandably then, the country sought to get some leniency on state aid and public spending after Brexit. However, there’s been pushback from other countries, namely Germany, for this proactive move. They say Italy can’t rewrite how things go just because of Brexit. The country is currently stuck.
So, what’s next for Italy? Tom Peck at Independent reported that in August, Matteo Renzi, the country’s prime minister, sat down with Francois Hollande, the president of France and Angela Merkel, the chancellor of Germany (and the one who shot down Italy’s attempt at loosening its spending requirements).
While public security from terrorism was a major talking point, the leaders also discussed the likely consequences of Brexit. Merkel commented:
“Europe is on the witness stand…We respect the Britons’ decision to leave, but at the same time, the remaining 27 of us want to show that we are focused on creating a prosperous Europe.”
It’s not quite clear how a prosperous Europe might affect Italy; and only time will tell whether its bank woes improve or worsen.
While several EU countries may have their trade relationships negatively impacted once the UK leaves the EU, Germany is not one of them.
ITV, a UK television station, openly admits Germany gets fewer imports from the UK than the UK does from Germany. Therefore, the UK would figuratively shoot itself in the foot if the country did decide to sever ties with Germany. Of course, Germany could make the decision to no longer do business with the UK.
In fact, Germany doesn’t seem to be as concerned about the Brexit decision as other EU member states. Fortune notes the country,
“with its experience of hyperinflation… maintained a historical connection to gold as a tangible asset that can protect wealth against economic downturns and currency fluctuations.”
According to the article, last year Germany shelled out 4.6b USD for both gold bars and coins.
Another factor that may be working for the country is what Trinity College Dublin finance professor Brian Lucey says is a preparation for these kinds of situations.
“In Germany’s economic history between 1922 and 1961, some people lived through three or four expropriations or collapses of wealth, so there is an embedded sense of caution.”
If Germany continues to be cautious during the changes that will characterize the EU as the UK starts its separation, the country should weather the potential economic storm.