April 18, 2019

Who's Next to Leave the EU?

Brexit stole the news headlines over the past month, but in the end there was a postponement of the United Kingdom's withdrawal from the European Union and the British pound did not really move. This development means that by Oct. 31, the UK will no longer be a member of the EU.

Given that the foreign currency market is at its lowest volatility level in five years, we decided to ask ourselves if there are any other nations that also want out of the EU?

Italy topped the list last May. Its newly-established populist government initially was at odds with the EU over the nation's proposed high-spending budget, which the EU rejected twice. Eventually they came to agree on the budget front, avoiding a “Quitaly."

Poland was on the radar last November when the EU forced a controversial reform of its judiciary system that resulted in the forced early retirement of a third of Polish Supreme Court judges. A poll suggested that a third of the Polish people would reject EU membership, and European Council President Donald Tusk, a former Polish prime minister, said that a “Polexit" is possible.

Sweden seemed a potential exit candidate as the right-wing, anti-immigration Sweden Democrats became the third-largest party in that country last September and promised a “Swexit" referendum. In February, the Swedish government quietly U-turned and supported EU cooperation instead.

Meanwhile, it is important to note success stories such as Greece, which stayed within the EU.

In summer 2015, Greece came very close to defaulting. After initially refusing the strict austerity measures imposed by the EU, eventually they were put in place. Three years later, their economic turnaround is quite remarkable. Gross domestic product growth has overtaken Germany and France, and Greece's deficit-to-GDP ratio is now a surplus.

Our View: Those straining economically and feeling left behind seek a means for their voices to be heard, resulting in people blaming the EU. Clearly their views do not resonate with elected officials, where their country is forced to take more immigrants even as their own lives remain a struggle.

But leaving the EU is not the solution. The Greek success story stems from the fact that the Greek would not return to the drachma. This led investors the confidence to buy up massive amounts of Greek 10-year bonds, pushing down their debt finance cost and accelerating debt payoff thanks to EU backing. The lack of trade barriers within EU nations also supports their economy. It has been a win-win for both the investors and the country so far.

Within the EU member nations, the smaller countries are realizing that when times turn bad, it is even more important to stay within the EU. During the EU referendum, British politician and Brexit promoter Nigel Farage predicted a ''domino effect'' of other countries leaving the EU after Britain, but as of now we do not see other nations following the U.K.'s footsteps.

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