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The question is the title: How will the brexit affect the euro and the pound?

It looks like GBP is facing a tough situation. It is at its lowest value since 1985. Has GBP dropped permanently(or for a really long time)?

But, what will this mean for the EUR? IMO the EUR will also fall heavily, because a big country from the EU has called quits. This can potentially destroy needy countries(read: Greece).

What do you think about it? Will the Pound and/or the Euro rise or fall(compared to the USD)?

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  • $\begingroup$ Define what it means for the pound to be "at its lowest since 1985" and what do you mean by "gone for good"? $\endgroup$ – snoram Jun 24 '16 at 18:53
  • $\begingroup$ @snoram edited question to make it more clear $\endgroup$ – Rushat Rai Jun 29 '16 at 14:16
  • $\begingroup$ So you mean the GBP is at its lowest value against the USD since 1985? $\endgroup$ – snoram Jun 30 '16 at 0:18
  • $\begingroup$ yes(at least that is how it was when the brexit happened) $\endgroup$ – Rushat Rai Jun 30 '16 at 13:49
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I think you are right to assume that both the EUR and the GBP are going to fall.

  1. Fall in investment, uncertainty about the future, trouble exporting, and facing the high probability of loss of at least a part of the banking sector will in the short term probably trigger at least a small recession in the UK, accompanied by consumer price inflation due to higher import prices due to a weakend pound. A looming Scottish independence referendum is also not beneficial in this situation. Since the British Government is likely forced to intervene with a stimulus program of some kind, they will have to finance it, which means more debts financed by QE. Expecting QE, investors and speculators will flee into "save" currencies, like the CHF or the JPY. The last part, while apparently not yet finished, has basically already happened.

  2. BrExit will shift vote majority inside of what remains of the EU from North to South. Which means countries like France, Portugal, Italy, Spain and Greece will push for a weaker currency (aka. more QE to buy government bonds) to finance their ever mounting debt burden.

  3. With BrExit, a lot of Eastern European workers currently working in Britain might, and eventually will, have to return to their respective homelands by the time their visas expire. Since job prospects and pay in Poland, Slovakia, Romania + Bulgaria are admittedly miserable and I would try to escape it, too, this "innovative specialists" will undoubtedly seek employment in the rest of the remaining EU, which might trigger the domino effect by being the spark that ignites an already more than full powder chamber, especially when it comes true that BrExit means less growth in an already troubled Euro-area - and there is little reason to believe that it won't.

  4. 2) in turn is bad for the northern European states, like Denmark, Sweden, Austria, the Netherlands, Germany, etc. as it means they are going to finance the South's debts against their will with their "assets", aka mostly future pensions. Also, Brexit will increase the remaining states contribution to the EU budget, for example the German contribution to the EU budget will rise by appx. USD 2*109 (half of which will flow into agricultural subsidies, not anything productive or innovative or growth-stimulating). This 2 billions will have to be cut somewhere else, where that money would also be needed, such as education - and where that money actually would boosts both, future industrial innovation and growth. This and popular pressure due to unemployment as a result of EU-inflicted migration might make Northern States push for an EU-exit as well, especially in Sweden, Germany and the Netherlands, where the EU is, despite the suggestions of some official polls, even less popular than in Britain. And with elections in Germany moving closer, and the "Euro-sceptical" AFD on there rise, the Merkel government is not going to stay there for all that much longer.

  5. Insecurity about the economic and political future, as well as perceived or actual political and/or economic instability is going to do the rest for the EUR. No sane investor likes these things.

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  • $\begingroup$ Great answer Stefan. I don't have enough reputation to upvote just yet(I find it too early to accept) . $\endgroup$ – Rushat Rai Jun 29 '16 at 14:19
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It depends. (As all things do.) I'm personally of the opinion that this will not result in any major long-run changes in the value of the Euro. This will, however, negatively affect the pound.

Most of the currency volatility that we're currently seeing is a result from investor panic rather than actual changes in economics. The UK and EU still need to discuss exactly how the UK will leave before investors can accurately assess the economic impact.

Brexit will negatively impact the EU by:

  1. Decreasing the amount of trade between the EU and UK, due to increased trade barriers (this is going to affect the UK more than EU, mostly due to size)
  2. Increased instability from political changes; may result in a domino effect on other troubled Eurozone countries attempting to leave (see: Greece)
  3. Lack of job opportunities; the UK has a lot of foreign workers who will eventually have to go back to Europe when their visas expire

Brexit will positively impact the EU by:

  1. Forcing a possible move of the financial industry to European centers rather than London

In my opinion, this currency change has more to do with a shift in politics than economics. The UK and EU will probably agree to some form of trade policy that will mitigate most of the economic damage.

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  • $\begingroup$ (see: Greece)..haha, nice one Kontorus $\endgroup$ – Rushat Rai Jun 28 '16 at 12:23

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