Brexit Could Set Off A Storm in Global Markets

If you have been following the financial news since the beginning of 2016, you likely know that Britain has considered leaving the European Union. Britain’s departure, or Brexit, could trigger the collapse of the entire euro zone. If this happens, financial woes may spread to the Americas and Asia. Leaders from France and Germany have also expressed concerns that Brexit would completely change the dynamics of Europe.

If Britain Leaves the European Union, International Markets Will be Plagued with Turmoil and Volatility.

There are many repercussions associated with a weakened European Union, and both political and economic issues would carry over to global markets. This international dispersal of EU problems is a concern for many investors who hold assets in euros. The uncertain atmosphere that has developed as a result of Brexit is already beginning to deter investors from Asia and North America.

Brexit Will Tank Stock Markets

According to Business Insider, Morgan Stanley predicted that Britain’s departure from the European Union will cause equities to drop by nearly 15 percent within six months. Since many of the world’s financial markets are interconnected, this can have repercussions for banks and investors from across the globe. If Britain decides to remain a member of the European Union, then stock prices are expected to grow by five percentage points. Based on these predictions, Brexit would cause a drastic slowdown for global commercial activity.

A Brexit-fueled economic slowdown would primarily occur as a result of uncertainty in global markets. Since investors expect volatility for stock prices, many people will transfer their funds to safer assets in Asian and American markets. With fewer funds in Europe’s financial markets, the effects of Brexit would only worsen over time. Unfortunately, the long-run effects of Brexit on financial markets are difficult to predict. Some economists in the European Union have suggested that the uncertainty caused by the idea of Brexit has caused stagnation in the UK’s housing and manufacturing industries.

Britain’s potential exit from the European Union is not the only factor that is hampering Europe’s economy. The euro zone’s economic woes of 2008 are also being exacerbated by inflation, negative interest rates, stiff regulations, and an unsolved migrant crisis. If these issues go unchecked, Brexit could be the final nail in the euro zone’s coffin.

The Sterling Will Rapidly Depreciate

Britain is attempting to leave Europe as a way of fleeing the economic problems of the euro zone. This is not going to alleviate Britain’s problems. Instead, Brexit will make credit-easing measures difficult for the Bank of England. If Britain leaves the European Union, the sterling is also expected to depreciate.

The possibility of depreciation is suggested by strange fluctuations in the foreign exchange market. As a result of the uncertainty caused by the Brexit proposal, currency traders have less interest in the British sterling.

The Value of the Euro Will Plummet

The stability of the euro depends on the unity of the European Union. According to The Telegraph, Britain’s departure may cause other nations to also leave the euro zone. With fewer countries in the European Union, market access will shrink. This will reduce trading and tourism within Europe, and aggregate economic activity will lag. When combined with low interest rates and high inflation, this economic problem will cause the euro to depreciate.

In normal situations, weak currency typically means that foreigners have greater purchasing power. Through increased tourism and trading, a weak currency can stimulate the economy. Unfortunately, a depreciated euro after Brexit will not improve the economy of Europe. This is because the expected rate of depreciation is much more extreme than what central bankers suggest to stimulate the economy. Compared to the American dollar, the euro is expected to depreciate by nearly 12 percent after Brexit.

Politics, fear, negative interest rates, and the potential collapse of the European Banking System will all work together to deter investors and travelers from entering Europe to improve the economy. To make matters worse, the yield curve for the 10-year bonds inverted in June, so financial woes may be on the horizon for Europe.

If Britain decides to exit the European Union, Europe and global financial markets are in trouble. Fiscal matters and politics will also complicate Europe’s economic issues over the coming years, so the future structure of Europe is unknown.

For more information about Brexit’s potential effects on financial markets, visit Personal Money Store.

Brexit Could Set Off A Storm in Global Markets

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