Shifting landscape in the EU after Brexit vote

Who will follow the British in their decision to leave the European Union? And are there likely to be any departures from the eurozone? For Nobel Prize-winning economist Joseph Stiglitz, Italy is the next EU member-state that will be leaving the bloc, while he recommends that Greece and Portugal follow suit.

This discussion may appear somewhat theoretical and hypothetical right now – but not much more than the discussions about Brexit and the emergence of the far right in Europe did 10 years ago. Nevertheless, the referendum has taken place in the UK, and the people voted to leave, while far-right parties have made electoral gains across the continent, so what does the future hold for Europe?

According to Stratfor analyst Adriano Bosoni, Brexit is simply a symptom of the problem in the European Union and will not in itself trigger an exit trend from the bloc. Speaking to Kathimerini, the Argentinean analyst notes that the eurozone is experiencing trends toward fragmentation and that Brexit will create the road map and mechanism for the next departure.

This, however, does not mean that another departure is inevitable, or that the eurozone is at risk of extinction. The only certain thing is that it is going to change.

Analysts are focusing on Italy, as the country features the problems of southern EU states (high debt, low competitiveness) and the strengths of the core eurozone states (mostly industrial, export-driven economies). Moreover, the eurozone could probably muddle along without Italy, which would not be the case if Germany or France were to bow out. However, because it is of some importance to the common currency, Italy is a position to exert pressure for some changes in the eurozone to the benefit of the southern states. As a powerful member of the EU and a member of the eurozone, Italy has more leverage than the UK.

As regards Greece, Bosoni believes that the country is at risk of leaving the eurozone – or even the EU – more because of the political and geopolitical challenges on its doorstep (the migration crisis, the Kurdish issue, relations between Russia and Turkey in combination with those between the US and the eurozone etc), rather than because of the economic crisis.

Berenberg chief economist Holger Schmieding, however, disagrees with the hypothesis that Italy may be the next country to consider leaving the euro or the European Union. Speaking to Kathimerini, Schmieding explains that even though Italy has a large and export-oriented economy, it has one major disadvantage, of which the other “big players” of the eurozone are aware: Its export and financial policy mix is in direct competition with China, meaning that Italy has a serious competitiveness problem.

Schmieding does not see any other country following Britain, an opinion that is shared by Jurgen Matthes, head of the International Economics and Economic Outlook research unit at the Cologne Institute for Economic Research.

Bruegel director Guntram Wolff stresses that the cohesion of Europe relies on its attractiveness – mainly to members. An unfavorable agreement with Britain may dissuade other states from leaving, in the short term, but the overall balance will be negative, as it will damage the EU’s attractiveness.

That said, Athanasios Vamvakidis, head of G10 FX strategy at Bank of America Merrill Lynch, believes that Europe will change, particularly when the European Central Bank stops printing money. He argues that there is actually no real convergence in the EU, as the debts of the south have soared to record levels and the ECB’s policy is to veil the problem. This, he says, will have to stop at some point, and when it does, all of the real problems will come bubbling to the surface. If, moreover, it turns out that Britain’s decision was the right one, this would only serve only as an example for emulation for the overindebted countries of the European south.

In contrast, if Britain is ruined because of the choice made by its citizens, then skepticism toward both the euro and the EU will vanish and overindebted nations will have to suffer more tough austerity measures for many years to come.

All the analysts agree that each member-state joined the EU for its own reasons: eastern countries for the additional security it afforded, southern countries for the funding, and the northern countries in order to transfer the cost of fiscal measures to the south in exchange for funding, but also in order to counter the extreme right-wing movements of the north with left-wing reflexes of the south.