Europe Suffers Loss of Confidence on Brexit Result

The European Union’s collective credit rating was downgraded as mounting fears that the union will break up.  Credit rating agency Standard and Poor’s, which maintains credit ratings on companies and countries, slashed the EU’s credit rating to AA. It fears that the EU may lose more members in the future.

The European Union’s collective credit rating was downgraded as mounting fears that the union will break up.  Credit rating agency Standard and Poor’s, which maintains credit ratings on companies and countries, slashed the EU’s credit rating to AA. It fears that the EU may lose more members in the future.

“Cohesion within the EU, which we now consider to be a neutral rather than positive,” drove the downgrade, with analysts noting that the EU’s new shape will also force the group to restructure and renegotiate deals both internally and with outside countries.

Of particular focus is Switzerland, a non-EU member whose access to the single market is increasingly uncertain. Recently, the EU said it would not continue to offer the Swiss free access to the EU’s single market if the country does not open its borders and allow free movement, as is required by all EU members. German policymakers have publicly stated their confidence that the Swiss will capitulate, as the country needs the EU more than vice versa.

Fiscal Struggles

In addition to concerns about the EU’s collective bargaining power, the S&P said it is increasingly skeptical of the bloc’s ability to maintain political cohesion and make internal agreements about fiscal policies that will benefit all economies within the union.

“Our baseline scenario was previously that all 28 member states would remain inside the EU. While we expect the remaining 27 members to reaffirm their commitment to the union, we think the UK’s departure will inevitably require new and complicated negotiations on the next 7-year budgetary framework.”

The ratings agency said the EU would find it harder to make smooth negotiations amongst member states for a number of reasons. Two of the primary reasons are discontent with austerity in southern states, and growing concern about migration that will put a strain on domestic economics throughout the EU.

While economists are avidly confident that migration is beneficial to EU’s economy, political skepticism has led to several policymakers and politicians, particularly in northern states, to promise more limitations on immigration to those countries.

In turn, making harmonious fiscal policies as EU member states become increasingly separatist and isolationist could create friction that will lead to difficulties in negotiations. “Going forward, revenue forecasting, long-term capital planning, and adjustments to key financial buffers of the EU will in our view be subject to greater uncertainty,” the S&P said.

Trade Flow Doubts

In addition to concerns about internal political wrangling in the EU, analysts remain concerned about how trade deals between the EU and a separate, non-EU Britain will take form. While British policymakers have asserted the need and desire for mutually beneficial trade agreements with the EU after Brexit, German policymakers have publicly asserted that the UK will have limited access and cannot make the same trade deals as it had as a full EU member.

The hit to Britain’s GDP from a lack of EU market access remains unclear. IHS Global Insight has downgraded its estimates for Britain, seeing 2% growth in 2016 fall to as little as 0.2% in 2017. However, IHS has admitted its estimates remain wildly uncertain, as the timing and impact of Brexit remain unforeseeable and unpredictable.