Fitch: Brexit to Pressure EU Economies, Increase Political Risk
We downgraded the UK to 'AA' with a Negative Outlook on Monday, reflecting our expectation that the vote to leave the EU will have a negative impact on the UK economy, public finances and political continuity. The impact on other EU economies will be smaller and we do not anticipate any other immediate negative sovereign rating actions. Downgrades or Outlook revisions will become more likely in the medium term if the impact on other economies proves severe or political tail risks materialise.
The main driver of economic pressure will be lower exports to the UK, but the scale of the impact will depend on the terms of any eventual trade deal. A sustained significant fall in sterling would also contribute to weaker exports by boosting the UK's competitiveness and reducing its purchasing power for imports in euros.
The most exposed countries are Ireland, Malta, Belgium, the Netherlands, Cyprus and Luxembourg, all of whose exports of goods and services to the UK are at least 8% of GDP.
Brexit will create a precedent for a country leaving the EU and we believe it increases political risk in several ways. It could boost anti-EU or other populist political parties, and make EU leaders more reluctant to implement unpopular policies that would have long-term economic benefits. If the UK were to thrive outside the EU, it might also encourage other countries to follow suit.
Negotiating the terms of the UK's exit could absorb much of the EU's time and energy and open up new fronts of disagreement. Brexit could shift the centre of gravity of the EU, making it more dominated by the eurozone core, poorer, more protectionist and less economically liberal. If Brexit results in Scotland leaving the UK, this could also intensify secession pressures in other parts of the EU, such as Catalonia in Spain.
Other impacts will include the loss of some or all of the UK's contribution to the EU budget, which means other net contributors will have to pay more, or net recipients will have to accept lower EU expenditure. EU countries could gain from the shift of some foreign direct investment from the UK to the EU. But countries such as Luxembourg, Malta, Belgium and Germany, which have a large stock of FDI and financial assets in the UK, would suffer losses in the euro value of those assets if there were permanent sterling depreciation.
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