Fitch: ‘Brexit’ Would Increase Downside Risks to EU Sovereigns

Fitch ratings have said that if the UK was to leave the European Union (EU), it would also weigh heavily on other countries in the EU.

The ratings agency said that they would not expect to take any immediate negative rating actions on other EU sovereigns if the UK left.

But negative actions would become more likely in the medium term, if the economic impact were severe or significant political risks materialised.

The economic impact of Brexit would be lower for the EU than for the UK, but would still be palpable.

Fitch believe that an exit from the EU would reduce EU exports to the UK.

Although the extent of the damage to the bloc of 28 countries would depend on the nature of any UK-EU trade deal, and the degree and duration of sterling depreciation.

The most exposed countries would be 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.

However, some EU countries could gain from the shift of some foreign direct investment  from the UK to the EU.

Fitch said that countries such as Luxembourg, Malta, Belgium and Germany, with a large stock of foreign direct investment  and financial assets in the UK, would suffer losses in the euro value of those assets, if there were a permanent depreciation of sterling.

Also, the banking sectors of Ireland, Malta, Luxembourg, Spain, France and Germany have sizeable links to that of the UK.

If the UK was to leave the EU, it would  reduce the UK’s contribution to the EU budget, which currently stands at a net EUR7.1bn in 2014, after rebates,  potentially to zero.

This would imply that other net contributors would have to increase payments, or net recipients accept lower EU expenditure

Fitch also believe that a ‘Brexit’ would create a precedent for countries leaving the EU.

The fall out could boost anti-EU or other populist political parties, and make EU leaders more reluctant to implement unpopular policies with long-term economic benefits.

As talks develop over the terms of a possible  UK’s exit, the time could exhaust the powers in Brussels and open up new fronts of disagreement.

There are also fears that a Brexit could shift the centre of gravity of the EU, making it more dominated by the euro area core.

Fitch said that the EU would possibly become poorer, more protectionist and less economically liberal.

Also, if the UK were to thrive outside of the EU, it might encourage other countries to follow suit.

Brexit could precipitate Scotland leaving the UK, which might intensify secessionist pressures in other parts of the EU, such as Catalonia in Spain.

The rising concerns  of other countries leaving could widen bond spreads for “peripheral” countries.

This could result in increasing the average cost of debt,  and making it more challenging to reduce government debt/GDP ratios. 

France Employment Increase

 In the first quarter of this year, employment in  France has increased in the non farm market sectors.

There was 24,000 extra jobs that were created in the first three months of this year, a rise of 0.2% from the final quarter of last year.

Tertiary sector employment was the main reason why net employment rose, as 40,800 new positions were created in this sector.

Excluding temporary work, employment in services accelerated slightly, with an increase of +0.4%, which amounted to 38, 800 jobs, after +0,3% in the previous quarter).

Over a year, excluding temporary work, employment in services increased by 117,800 a rise 1.1%.

All in all, employment in non-farm market sectors excluding temporary work increased over a year, creating an extra 48,500 jobs.