Second-round political risks for the rest of the EU – Goldman Sachs

Research Team at Goldman Sachs, expect the rest of the EU to reaffirm its desire to make the EU, including the Euro area, more workable.

Key Quotes

“Yet, given previous experience with imperfect follow-up to such statements (for example, completing banking union without an agreed deposit insurance scheme), it is doubtful whether this will have much credibility in financial markets.

The UK’s exit from the EU comes on top of a subdued recovery in large parts of Europe, yet controversy in Germany over ECB activism to support that recovery, and a European refugee crisis. These challenges expose political tensions within and between countries.

Europe has not resolved the tension that exists between a need to integrate in order to underpin a more workable monetary union and its reluctance to relinquish national sovereignty. Euro-sceptic elements will be emboldened by the UK’s decision to leave the EU. Given that tension, Europe’s practical steps to signal “more Europe” will be limited.

European assets that benefit from investors’ adopting a consolidated view of European assets – including peripheral bond yields and banks backed by weaker sovereigns – are likely to come under some additional pressure, albeit contained largely by ECB policies and other political commitments.”