A House of Cards

The Brexit has taken over the world – and it seems that it has left significant question marks over the future of the EU. Any organisation thrives on the strong connections and co-existence of its members, and with Brexit, it seems that someone has pulled a card midway and thus endangering the entire House of Cards.

With UK gone from the picture, EU has to now shift its focus on the other countries that may also look to exit which would only weaken the structure even further.

With the furore surrounding Brexit now settling down proving the world will continue to revolve whatever the decision was, some other cracks in the EU have become more visible and are a cause for concern. The ECB stress test result is due to be released soon and one country to be concerned about is Italy. The overall perception of Italy is that of an underperforming and inefficient economy with corruption running rampant through the picturesque piazzas. However, a major sign of concern is its banking sector.

Italian banks have been recorded to be in possession of €360 billion in shaky loans. These loans offer a very low interest rate reducing the spread between bank borrowing costs and lending rates - their elementary way of making money. Another interesting aspect is that less than 50% of these loans are backed by assets. Sounds familiar? It is very hard to ignore the similarity between the current financial conditions in Italy and the economic conditions in the pre-2008 USA. Three of Italy’s largest banks are sitting on the cusp of a bubble that might just burst in the near future. In the current scenario, EU is not in a position to afford a financial crisis.

With global immigration reaching a peak following the ongoing Arab Spring and political unrest around the world, it is not possible to disregard the effects it would have on EU. It is said that one of the most crucial aspects that tipped over the Brexit decision is EU’s lookout on immigration. A strict immigration policy for refugees and victims of civil wars around the world has inculcated a feeling of resentment and desperation. The recent suicide attack in Germany is an example of the same. It is believed that the killer was a Syrian refugee who was denied asylum in Germany. With immigration bound to increase pressure on natural and monetary resources, EU should focus on cementing this crack in the foundation.

Another problem is that Brexit may pave a way for other members voting to exit from the EU in a referendum vote. Opinion polls show that 61% of French people “hold unfavourable views of the EU” while two-thirds feel that ‘’the EU has failed them economically”.  Under such circumstances, ‘Frexit’ may not be a distant reality.

Brexit has been a shock for EU; however, the strong foundation could sustain that shock. But, a few tremors were felt. How Brussels deals with the wobbly house is something that only time can tell. One thing is certain: if EU does not let go of austerity, it will be difficult to avoid further exits. What shall remain then is a pile of cards in place of the tower that once dominated the geopolitical world.

Should you wish to discuss any concerns you have about Brexit or the financial markets in general, please contact me at [email protected]