While Indian markets are getting volatile ahead of Finance Minister Arun Jaitley’s Budget presentation, global markets are looking at developments in Europe which has the potential to bring the continent in the limelight again, for all the wrong reasons.
Britain is once again going in for a referendum to decide if it wants to leave the European Union or stay in it. The last time the Brits voted for a referendum was in 2014 to decide the fate of Scotland. The referendum to be held on June 23, 2016, is expected to keep global markets anxious.
Termed as Brexit for Britain’s exit from the European Union (EU), market feels that the move can rock the global markets.
Rating agencies Moody’s has threatened that a vote to leave the EU will threaten the UK’s strong credit score, potentially pushing up the cost of government borrowing. The economic costs would outweigh the benefits, says Moody’s. Exports would suffer as would investment, and policymakers would get tied up in lengthy renegotiations of the UK’s trade relations.
When the Mayor of London, a dominant figure in UK’s politics, jumped in the ring by announcing his vote will be for Britain to exit the EU, pound fell to a seven-year low against the US dollar. Other rating agencies like Fitch and S&P too have voiced similar concerns.
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Citi economists in a research note wrote that they expect the campaign between now and June to shift the debate from the nature of the UK’s relationship with the EU to the economic and political risks of Brexit. Till the result is announced, market will remain jittery and in case of an exit vote, can tumble lower.
Britain though is not part of the Euro zone common currency ‘Euro’, it is part of the European Union, which is the island country’s biggest trading partner. Britain has been an important, though a reluctant member of the EU since 1973. It has been instrumental, to some extent, in the growth of the EU.
In the mid-1980s, Margaret Thatcher played a key role in setting up the single market, a space in which people, money, goods and services can move with relative ease.
The exit of Britain will not only affect the country but also weaken the European continent. Brexit would affect the country’s ability in global trade negotiations. Britain is USA’s voice in the Euro zone, exiting it could impact its relationship with the US.
Britain, without the backing of Europe, is much too small a player to influence trade treaties. Companies have already started voicing their concerns on Brexit and some have in fact hinted at migrating their offices.
Britain has a trade agreement with EU which is its biggest trading partner with about £229 billion in annual trade. Exiting the zone would mean conceding preferential trade treatment and further slowing of Britain gasping economy.
Just when the world needed stability and growth a referendum for Brexit will add volatility in financial markets and a Brexit is probably the last thing markets want. With foreign investors deciding the direction India markets might take, a Brexit will only add to the outflow. In any case there is little expectation from Jaitley’s budget, events unfolding in Europe might decide market direction in India.