The Impact of Brexit On the Euro

In Europe, the issue of Brexit has been a source of drama and uncertainty for almost a year now

LAST UPDATED: 26 May, 2017 @ 16:06
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AS Britain anticipates one of the most unusual general elections in living memory, it is difficult for anyone concerned with the markets to look away from the UK.

In Europe, the issue of Brexit has been a source of drama and uncertainty for almost a year now, and many of the risks it presents are still unknown as we wait for negotiations to begin in earnest once the government, which will be making those negotiations of behalf

How Has Brexit Affected the Euro So Far?

The main effect on the euro over the course of the last year is that it has been worth considerably more against the pound. The euro now regularly fetches around 87p and has been as high as 90p at times. However, before, the referendum prices were closer to 76p to one euro.

This is more due to the pound dropping against just about everything in the wake of the decision, rather than the euro looking stronger with Britain out of the EU, and the euro’s price against the dollar has shown a different pattern.

The euro was able to buy $1.13 around the time of the referendum, but now, after a low of $1.04 in December, it is pushing up around the $1.12 mark. What this really means is that the euro’s buying power, both against the pound and the dollar, is really more affected by the rises and falls of those currencies in the global markets than by the events that triggered them (namely Brexit and Trump).

Europe and Brexit

Europe was predicted to be in a position of uncertainty should Britain leave the EU, with other countries at risk of following them. However, the recent election in France assuaged a lot of global fears around this. Had right-wing candidate Marine LePen won this election, it would have been very likely France would have taken steps to exit the union, and this would have been likely to trigger the much talked about ‘domino effect’ that analysts feared would be the end of the EU as we know it.

With Macron securing a big win, it has quelled fears about this and bolstered the euro. This means that the situation in terms of the pound to euro exchange rate is now favourable for eurozone countries and looks likely to remain that way with the pound likely to remain depreciated for the foreseeable future.

It is worth noting however, that the FTSE 100 is not strongly tied to the pound, and that the London Stock Exchange has not fared badly at all of late.

Trade with Britain

For both sides of the equation, a weak pound against the euro causes some problems. For Britain, it means it becomes more expensive to purchase things from Europe, and for Europe, it means that Britain will look to import less from eurozone countries, even before any tariffs following on from the trade negotiations are imposed. This could be bad news for businesses who have a lot of trade with Britain in the longer term.
A lot remains to be seen about how the euro will be affected by Brexit and what it will actually mean for businesses and individuals on both sides of the English channel. However, it can be taken as highly likely that the pound will remain low against the euro for the medium term future, even despite any relief rallies following the June 8th general election.

 

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  1. Or the Euro. I can’t decide which one has no real economic history and is kept together through artificial ‘quantitative easing’…

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