The world watched in shock on June 23 when the UK voted to leave the European Union.
The British pound plummeted, and global markets briefly plunged into turmoil.
But some observers think the vote for the so-called Brexit was just the beginning of the end.
“Our main conclusion is that by doing the unthinkable and actually voting to leave, Brexit substantially increases the likelihood that other members of the European Union will also seek to break away,” commentary from London-based Eclectica Asset Management said.
In a monthly report to investors, the team led by Hugh Hendry cited the collapse of the gold standard as an example of when the “defection of just one member from a currency union caused the system to unwind rapidly.”
Just two years after the UK rejected the gold standard back in 1931, the Eclectica team pointed out, just 12 countries remained on the standard versus the 45 that had previously been committed.
Hendry cites surging political uncertainty in countries across Europe, including France, Italy, Germany, and Spain. In those and other countries, nationalist, anti-immigration, and anti-European agendas are a major cause for concern in 2017. He said there was a “real and present danger” of more EU members replicating the British decision and leaving the EU as “mass fears concerning immigration, unemployment, and inequality seem to define national elections in Europe.”
“The system simply isn’t working,” he said.
On top of political upheaval, the Bank Recovery and Resolution Directive makes it difficult for any European bank to be rescued in the event of a financial crisis. The resolution makes it illegal for any European bank to be bailed out until 8% of its total liabilities have been bailed in, blocking urgent capital repair that could save the system.
Add in present monetary policy and the coming end of the current term of quantitative easing by the European Central Bank, in which the central bank buys bonds to keep interest rates low, and Hendry and his team “fear a storm is coming.”
“Without appropriate monetary policy, fiscal policy, or bank rescue as an option,” the team said, “all the EU has left is fear to hold it together.”