A series of surprises on the French political scene have fueled investors’ unease.
The “No” vote has cost Italy a chance to make its political system leaner and more conducive to reforms.
While we believe a failure of the referendum to pass would hurt the country’s long-term political stability and reform prospects, we view the key risk to markets to be the election of an anti-establishment euroskeptic government – an outcome we think is unlikely irrespective of the referendum’s outcome.
The Brexit decision chiefly affects the UK, but it will also reverberate well beyond its borders. For the eurozone, the near-term macro implications are likely to be contained, though they are not insignificant.
Why the Spanish election may join the Brexit referendum in causing political risk in Europe to rise.
Questions remain over the ability of the Greek economy to return to growth and to adopt a sustainable financial and public-sector model over the medium term. In our view, however, such risks may take a while to materialize.
From an investment perspective, the combination of solid growth, significant policy accommodation and improvements in Greece – for now at least – bodes well for risk assets in the eurozone.