The UK may have just opened 'Pandora's Box' in Europe

It’s official:
Britain has chosen to leave the European Union.
Britons voted Thursday on whether the UK should stay in or leave the 28-nation bloc, with the results counted overnight.

As of 7 a.m. BST (2 a.m. ET) on Friday, the final results showed that 51.9% voted to leave the EU versus 48.1% that voted for Britain to stay within the EU.

Notably, a team of Barclays analysts previously argued that should the Brits choose to leave, the outcome could have serious consequences for the rest of Europe.

Here’s what they wrote (emphasis ours):

“A UK exit would set an unwelcome precedent for countries to leave the EU whenever domestic priorities conflict, and would do so at a time when political risks and potential for sovereign-EU confrontation already high. Simultaneously the UK would present Continental opponents of immigration with a politically potent example (and threat) of how to deal with one of the thorniest and most emotionally charged trans-national issues confronting European voters: immigration. […]

The precedent of a member state leaving the union would open Pandora’s box: it could be used as a political argument by populist and extreme parties in several countries, both from the right and the left, to push for an EU exit, including for some euro area countries. […]

Such events would certainly revive the ‘redenomination risk’ in the euro area.”

More recently, a Morgan Stanley research team led by Elga Bartsch wrote something similar in a note to clients:

“ our view, the political discontent that is being displayed around the public debate about Brexit is deep-rooted and likely to be echoed elsewhere. The political fragmentation that currently manifests itself in an increasingly populist debate about the UK’s EU membership is neither limited to the UK or Europe nor it is likely to dissipate quickly, we think. In our view, the voter backlash against established political parties and international institutions is on the rise.”

As an example of the kind of backlash Bartsch describes, Austria nearly elected in May the first far-right European head of state since World War II.

Another example, which many people might have missed given the anxiety surrounding the Brexit vote, is that the Eurosceptic, antiestablishment Five Star Movement was the big winner in Italy’s recent municipal elections. Most notably, Five Star’s candidate for mayor of Rome, Virginia Raggi, won 67% of the vote, which is more than twice the vote share that the mainstream center-left Democratic Party (PD) candidate got.

And Europe has a bunch of other elections coming up. The Spanish will head to vote again on June 26 after elections in December failed to produce a government. And over the next year, the Netherlands, France, and Germany – three major countries where far-right populist parties are growing in popularity – will have elections, too.

Plus, almost immediately after news outlets called a Brexit, several European politicians made comments about having their own referendums. As Business Insider’s Natasha Bertrand outlined:

  • Scotland’s first minister, Nicola Sturgeon, announced that Scotland “sees its future as part of the EU,” suggesting that Scotland may hold another referendum to decide whether to separate from Britain and re-negotiate an entry back into the European Union as an independent country.
  • The Irish political party Sinn Fein, meanwhile, called for a referendum on uniting Northern Ireland with the rest of the country as the Brexit results came in.
  • France’s Marine Le Pen, leader of the far-right National Front party, called the Brexit “victory” — and then changed her Twitter avatar to the Union Jack. Meanwhile, the party’s vice president, Florian Philippot, called for a French referendum on leaving the EU.
  • Geert Wilders, the leader of the far-right Dutch Party for Freedom, called on the country to have its own EU referendum in light of Britain’s successful Leave campaign.

Notably, analysts had previously argued that we could be looking at continued political uncertainty and limited coordination in Europe in the longer run.

A few days ahead of the Brexit vote, Deutsche Bank research team wrote in a note to clients, highlighting the upcoming elections as well as the migrant crisis and Greece:

“Beyond the immediate risk events of the Brexit referendum and Spain election, geopolitical agenda remains in focus. This backdrop makes policy progress very unlikely as domestic politics drive the agenda [leading to] limited room for country-level structural reform [and] little progress toward EU or eurozone reform or integration.”

The team added that “policy uncertainty is and will remain high,” as illustrated in this chart showing that policy uncertainty in Europe is now around 2011-12 levels during the height of the Eurozone crisis:

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