At one stage the British pound had collapsed no less than 10 U.S. cents, its biggest fall in living memory, while the euro slid 1 percent as investors feared for its future.
KUALA LUMPUR: The shock to Europe over the exit of Britain from the European Union (EU) is likely to be permanent, causing people to question investments in the eurozone over the long term, said Dr Michael Hasenstab.
“As a result, we remain convinced the euro is likely to weaken,” said the Templeton Global Macro chief investment officer said in a note on Monday.
Hasenstab said the impact of Britain’s from the EU, or Brexit, should be divided into two components - the permanent effects on the UK, Europe and the global economy, as well as the temporary factors.
In terms of permanent effects, he said Brexit was clearly a negative for the UK economy as its trade with Europe accounts over 50% of its total global trade.
He said it will be “very difficult” for the UK to negotiate free trade agreements to replicate the trading arrangements that it had as part of the EU.
“Labor mobility is going to be affected.
“The London-based financial sector also is going to be affected,” he said.
However, he said the bigger impact depended on whether Brexit indicated a rise in populist, nationalist sentiment throughout the European continent against the EU and the eurozone project.
“In 2011, we were convinced the eurozone would stick together despite the massive economic imbalances and the lack of political union, the lack of fiscal union, the lack of banking union and the inability of Italy to structurally reform.
“Unfortunately, what Brexit and the surprise outcome has indicated is that this broad political will is quickly deteriorating,” he said.
Going forward, Hasenstab expects to see more referendums and more nationalist parties advocating exits, creating “a tremendous amount of volatility” and difficult times ahead for the eurozone.
On temporary effects, he said, the massive risk aversion was also seen in the post-vote rally in US Treasuries and in the Japanese yen, and in the sell-off of emerging market assets.
He said these were temporary effects and the market trends may begin to reverse as people realised that it was a long-term challenge for the eurozone.
“At specific points during the post-vote volatility, we found what we estimated to be a bit of a bottom in specific emerging markets, a number of emerging market currencies had initially fallen 5% to 7% but began to regain some lost ground as things began to normalise later during the June 24 trading period.
“Over the weekend and next couple of weeks, once people begin to distill what really matters surrounding the outcome of this event for Europe and the rest of the world, I think that some of those risk assets in emerging markets that sold off will begin to recover.
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