Brexit: EU economic and sentiment backdrop - Nomura

It has been clear since June 2016 that the worst possible backdrop to Brexit negotiations would be a weak euro area economy (especially if it is weaker than the UK) and more euro-scepticism emerging in Europe, according to analysts at Nomura.

Key Quotes

“This would have provided the EU leadership with a strong incentive to punish the UK, putting political concerns ahead of economic ones and forcing the UK into the worst possible outcome.”

“In H2 2016, these concerns seemed somewhat justifiable: the euro area growth story was still in its infancy and vulnerable, while concerns about euro sceptics leading governments in Amsterdam (or Hague, check) and Paris were plentiful, with the odd tremble about M5S in Italy also present.”

“Fast forward to H1 2018 and such concerns are far behind us. Euro area growth is strong, looks well-set and easily outstripping that of the UK. In the ranking of G7 economies on latest GDP data, the UK comes last with Germany second and France fourth. France has installed as President arguably one of the most pro-European leaders of modern times and when Germany has a functioning government again we would expect a renewed push on further integration, at least in the eurozone.”

“It isn’t just down to the elites either: the Eurobarometer series shows a growing proEuropean sentiment right across the continent (quite ironically, including the UK). This started in 2015 and is likely down to better economic performance since then, but the point is Brexit did not put a dent in it, and we think it may have even helped it.”

“Against this backdrop, we think the EU has every reason to be generous and to put economic interests ahead of political interests – where quite frankly it doesn’t need to worry. We think the trade talks, when we get onto them, will be tough, difficult and may have moments that cause markets to be concerned. But the UK has, by chance, found itself operating against the best possible backdrop to give it a chance of a decent deal. We will see over Apr-Oct 2018 whether the UK government takes that opportunity.”