RaboResearch - Economic Research

EU exit contagion risk


  • In this Special we focus on political exit contagion risk of ‘Brexit’ to other EU countries
  • We look at the current political landscape in the EU and the rising trend of Euroscepticism
  • Although we still consider a repeat of ‘Brexit’ more unlikely than likely in all member states, some countries are certainly worth watching in the year ahead

From Brexit to worse?

The United Kingdom voted to leave the European Union on 23 June. Although it would appear that the (economic) impact on Europe has been relatively limited so far, concerns that other countries might be following Britain’s example in the future have not been dispelled by European leaders. Indeed, their largely unsuccessful meeting in Bratislava on 16 September only serves as a case in point.

This special zooms in on the current (political) situation in Europe and how this might translate into ‘exit risk’. We first give a factual overview of the current political landscape and a timeline for important national elections in the years ahead. We then move to the questions about sentiment vis-à-vis the EU. Where is Euroscepticism more prevalent, and where and why has Euroscepticism increased? We then move back to the question of where anti-EU parties have the strongest foothold and in which countries citizens can demand a referendum. Finally we discuss the likelihood of a referendum happening and this, ultimately, turning into a situation where a country decides to follow the UK in leaving the EU.

Considering the variety of these issues, this special is written in a Q&A format. The reader can jump to the questions (and our answers) using the menu below.

Political landscape and timelines

1. What does the political landscape in the EU currently look like?
2. When are the next lower house elections in each EU member state?

Anti-European sentiments

3. What are the prevailing sentiments about the EU?
4. What are the possible explanations for increased Euroscepticism?

How could Euroscepticism turn a country into following the UK?

5. In which countries do anti-EU/Euro parties have a foothold?
6. In which countries can citizens demand a referendum?
7. What are the warning signals indicating a rising risk of a referendum?
8. What is the likelihood of an EU country following the example of Brexit?

Financial markets

9. How would financial markets respond to an EU/Euro exit?

Political landscape and timelines

Q1. What does the political landscape in the EU currently look like?

Politically speaking, Europe is strongly divided. Even within member states this fragmentation is being reflected in the prevalence of coalition governments. Figure 1 shows the political position of the current governments in EU member states, based on the traditional left-centre-right scale. There is no traditional political view that dominates in Europe. Southern Europe mostly has left-wing governments with Greece having the most left government. Northern and Eastern Europe mainly have right-wing governments with Poland being particularly skewed towards the right side of the political spectrum. In Central Europe we see more governments in office with a centrist political position. Spain has been in a political limbo after two (inconclusive) elections, but the country finally has a new government. Romania is currently being led by a technocratic government and so is not categorised.

Figure 1: Political position of current EU governments
Figure 1: Political position of current EU governmentsSource: Rabobank

The political landscape has been one of diversity throughout the history of the EU (after all, two of its main architects – Helmut Kohl and Francois Mitterand – came from very different political backgrounds) and one could argue that this actually speaks for the success of the EU.

However, the current balance on the political spectrum, as shown in Figure 1, may also tell us something about support for the current budgetary framework, one of the corner stones of EU policy, and for further EU integration at large. Broadly speaking, we would expect more pressure from the left side of the political spectrum to ease or even overhaul the current budgetary rules, as they are seen as an impediment to economic growth. Notably, France, Spain, Portugal and Italy are worth mentioning. These countries are still suffering from structural deficits despite sizeable ‘forced’ adjustments since 2009. Countries on the right hand side of the political spectrum are more likely to resist such changes to the rules.

Q2. When are the next lower house elections in each EU member state?

Elections in October led to a victory for the anti-establishment Peasants and Greens party in Lithuania. For the remainder of 2016Q4 the election calendar is fairly thin with only lower house elections in Romania (11 December). Nonetheless, the last month of 2016 will be of considerable importance for European politics. The second edition of the Austrian presidential elections will take place on 4 December. But the most important event, in our view, is the Italian constitutional referendum, which is also taking place on that same day. A “” should strip the Senate of most of its legislative powers, but a “No” could unleash fresh political turbulence.

Spain should be mentioned here as well, even though the next general election isn’t planned before July 2020. The economy may be getting back on track thanks to a sharp cyclical recovery, but the country is suffering from ongoing political uncertainty. The last two elections, first in December 2015 and then in June this year, were both inconclusive even though the People’s Party (PP) of acting Prime Minister Rajoy won the vote on both occasions. Last month, caretaker PM Rajoy’s attempt to form a government fell just short, but the resignation of PSOE leader Pedro Sanchez in early October has opened the door to a formation of a Spanish government as early as this week. Still, the minority government headed by Rajoy up is likely to face significant opposition when it comes to implementing new policy measures. One of its first challenges is to agree on fresh austerity measures in order to comply with demands by the European Commission. As such, political stability in Spain is not guaranteed.

Figure 2: Election Calendar
Figure 2: Election CalendarSource: Rabobank

Next year will then bring lower house elections in the Netherlands (March), France (June), Germany (September) and the Czech Republic (October), as well as presidential elections in France (April/May).

Each of these political events could serve as new flash points for anti-EU forces. In the short term the Italian referendum would seem the most relevant by far (see below for more details under Q8). Eurosceptic parties may use the current dissatisfaction among the public as a means to drive their political agenda. This may also impact the agenda of the mainstream parties, trying to prevent voters from switching to Eurosceptic parties. Indeed, the main risk is a state of paralysis on the sensitive dossiers, with EU member states seeking common ground on less contentious matters (such as defence).

Anti-European sentiments

Q3. What are the prevailing sentiments about the EU?

In an IPSOS-MORI survey, held six weeks before the Brexit referendum, it was reported that 45% of citizens in 8 EU countries wanted a referendum on the union; 33% of citizens would vote “out” if referendum were held (the latter varying from 48% in Italy and 41% in France to 22% in Poland). Whilst a snapshot, it underscores the challenges Europe is facing. To put this in a broader perspective, we look at the EU’s Eurobarometer survey, which gauges the attitude of its citizens towards the EU every six months. The last survey was conducted in May and then published in July 2016. 34% of the respondents had a positive image of the EU, whereas 27% had a negative.

Figure 3: EU Sentiment May 2016 (latest EuroBarometer)
Figure 3: EU Sentiment May 2016 (latest EuroBarometer)Source: Standard Eurobarometer 85, Rabobank

Figure 3 shows the EU sentiment per country. Sentiment is measured as the percentage of respondents having a positive image of the EU minus the percentage of respondents having a negative image. There are large differences between countries. An above-average positive image of the EU is found among respondents from Eastern European countries, especially Lithuania (35% net), Bulgaria (35%) and Poland (33%). However, the Irish people are the most positive about the European Union: 44% net.

Countries where people have a particularly negative image of the EU are, unsurprisingly, Greece (-35% net) and Cyprus (-15%), but also the Czech Republic (-8%), United Kingdom (-5%) and Austria (-5%) generally have an unfavourable view. In the thirteen new member states sentiment about the EU is on average more positive than in the ‘old’ EU-15 countries.

Figures 4 and 5 put EU sentiment in perspective over the last decade. The first of these figures shows the sentiment in the four big founding nations of the EU, the United Kingdom and the EU average. After the 2008 financial crisis sentiment about the EU became more negative.

Figure 4: EU Sentiment 2006-2016
Figure 4: EU Sentiment 2006-2016Source: Standard Eurobarometer 67-85
Figure 5: EU Sentiment 2006-2016
Figure 5: EU Sentiment 2006-2016Source: Standard Eurobarometer 67-85

From 2013 onwards sentiment recovered, but with the refugee crisis it fell again. Sentiment in Germany, France, the Netherlands and, after 2012, Italy follows the path of the EU average. Sentiment in the United Kingdom has, however, been quite negative last decade. In almost every poll, British respondents were more negative than positive on balance about the EU. Perhaps somewhat ironically, UK citizens were relatively positive about the EU over the last two years.

Figure 5 shows the sentiment in other big countries where Euroscepticism is a hot topic. Sentiment in Denmark and (after 2008) Sweden roughly follows the EU average. The sentiment in the Czech Republic has always been somewhat more negative than the EU average. However, two countries do stand out. Sentiment vis-à-vis the EU has always been relatively negative in Austria over the last decade. Sentiment in Greece was positive, but collapsed after the 2008 financial crisis. These two countries will likely require additional monitoring in the coming years.

Significant differences by social group

The EU referendum in the UK revealed large differences between different education groups in their support of the EU. Darvas[1] finds several determinants of the share of ‘leave’ voters in the EU referendum per UK region. Determinants are, among others, the share of population aged 65 and over, the share of population without a degree, the Gini coefficient of income inequality and the poverty rate. Especially the first two factors are shown to be highly significant.

The higher these factors, the higher the share of ‘leave’ voters. Large differences in voting outcomes in the referendum were thus seen between groups of people with different ages, educational levels and income. In other words, some groups are well disposed to support the EU, whilst other groups are not.

Figure 6: EU Sentiment by age group
Figure 6: EU Sentiment by age groupSource: Standard Eurobarometer 67-85
Figure 7: EU Sentiment by education
Figure 7: EU Sentiment by educationSource: Standard Eurobarometer 67-85

These differences in sentiment vis-à-vis the EU are also apparent when we look at this issue on a broader European scale, using again the Eurobarometer. Figures 6 to 9 break EU sentiment in May 2016 down into several socio-economic groups. Figure 6 shows that the EU sentiment among young people is more positive than among old people. The right panel (Figure 7) shows that the higher the amount of years of education followed, the more positive is the EU sentiment. This chimes with the findings on the UK’s EU referendum. However, the differences in EU sentiment between different socio-economic groups in the UK are quite large when compared to several other EU member states. Only in Austria are the differences larger. Figure 8 shows that people who regularly have difficulty paying the bills are generally more negative about the EU than people without such problems. The right panel, Figure 9, shows that left-wing people are generally more positive about the EU than right-wing people, except for Swedish people.

Figure 8: EU Sentiment by ‘having difficulty to pay the bills’
Figure 8: EU Sentiment by ‘having difficulty to pay the bills’Source: Standard Eurobarometer 67-85
Figure 9: EU Sentiment by self-identified political stance
Figure 9: EU Sentiment by self-identified political stanceSource: Standard Eurobarometer 67-85

Based on these findings we expect the Eurosceptic agenda of some political parties to find a better reception among the higher age categories, people with a below-average education level and with below-median incomes.

However, the UK sentiment vis-à-vis the EU among different socio-economic groups seems to be a turbo-charged version of the EU average. This implies that Euroscepticism itself might be much less engrained on mainland Europe.

Q4. What are the possible explanations for increased Euroscepticism?

Euroscepticism has increased markedly over the last decade (the corollary of declining sentiment vis-à-vis the EU). This can be partly explained by the protracted crises that have impacted Europe in the last decade. The 2008 global financial crisis was followed by a sweeping European debt crisis from which most countries affected have still not recovered. More recently the 2015 refugee crisis struck Europe. We will now look at the question as to what extent this increased Euroscepticism goes together with both increasing unemployment and/or increasing amounts of asylum applications.

Figure 10: Change in EU Sentiment March 2008 – May 2016
Figure 10: Change in EU Sentiment March 2008 – May 2016Source: Standard Eurobarometer 69 & 85, Rabobank

In the previous section we looked at the extent of Euroscepticism in the EU countries. Figure 10 shows the percentage point change in EU sentiment between the Eurobarometer survey in March 2008 and the survey in May 2016. The average EU sentiment in the EU countries collapsed by a massive 27 percentage points from 34% to 7%. Only in Austria, Croatia, Latvia and the United Kingdom did sentiment about the EU became more positive. Sentiment worsened the most in Belgium, Cyprus, Greece and Spain.

The labour market

After the 2008 financial crisis several countries fell into a serious sovereign debt crisis. Pressure from the EU forced these countries to take draconian measures to correct imbalances. These measures have taken a heavy toll on their inhabitants, for example by people losing their jobs. So one angle to this issue is that people blame the EU for the rise in unemployment. We therefore look at the correlation between the EU sentiment in the 17 Eurobarometer surveys in the period 2008–2016 and the unemployment rate.

Figure 11: EU Sentiment versus unemployment
Figure 11: EU Sentiment versus unemploymentSource: Standard Eurobarometer 67-85, Macrobond
Figure 12: Cross section: change 2008 - 2016
Figure 12: Cross section: change 2008 - 2016Source: Standard Eurobarometer 67-85, Macrobond

Obviously, correlation is no causation, but a negative correlation between (the changes in) unemployment rate and EU sentiment is a necessary condition for drawing the conclusion that an increase in the former may have caused a decrease in the latter.

Figure 11 does lend support to the view that the sharp rise in EU (seasonally adjusted) unemployment between 2008 and 2014 went hand in hand with a decline in EU-wide sentiment vis-à-vis the EU. Moreover, when we look at the country-split we can draw a similar conclusion. By using the change in unemployment and EU sentiment between 2008 and 2016 (Figure 12), it is clear that – barring a few exceptions – EU-sentiment clearly worsened more in those countries where unemployment rose the steepest (in three countries the unemployment rate decreased, the most in Germany. The unemployment rate increased the most in Cyprus, Greece and Spain.)

As it turns out, the correlation over time between the change in the unemployment rate and EU sentiment in the period 2008-2016 is -0.19 over the 28 EU countries averaged. The cross-sectional correlation between the change in the unemployment rate and the change in sentiment is -0.50. Altogether this suggests that the evidence of a relationship between these factors is significant although unemployment obviously cannot explain everything. Serricchio, Tsakatika and Quaglia[2] find a negative, but insignificant effect of the unemployment rate on the extent of Euroscepticism.

Serricchio et al. attribute the extent of Euroscepticism more to the strength of the national identity and confidence in national institutions. Braun and Tausendpfund[3] find a positive and significant effect of the strength of the national job market on the individual support for the EU. Also the respondents’ view about the national economy and its household’s finances influence EU support significantly. Respondents stating that the worst is still to come in the economic crisis have, on average, a significantly lower support for the EU.

In other words, the state of a country’s economy does explain a part of the extent and the change in Euroscepticism in a country, but it certainly does not tell the complete story.

The refugee crisis

The 2015 refugee crisis might also be an explanation for the increased Euroscepticism or at least solve the ‘puzzle’ as to why EU sentiment declined in 2015 while the labour market continued to improve. Figure 13 shows how many times the monthly asylum applications multiplied between March 2008 and November 2015, when the refugee crisis was almost at its peak. The burden mostly fell on the shoulders of the Western European countries, in particular Germany, with almost 60.000 asylum applicants in November 2015 (nearly 40% of the total people that sought asylum in the EU in that month). Also Sweden (37.000) and Austria (12.000) received many asylum applications. Bulgaria also attracts attention, but this is better explained by the low amount of applicants in March 2008 (60) than a high amount of applicants in November 2015 (2.400).

Figure 13: Change in asylum applicants March 2008 – November 2015
Figure 13: Change in asylum applicants March 2008 – November 2015Source: Eurostat

Under the hypothesis that an increased amount of asylum applications leads to more negative sentiment vis-à-vis the EU we would expect a negative correlation. This, however, is not strongly supported by the data. The average correlation over the 28 EU countries between the amount of asylum applicants and the EU sentiment in the period 2008-2016 is just -0.12. Only in Bulgaria (-0.81) the increased amount of applicants might partly explain the more negative EU sentiment, although the amount of applicants is still low.

However, combining unemployment and the change in asylum applications (with a one observation delay to allow for “news headlines to affect sentiment”) in a multiple regression (results available upon request) does deliver a statistically significant result. Both factors combined explain more than 70% of changes in EU average sentiment, whilst this is only 57% for unemployment alone).

In other words, there is evidence that the sharp rise in asylum applications since mid-2015 has been responsible for the decline in EU sentiment in 2016, as it took place amidst a backdrop of improving labour market conditions in most member states.

How could Euroscepticism turn a country into following the UK?

Q5. In which countries do Eurosceptics have a foothold?

Eurosceptic parties are found in almost all of the old EU-15 countries. Not all Eurosceptic parties do however explicitly call for the country to leave the EU and/or to abandon the Euro. Moreover, only a few Eurosceptic parties are currently ruling or are member of a ruling coalition. Table 1, which is by no means exhaustive, gives an overview. No Eurosceptic parties explicitly calling for their country to leave the EU and/or Eurozone are currently in a ruling coalition.

Table 1: Overview of Eurosceptic parties in lower houses
Table 1: Overview of Eurosceptic parties in lower housesSource: Eurasia Group, Rabobank

However, the fact that most of these Eurosceptic parties have been on the rise in recent years, but do not (yet) take part in the government, highlights the importance of event risk. For the very existence of (explicitly) Eurosceptic parties implies that any economic or political shock that is viewed as undermining the credibility or effectiveness of the EU could be quickly channelled into anti-European sentiments through these parties. As shown in Q4, this could also be a domestic shock that drives up unemployment and further incites anti-EU sentiments.

This obviously brings the political events calendar into focus. Besides the main parliamentary elections, presidential and regional elections or referendums on non-EU related issues can have a significant impact on broader sentiment and – potentially – even on financial markets.

Q6. In which countries can citizens demand a referendum?

All EU countries, except for Belgium and Germany, have legal provisions for a referendum at the national level. Who can demand a referendum differs per country. Often a legislative majority can demand a referendum. In some countries a legislative minority, the government and/or the president can demand a referendum. Every country has its own specific rules on which issues a referendum can be held. Also the conditions to be met before the referendum can be held differs per country. In 10 EU member states citizens can demand a referendum by collecting signatures (see Table 2). Collecting a sufficient number of signatures is often just the first condition to be met in order to hold a referendum. But it does not always have to lead to a referendum being held.

Table 2: Overview of referendum initiative laws in EU countries
Table 2: Overview of referendum initiative laws in EU countriesSource: Institute for Democracy and Electoral Assistance

Q7. What are the warning signals indicating a rising risk of a referendum?

Predicting whether a referendum on EU/Euro membership in a member state will actually be held is not a simple thing. However, some warning signals could point to a rising probability of a referendum in a country. We envisage the following indicators:

  •   Eurosceptic parties changing opinion

Hard Eurosceptic parties want their country to leave the Eurozone and/or the EU. Soft Eurosceptic parties think the EU is going in the wrong direction, but do not explicitly want their country to leave the Eurozone and/or EU. In countries with hard Eurosceptic parties a referendum is thus more likely to be held. A soft Eurosceptic party changing its opinion to a hard position thus increases the chances of a referendum being held. Obviously, a resurgence of the refugee crisis and the slow economic recovery could raise these chances.

  • Eurosceptic parties getting government power

Several Eurosceptic parties are high in polls for upcoming elections. A good election result does however not necessarily give the party legislative power. Only in Finland and Greece are soft Eurosceptic parties in the ruling coalition at the moment. No hard Eurosceptic party is ruling at the moment. A good election result by a Eurosceptic party, especially when it is the winner, is hard to ignore for other parties, however. Simply extrapolating the trend of the past years would suggest that we will see more Eurosceptic parties getting into office in the coming years. This also makes a referendum more likely to be held.

  • Grand parties offering a referendum

In the United Kingdom no anti-establisment Eurosceptic party was responsible for the referendum being held. Former UK Prime Minister Cameron made the decision to hold the referendum (to regain support from former conservative voters who defected to UKIP). Political leaders elsewhere in Europe can follow his example if the public demand for a referendum is high. Eurosceptic parties are thus not the only political actors to look at when judging the probability of a referendum.

The domestic post-referendum political turbulence in the UK is however likely to be considered a warning sign for those who simply want to use Euroscepticism as a means to gain political power. On the other hand it should be admitted that the economic doom forecast by the ‘Bremain’ camp has not materialised so far either.

  • Proxy referendums on EU stance

Several EU countries, such as Denmark and Italy, have a longstanding tradition in holding national plebiscites. Such referendums might have an impact on the debate about the EU and/or Euro membership of a country. The previous section discussed the Italian referendum in December about the constitutional reforms. A “No” to constitutional changes in this referendum may raise the likelihood of a referendum on Euro membership.

The referendum on the refugee quota on 2 October in Hungary was a good example of this phenomenon. In the event, the electoral quorum could not be cleared which made the outcome of the referendum obsolete. But the fact that an overwhelming majority (98%) voted against the refugee quota could still be seen as a proxy vote ‘against the EU’.

Q8. What is the likelihood of an EU country following the example of Brexit?

Brexit has fuelled concerns that more EU countries will follow the British example. However, the United Kingdom was (and always has been) the odd-one-out in the EU. The UK is not one of the founders of the EU, does not use the Euro and is not a member of the Schengen zone. The UK also frequently negotiated exemptions in EU laws. As shown above (see Q3), EU sentiment in the UK was way more negative, and consistently so, than in other big EU countries. The UK was (and for the moment is) part of the EU but always has kept an independent stance.

Table 3 gives our judgment of the EU/Euro exit risk of eleven EU member states, which reflects our thinking about the joint probability of a referendum being held and people voting for an exit[4] as Figure 14 shows. We judge this risk on basis of:

  • ŸCurrent degree of Euroscepticism
  • ŸTrend in Euroscepticism over the past years
  • ŸAvailability of future flash points that could channel Euroscepticism into a real EU/Euro exit risk
  • ŸPower of Eurosceptic parties to organize a referendum on EU/Euro membership and/or their ability to amplify anti-European sentiments
Table 3: Overall judgment of EU/Euro exit risk in EU countries
Table 3: Overall judgment of EU/Euro exit risk in EU countriesSource: Rabobank
Figure 14: Chance of EU/Euro exit
Figure 14: Chance of EU/Euro exitSource: Rabobank

Figure 14 shows that we judge the chance leaving the EU and/or Eurozone to be the highest in Austria, France, Greece, Italy and the Netherlands. But, again, we need to stress the relative scale of this judgement!


The Freedom Party of Austria is leading the polls for the 2018 election. Their candidate, Norbert Hofer, has a good chance to win the presidential election on December 4. The party has a critical stance vis-à-vis the EU and favours a common currency for the Northern EU countries. So far the party has not asked for a referendum, although it has threatened to do so if Turkey joins the EU or more responsibilities are moved towards Brussels. In the 2018 election campaign the party might however pledge a referendum. Polls show support for the Austrian EU membership at this moment.


The big question in France is whether Front National leader Marine le Pen will win the presidential elections next spring. Le Pen has already pledged to hold a referendum about the French EU membership if she is elected. The French president can initiate a referendum on a motion from the French Parliament or on recommendation of the government[5]. Le Pen will probably make it to the second round. An opponent from the Republican Party (probably Juppé or Sarkozy) would beat Le Pen according to recent polls. In competition with a Socialist Party candidate (probably president Hollande or perhaps Valls) the battle will be more equal. Next to presidential elections France also holds lower house elections in June.


The Greek government debt crisis made Greeks the most negative people about the EU, the latter being the herald of austerity rather than being the country’s saviour. Last year the Greeks were close to leaving the Eurozone. The risk has decreased now, but Greek economic problems are far from over. The next Greek elections are scheduled in 2019, but in the tumultuous Greek political climate early elections are far from unlikely. Greece held a referendum on the bailout conditions in July 2015. This referendum was branded by the opposition as a proxy referendum on Euro membership. A referendum on the membership of the EU or on the Euro is however not on the agenda at the moment.

Debt restructuring – as advocated by the IMF – does not appear to be on the cards yet, but should it come to that, it would likely lower the risk of Greece exiting the EU but raise Eurosceptic sentiments in the core member states (which is probably the reason why this subject has been dodged!)


Eyes will be on Italy on 4 December when the Italians vote on a constitutional reform. PM Renzi could resign when the proposal is rejected (although he appears to have softened his stance somewhat in recent pronouncements). Whilst this could simply lead to his replacement or the installation of a (temporary) technocratic government, it may also put the country on a path to new elections. The left-wing Five Star Movement (M5S) would have a good chance of winning these elections (given the new Italicum voting system). This party is clearly Eurosceptic, but is not necessarily in favour of leaving the Eurozone (and certainly not the EU – although we would argue that it could prove difficult to have one but not the other in Italy’s case). Although M5S has used its call for a referendum on the Euro as a means to ‘put the power back to the people’, it has softened its stance in order to gain a stronger footing among voters in the centre of the political spectrum.

Lega Nord (LN), one of M5S’s potential coalition partners, does want to leave the Euro, however. Together both parties could garner around 40% of the vote, should elections be held. So a referendum on EU membership or a proxy referendum cannot be dismissed. That said, it needs to be added that:

  • ŸA referendum on Euro or EU membership would require a change in the constitution, which, in fact, could prove difficult because M5S+LN would not have a majority in either house of parliament if the people voted “No” on 4 December.
  • ŸA “” in the 4 December referendum would imply that PM Renzi stays. It would then be only in 2018 that M5S could grab power and (supported by a bonus[6] for winner of the election) could gain an absolute majority in the Chamber of Deputies. In that case a change in the constitution (required for an EU referendum) could actually prove easier.
  • ŸPolls also show support among Italians for retaining the Euro.

Altogether, it is likely that a “No” vote would unleash fresh political turbulence, which could be negative for financial markets and for economic confidence. However, putting Italy on the same path as the UK is very unlikely.

The Netherlands

The Freedom Party leads the polls for the 2017 elections. The party wants to hold a referendum on an EU exit of the Netherlands. Dutch citizens are ambiguous in their support of holding a referendum. Polls show support for the Netherlands to stay in the EU. Although citizens can collect signatures to demand a referendum, an important restriction is that the referendum is about a bill passed in the last 4 weeks. More information can be found in our Nexit special of last June.

Financial Markets

Q9. How would financial markets respond to an EU/Euro exit?

Brexit was a significant source of volatility, but so far the ‘global’ and European fallout has proved limited. However, a referendum on Euro and/or EU membership in a Eurozone member state is likely to have a much more significant impact on European markets.

The individual country perspective

First there is the individual country perspective. If a member state is at risk of leaving the Eurozone (we assume that leaving the EU would automatically lead to a loss of Eurozone membership), this is likely to amplify the market’s view on that member state. High current account deficits were an important catalyst in this process during the height of the sovereign debt crisis[7]. When market participants no longer ruled out the possibility of some member states leaving the EU/Eurozone – we saw a massive increase in risk premiums in the periphery. Also notable was the Euro denomination risk that crept into sovereign debt yields[8]. This led to a sharp rise in peripheral yields and a flight to core bonds (figure 15), combined with inversions (i.e. short-term rates rising above long-term rates, figure 16).

Figure 15: Sovereign bond yields soared in 2010-2012 on the back of euro exit risk
Figure 15: Sovereign bond yields soared in 2010-2012 on the back of euro exit riskSource: Macrobond
Figure 16: Strong inversions in Ireland and Portugal in 2011 (10y/2y bond spread)
Figure 16: Strong inversions in Ireland and Portugal in 2011 (10y/2y bond spread)Source: Macrobond

The ECB’s response to this situation was the famous “whatever it takes” comment by Mr. Draghi followed by the official announcement of the OMT program in 2012. However, the key premise in this program is that a country stands to lose its access to debt markets due to sharply rising bond yields. The OMT program, which would require conditionality in the form of an adjustment program, would then allow the ECB to buy this country’s bonds and ensure that the country maintains access to debt markets.

However, if – in the eyes of the market - a country is heading for the exit because its population or its politicians are demanding this, the OMT program is unlikely to be a credible backstop. First, because it is unlikely that the country in question is willing to submit to the conditions set by the other member states. To the contrary. Likewise it would appear unlikely that the remaining member states are willing to commit further tax payer money to a country that is about to leave the Eurozone.

In other words, there are no guarantees that we will not see a (mild?) repeat of the 2010-2012 sovereign debt crisis turbulence should the perception increase in financial markets rise that a country is moving towards the (EU) exit. Obviously, the longer term impact of an EU exit also depends on the prospects of new trade agreements made between the exiting country and the EU.

Figure 17: ECB holdings of government debt becoming serious chunk of total outstandings
Figure 17:  ECB holdings of government debt becoming serious chunk of total outstandingsSource: Macrobond
Figure 18: Systemic impact of sovereign debt crisis on currency proved limited
Figure 18: Systemic impact of sovereign debt crisis on currency proved limitedSource: Macrobond

The systemic perspective

However, the ‘individual country perspective’ is unlikely to apply even when a single member state signals that it is heading for the exit. First of all, the ECB purchase programs have, to a sizeable degree at least, led to a de facto mutualisation of government debt already (see figure 17). This implies that a part of the euro denomination risk actually falls upon the Eurosystem and, ultimately, on the remaining member states. Even though the decision to leave is a “voluntary” one in this case, i.e. not triggered by an event such as a sovereign default, the risk increases that the leaving country cannot fulfil its debt obligations to the Eurosystem and its members. This holds in particular when the leaving country sees its new currency depreciating suddenly.

Secondly, the market is unlikely to view the departure of a single member state as “another” isolated event. In fact, the precedent has already been set by the UK. Indeed, given that the rise in Euroscepticism and rise of Eurosceptic political parties in recent years has been broad based in the EU, the market is likely to speculate that other countries will follow and that this single event could mark the beginning of the end of the Eurozone. As such, the relatively ‘limited’ impact seen in the external value of the euro during the sovereign debt crisis (where EURUSD remained broadly unchanged between late 2010 and mid-2012) is unlikely to be any guidance. A more significant drop is likely in this scenario.


[1] Darvas, Z. (2016). ‘Brexit vote boosts case for inclusive growth’.

[2] Serricchio, F., Tsakatika, M., & Quaglia, L. (2013). Euroscepticism and the global financial crisis. JCMS: Journal of Common Market Studies51(1), 51-64

[3] Braun, D., & Tausendpfund, M. (2014). The impact of the Euro Crisis on citizens’ support for the European Union. Journal of European Integration36(3), 231-245.

[4] In technical terms one could argue that the probability of a country leaving the EU is equal to the probability of a referendum being held times the conditional probability that voters would chose to leave the EU given such a referendum were to be held: P(i) * P(j | i). The latter is determined by factors that influence Euroscepticism. The first is determined by the power/ability of Eurosceptic parties to organize such a referendum; in turn, the probability of a referendum is the joint probability of Eurosceptic parties gaining a majority and organizing a referendum).

[5] Art. 11 (Optional referendum): The President of the Republic may, on a recommendation from the Government when Parliament is in session, or on a joint motion of the two Houses, published in the Journal Officiel, submit to a referendum any Government Bill which deals with the organization of the public authorities, or with reforms relating to the economic or social policy of the Nation, and to the public services contributing thereto, or which provides for authorization to ratify a treaty which, although not contrary to the Constitution, would affect the functioning of the institutions. Where the referendum is held on the recommendation of the Government, the latter shall make a statement before each House and the same shall be followed by a debate.

[6] It is still uncertain whether the new voting law (Italicum) is consistent with the constitution. As a consequence, this also holds for the ‘bonus’ seats that would give the winner of the election an absolute majority in the Chamber of Deputies.

[7] Although current account imbalances have been corrected, underlying economic fundamentals in some countries remain weak and as such the market is likely to continue to hold a negative view on these countries should perceived EU-exit risk rise sharply.

[8] By leaving the Eurozone a country would need to return to its old currency. In strong economies the currency is likely to appreciate, which should reduce the trade surplus but should also depress inflation and boost asset prices. For weak economies it is the other way around.

Elwin de Groot
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 1389 2916

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