What next for Europe?

The immediate reaction to the referendum showed that investors "are relatively unconcerned" about the FTSE 100's globalised firms, says Lex in the FT. Other European indices took a bigger beating last Friday, with Spain and Italy's main indices slipping by 12% and 10% respectively. A pan-European index of banking stocks fell 22% in the two days after the vote.

"The market seems to be pricing in the possibility that European rejectionism will spread to the countries that need unity most," says Lex. There is certainly ample scope for Brexit contagion, agrees Randall Forsyth in Barron's. In France, the head of the right-wing populist Front National, Marine Le Pen, called for a referendum on France's membership of the European Union (EU). Populists in Denmark, Sweden and Italy also want plebiscites, with the latter focused on membership of the single currency. Their case would grow stronger if threats of Brexit's dire consequences for the UK are proved wrong, adds Capital Economics.

The main reason to expect the clamour for plebiscites and anger with Brussels to grow steadily is the stagnant economy. Deutsche Bank notes that a third of the variation in people's current opinion of the EU can be ascribed to their country's growth over the past five years. The recent stagnation in the eurozone thus helps explain why, of the 50 referendums held across Europe on EU-related issuessince 1972, two-thirds went in favour of the EU but the figure has dropped to 50% in the past decade. "Pro-Europeans better hope that growth recovers soon."

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Yet in the short term, at least, it is likely to ebb amid post-Brexit uncertainty. And in two of Europe's trouble spots, recent developments have clouded the outlook. Last Sunday's election in Spain produced an increase in support for the centre-right party headed by Prime Minister Mariano Rajoy, but, for the second successive election, a hung parliament. "The path towards a stable government remains unclear," says Mizuho International's Antoine Bouvet. That could sap confidence and dent growth, not leastbecause structural reforms stay on the back burner.

But "the real risk to a eurozone break-up remains Italy", CLSA's Christopher Wood told Barron's. It is mired in an endless slump, having grown by just 5.4% since 1999, compared with Japan's 14%. Now the reformist Prime Minister Matteo Renzi is fighting off a populist party that could cost him victory in a referendum over constitutional change this October. If his reforms of the Senate don't go through, his odds of reforming Italy and finally boosting growth will dwindle. Italy may be the main reason to believe that Brexit could well prove worse for the continent than for Britain.