The Reality of Brexit May Not be as Bad for Bavaria as Speculation Suggests

As Brexit looms like the sword of Damocles, economic analysts are bracing for the next chapter in the European Union's (EU) story. When the Maastricht Treaty came into force in 1993, the fortunes of multiple nations became inextricably linked. Now, 26 years on, the once harmonious community is about to be broken up.


Brexit Bad for Bavaria Or So the Analysts Say

However, even before the UK leaves the EU, political talk and media hype has had an impact. In December 2018, a study by the IFO Institute commissioned by the Chamber of Industry and Commerce (IHK) for Munich and Upper Bavaria predicted a hard Brexit would cost Bavaria EUR1.4 billion. The report took into account a variety of statistics but, importantly, political statements seemed to fuel the pessimistic forecast.

Although the annual loss is merely a prediction at this point, the takeaway is that political statements are just powerful, if not more powerful, than the policies themselves. In fact, the interplay between speeches and currencies is something DailyFX has noted in its online tracker (see infographic above). A perfect example of this was Jean-Claude Juncker's 2018 comments on Italy. Reviewing the country's budget plans, the European Commission President said that Italy was "distancing itself from the budgetary targets we have jointly agreed at EU level".

The criticism saw the value of the Euro fall from 11800.0 to 11500.0 days after the comment was made. For investors and analysts, EUR/USD forex trackers and charts are seen as one of the best indicators of economic strength. In simple terms, EUR/USD says how many dollars are needed to buy a single Euro. What the FX pair also provides is an indication of how well two of the most influential economies in the world are performing. By tracking this currency pair, a correlation can be found between Juncker's negative comments and the weakening of the Euro.

Comments Cause Changes

What we can learn here is that the interplay between political comments and daily price charts are significant. When Juncker gave his opinion on Italy, the Euro took a tumble. The same is now true of Brexit. As we've shown, businesses across Bavaria are already expecting production to drop if a hard Brexit occurs. Why? Because people have said it will. Although anticipating change is crucial in any situation, it seems that major market shifts are less a product of reality and more about speculation.

In practice, this may mean the impact of Brexit isn't as bad as many assume. What's more, it may not adversely affect the Euro. To put it another way, the greatest period of change may have already happened. Since 2016, talk of Brexit and how it may affect the EU has seen all markets, including forex, experience major swings. However, when the split actually happens, things may actually find their level.

Financial markets often follow political discourse. If national leaders are using a negative tone, their country's currency may suffer. Conversely, if the comments are positive, as they were between Shinzo Abe and Donald Trump in 2018, a currency can strengthen. Therefore, even though reports are suggesting Bavaria will suffer at the hands of a hard Brexit, the reality may be different. Indeed, it may be the case that the worst has already happened and that businesses are only hit when the split finally happens

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