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Brexit and financial markets: the consequences for Italy

Milan, 15/04/2019, National Roundtable

Brexit and all the uncertainty it is generating constitute an entirely new and potentially destabilizing element for financial markets.

London has long functioned as Europe’s main financial market despite being located outside the Eurozone. The United Kingdom’s exit from the European Union now places Europe at a crossroads: either reach an agreement making it possible to maintain a good portion of operations in London or begin the long and painstaking task of creating a continental marketplace.

The only thing that appears certain for now is that no other marketplace can replace the City and that Europe’s new financial geography will be decentralized. Such a scenario carries many risks for Italy and some opportunities. On the one hand, Europe without the Anglo Saxon legal and financial system could give way to the hegemony of the Franco-German model; and on the other, the creation of a new decentralized continental infrastructure could have advantages for Milan, which boasts solid expertise in the financial industry, from the state bond market to clearing platforms and payment systems.

In any case, it is still early to fully understand what Brexit’s effects will be on the future of financial markets. Since it is going to be difficult to duplicate London - and its market liquidity – in another location, there is going to be a long period of transition and of complications. The problem is not only going to be to change laws, regulation and logistics, but also the fact that less liquid markets are not going to the able to find another hub – or hubs – where they can create liquidity. The process is influenced by an array of factors that cannot be confronted at the political level, as witnessed by the scarce results achieved by some countries, starting with France, which sought to create a new European financial hub in Paris.

In addition to the future of Brexit, there is another element of uncertainty capable of significantly conditioning the financial world. According to the analysts, all the most problematic aspects of the current scenario are political in nature, which is quite something new for a world that has been struggling for the past 10 years with the effects of - and possible ways to survive - the financial crisis that began in 2007.

Indeed, the main factors concern the new wave of protectionism triggered by the Trump administration’s decisions and the possible re-election of the sitting American president. What’s more, the UK leaving the EU is being treated as a purely political issue – pivoting on the break within the conservative party and on the Irish question – while the role of the City in the public debate has been shifted to the back burner.