After Brexit, Who’s Next?


After the surprising result of Brexit, there are more and more doubts about the feasibility and efficiency of Eurozone system. Brexit uncovered major concerns, such as the European single market’s lagging global trading competitiveness, immigration issues, risks on unitary regulations and laws. This event triggered the alarm for Eurozone countries to reconsider whether it is beneficial to stay in Eurozone.

Let’s take a close look at the actual economic changes to those Eurozone countries to judge which countries are better off within the Eurozone, and which are worse off. We build an Economic Scorecard Model (final data as below) based on 20 years of data from 1997 to 2016. The seven economic indicators used are real GDP, unemployment rate, inflation rate, government debt, industrial production, retail sales index, and trade balance. Based on the characteristics of each economic indicator, we have analyzed each variable from absolute and relative levels.

Ireland is the best-performing country in Eurozone with an overall score of 69.51. Ireland aces real GDP and unemployment rate metrics and ranks second for industrial production. Belgium, Malta, Germany, and Finland rank from second to fifth place with scores of 62.59, 57.32, 55.79, and 55.6. Looking at the bottom of the rank. Slovakia, Cyprus, Greece, and Portugal have overall scores below 40. Unsurprisingly, Greece only has an overall score of 32.04 with worst performances in real GDP and industrial production metrics. The Economist would agree with our model when they state, “As it turned out, the super-responsible ECB spent the 2000s making a monetary policy that fit the laggardly German economy, and which was actually too loose for Greece’s economic situation” [1]. Portugal has an extremely low score of 19.57with zeros and single-digit scores for five factors out of seven.

Now, on to the more dominant countries. Germany, as the largest manufacturing and exporting country in Europe, has the highest world rank at 4th place with a score of 55.79. Eurozone brings plenty of benefits to Germany, and as Fortune would put it, “Germany’s gains in competitiveness were immediately translated to gains in trade, since the freedom of goods, services, persons and capital allowed German products to circulate freely and quickly throughout the European Union” [2].  The Euro helps Germany offset the effect of booming export on currency appreciation. Their ability to keep good prices competitive relative to other European markets gives them huge advantages on foreign trade. It scores 100 on trade balance metric and leads the second-place Ireland by 55.54 points. Inflation stability and improved unemployment also support Germany in developing further under the Eurozone system.

France is the worst performer among major Eurozone countries. Unemployment score is the only other score above 50, while the scores in all other metrics are depressed, which show the country suffered from low real GDP growth, increasing government debt, deteriorating industrial production, and decreasing the foreign trade balance. No wonder populism is booming in France. Eurozone system does not seem like a good fit for France. Even though Macron won the presidential election, Le pen’s National Front could grow further in the future if the fundamentals in France don’t change.

Italy scores 42.9 and is one place above France in the rank. As a well-developed country before joining Eurozone, there was not as much potential to improve on retail sales and the unemployment rate. Real GDP growth is the second worst among Eurozone countries with a score of 1.68, and even trade balances got worse. Further, industrial production has completely collapsed under the euro — it has been absolutely butchered – since, after entering the single currency market, Italian firms can no longer offset their high production cost by depreciating their currency. This has been deteriorating their trading competitiveness dramatically and has led to the slowdown of a historically great economy. Facing corruption, fiscal and banking sector issues, and a refugee crisis, it is time for Italy to change. The Anti-Euro Five Star movement is leading the poll at 32%, whereas the center-left Democratic Party is at 26% [3]. It is very likely that the Five Star movement will win the election next year and exit the single currency market soon thereafter.

The creation of Eurozone has its own benefits and flaws. It is crucial to question whether Eurozone is a good deal for all the Eurozone countries. Based on the Economic Scorecard model, the answer is simply ‘No’. Just as Nobel laureate Milton Friedman (1997) wrote: “Europe’s common market exemplifies a situation that is unfavorable to a common currency. It is composed of separate nations, whose residents speak different languages, have different customs and have far greater loyalty and attachment to their own country than to the common market or to the idea of ‘Europe’ [4].” With more exposure of the innate problems of the Eurozone system, the European right-wing is gaining popularity. Structural changes to reshape the Eurozone are unavoidable.

After Brexit, who’s next? My answer is Italy.