Although reforms have strengthened the European Union in recent years, it remains vulnerable to any future shocks, leaving governments and other issuers of debt exposed to negative credit implications, Moody’s Investors Service said in a report Wednesday.
Europe’s institutional reform — including the creation of the European Stability Mechanism, the European Banking Authority and other structures — remains unfinished, and leaves the EU exposed to shocks and downside credit risks, the Moody’s report says.
“We have seen substantial institutional changes in Europe over recent years,” says Colin Ellis, managing director and chief credit officer EMEA at Moody’s, in a statement announcing the report. “However, as significant as these steps were in political and economic terms, great vulnerabilities remain in the euro area.”
For example, efforts to promote investment in Europe “has run into difficulties and imbalances in public and private demand are not being addressed through fiscal policy,” the Moody’s report says.
Additionally, measures such as austerity policies have sparked disillusionment with the idea of the EU in some countries, the report adds. As well, Europe’s “fragmented response to the migration crisis has also exposed weaknesses in its decision-making process,” the report says.
If the United Kingdom votes to leave the EU at its upcoming referendum, the result “could fuel support for anti-EU parties elsewhere, weaken investor confidence in the bloc and lead to liquidity challenges for EU issuers,” the Moody’s report says.
“If the EU survives its current challenges largely unscathed, even a ‘small’ future crisis could threaten the sustainability of current institutional frameworks, if it coincided with negative public sentiment and populist political developments,” Ellis adds. “Ultimately, any scenario that leads to even the partial break-up of the Union would have material negative credit implications, albeit ones that may take many years to crystallize.”