The immediate reaction of financial markets to Britain’s decision to leave the EU has been telling. Sterling has fallen sharply but gilt yields have rallied and the FTSE 100 has been one of the better performing equity markets in the world.
Instead, the locus of pain is peripheral Europe. Bond yields in Greece, Italy, Spain and Portugal have risen, reviving fears of the “doom loop” whereby undercapitalised banks prop up over-indebted governments by buying their bonds in a circle of insolvency.
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The doom loop was broken in 2012 by Mario Draghi, the president of the European Central Bank, with his vow to “do whatever it takes” to preserve the euro and the unprecedented ECB intervention that followed. But the underlying problems of southern Europe remain unresolved. In the two trading days since the vote, the FTSE 100 has fallen 5.6 per cent, while the Italian equity market has shed 16 per cent, Spain 14 per cent and Greece 16 per cent.
The prophets of UK doom will argue that it was the weakness of sterling that made the difference. But that is the whole point: sterling can act as our shock absorber. Portugal, Italy, Greece and Spain, meanwhile, are locked into a currency system that is imposed from above and does not reflect their economic needs.