US ratings agency Moody's out with their latest review 4 May 2016

  • while reforms have strengthened the EU in recent years it remains vulnerable to any future shocks
  • institutional reform and the EU's integration are unfinished and ;left the EU exposed to shocks and downside credit risks
  • if UK votes to leave EU it could fuel support for anti-EU parties and weaken investor confidence which could lead to challenges for EU issuers

Says Colin Ellis, Moody's Managing Director, Chief Credit Officer EMEA, and co-author of the report:

We have seen substantial institutional changes in Europe over recent years," . "However, as significant as these steps were in political and economic terms, great vulnerabilities remain in the euro area."

For example, Europe's Banking Union is incomplete, the "Juncker Plan" to promote investment in Europe has run into difficulties and imbalances in public and private demand are not being addressed through fiscal policy because significant fiscal union is still off the table.

The European institutions also face challenge that extend beyond the economy and financial markets. Years of austerity policies have fuelled resentment and disappointment with the EU project in some countries, while the EU's fragmented response to the migration crisis has also exposed weaknesses in its decision-making process.

The 23 June UK referendum on its EU membership has created uncertainty. If the UK votes to leave the EU, it could fuel support for anti-EU parties elsewhere, weaken investor confidence in the bloc and lead to liquidity challenges for EU issuers.

While the EU has over the years displayed an ability to adapt and reach difficult compromises, the catalyst for change has often been a crisis, the report adds.

"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," Mr Ellis added. "Ultimately, any scenario that leads to evn the partial break-up of the Union would have material negative credit implications, albeit ones that may take many years to crystallize."

Full report for subscribers here