Will the UK leaving the European Economic Union hurt or improve the UK economy? Will the Brexit precipitate further exits and create real problems for the EEC. Henry grapples with deep uncertainty.
So far, economic implications of Britain’s likely exit from the European Union (‘Brexit’) have focussed on damage to the British economy. It is hard to see how some damage can be avoided. There will be uncertainty for British industry, with associated weakness of investment, further devaluation of sterling and possible loss of consumer confidence. Not all of these consequences are negative, and in the longer term there are likely to be real net benefits. A lower pound will boost competitiveness and the eventual lifting of the many EU regulations will have further direct benefits. As the way forward becomes clearer, confidence will recover. Financial markets are influenced by national pride, and a new start as a fully sovereign nation may trigger a new investment and consumer boom.
While the inevitable uncertainties are worked out, financial markets are likely to fluctuate more than usually. Markets thrive on volatility. UK stocks fell less than French and German stocks on the Friday when results of the UK referendum were known. This suggests that experienced judges, with money at stake, see eventual damage to the Eurozone nations as likely to be greater than any net damage to the UK economy.
Such a judgment is probably based partly on beliefs that other nations will seek to exit. There is a design flaw in the Eurozone, which is one reason that the UK never entered that particular entity. This is because it imposes a single currency. Great for German industry, as the Euro is lower that the Deutche Mark would be if Germany still had its own currency. Not great for the economically weaker nations of Europe that suffer a higher currency than they would have if they had kept their own Lira, or Pesata or Zloty. William Jennings Byran, an American politician, concluded a famous speech in 1896 by saying: ‘You shall not crucify America on a cross of gold’. As a modern Eurozone skeptic I suggest that the weaker nations of Europe are staked out on an anthill in the hot sun.
Should another nation seek to exit the EU (and leave the Eurozone) the fear of eventual dissolution of the whole shooting match will increase uncertainly and damage the whole Eurozone project. It has sometimes been said that the safest way to overcome the Eurozone design flaw would be for Germany and the other Northern Eurozone nations to adopt their own ‘New Euro’ (Deutche Mark?) leaving the weaker Southern Eurozone nations to be part of a greatly depreciated ‘Euro Lite’ (Lira?).
The big fear if a weaker nation, like Italy, Spain or Portugal, leaves the Eurozone, is that it would create a monster banking crisis. The banks of the Eurozone own large ‘Euro’ debts that will almost certainly never be repaid. If an Italy left the Eurozone, and adopted an Italian Lira, its banks with large debts in Euros but assets in depreciated Liras would almost certainly fail, and there would be an almost instantaneous expectation that this process would cascade. Such a cascade, many experts believe, would make the consequences of the ‘Global Financial Crisis’ look like a teddy bear’s picnic.
The distinguished economist Willum Buiter, global chief economist at Citigroup, wrote in 2011 as follows: ‘Exit, partial or full, would likely be precipitated by disorderly sovereign defaults in the fiscally weak and uncompetitive member states whose currencies would weaken dramatically and whose banks would fail. If Spain and Italy were to exit, there would be a collapse of systematically important financial institutions throughout the European Union and North America and years of global depression’. (Quoted by Andrew Ross Sorkin, International New York Times, June 29 2016)
My own view of the state of the Eurozone economy and financial system in late 2010 was as follows: ‘The European banks could yet be hiding large potentially bad debts and a single large failure could unleash a cascade of further failures. One must doubt if the international and Eurozone agencies could summon the will or the resources to prevent a cascade of bank failures. Such a shock would end the tepid recovery of the western nations, lay the basis for Eurozone depression and send policy back into the melting pot’. (Great Crises of Capitalism, Pp 290-291).
You are entitled to ask whether there is an orderly solution. One assumes that the international powerbrokers and economic agencies have a good plan but they have not shared it with the rest of us for obvious reasons. Part of a solution would involve large scale debt discounting or even forgiveness. The world has found ways to forgive debts of lesser nations, most elegantly by selling the debts at greatly discounted values, and brave entrepreneurs have made substantial profits when national recovery occurs. But would China agree to forgive or write down America’s massive debt as part of a global solution crafted in secret? Would national governments have the credibility to repay debts of their banks by printing discounted currencies? Even if such a plan could be implemented more or less immediately the cascade of sovereign and bank failures began, it is hard not to imagine powerful panic, unforeseeable responses and rapid slide into global depression.
The political consequences of such an outcome cannot confidently be foreseen. But the design flaw in the Eurozone makes a damaging breakup likely, if not a near certainty, and the world will need to face the consequences at some time.
Comments welcome: PeterDJonson@gmail.com