Brexit

Problème économique ou question politique ?

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On June 23, beating most pollsters, 52 per cent of British voters asked to leave the European Union. The alarmist speeches immediately multiplied. As far as Britain is concerned, the most diverse and even fanciful figures are circulating, including a 14 per cent loss of GDP per capita by 2030, according to Bertelsmann Stiftung, a German pro-European think tank. Others are content with much more modest estimates of no more than 1 or 2 points of GDP. Christine Lagarde recalled that her institution, the IMF, estimated a loss of growth of 1.5 to 4.5% for the United Kingdom with the Brexit. The shock would therefore be severe, with growth coming to a halt as early as 2017. As for the influence on the world economy, the discourse is also worrying, although the figures put forward do not support the concern expressed. For example, on July 19, the International Monetary Fund lowered its growth forecast by 0.1 percentage points for this year and next: the Brexit could cost the global economy a tenth of a percentage point of growth, which is not particularly worrying.

Financial markets little destabilized

The financial markets quickly absorbed the shock. The Euro Stoxx 50 and Stoxx Europe 600 indexes, the main references for European equities, returned to their June 23 level, the day of the British referendum on leaving the EU, during the week of August 15. After falling 10.8% in the wake of the vote, the CAC 40, the Paris stock exchange’s flagship index, rebounded 13% at the end of August.

The concerns were « neutralized » by a new massive injection of liquidity. Once again, central banks have shown that they are ready for anything. The Bank of England lowered its key rates and reactivated itsquantitative easing program, while the European Central Bank (ECB) extended its own asset purchase program. Similarly, the atmosphere on Wall Street has eased since the U.S. Federal Reserve (Fed) hinted that there would be no rate hike before the November presidential election. This scenario is an ideal configuration for the stock market. The new deployment of « accommodative policy », whether by the Fed, the ECB or the Bank of England, is artificially boosting the price of risky assets and increasing imbalances.

However, if it does not really bring new economic problems, the climate of instability that it creates exposes the structural imbalances, both Anglo-Saxon and those of the EU as a whole and of the world economy. The Brexit, announced as a disaster for the economy of Great Britain, must be relativized to the extent of the British half-commitment and the multiple derogations that characterize it. The concerns of the various economic actors are less related to the Brexit itself than to its role in revealing the imbalances, both in the EU and in the world economy, caused by the systematic money printing policies of the various Central Banks.

Outside while staying inside

With Britain having only half a foot in the EU, the British exit would, by necessity, be only half an exit. The UK is used to back and forth and semi-commitments. We remember the renegotiation of the British cheque under Margaret Thatcher in 1983. More than 4 billion euros of reduction of the British contribution which were distributed on the other Member States. We still remember the accession to the European Monetary Snake in 1990, which turned out to be a failure…We still remember joining the European Monetary Serpent in 1990, which was short-lived, the ratification of Maastricht in 1992 with the proviso of not adopting the euro, and then the signing of the social chapter of the Maastricht Treaty and the Amsterdam Treaty under Tony Blair, accompanied by exemption clauses and in particular the refusal to take part in the Schengen area, as well as numerous exceptions concerning border controls, not to mention the British refusal to sign the budgetary pact of December 2011, which exempts it from the budgetary discipline of the other Member States. Not forgetting the gift package granted in February 2016 to David Cameron: a seven-year « safeguard » clause suspending social benefits for workers from an EU member state settled in the United Kingdom, indexation of family allowances to the standard of living in the country of origin, removal of « obstacles » to the movement of capital, fussy protection of the financial interests of the City.

An unplanned, trompe l’oeil exit?

British leaders are in no hurry to leave the EU. Britain’s actual departure from the European Union could, due to the difficulties faced by the British administration, be postponed until the end of 2019. The newly created department charged with overseeing the Brexit is said to have hired less than half of the civil servants needed to run it. As for the Ministry of International Trade, it does not yet have the experts to intervene in the negotiations with the EU. It seems that Britain’s exit was an option not foreseen by the politicians who were pushing for withdrawal from the European Union. According to the Sunday
Times
, British ministers have privately warned senior financial sector officials in the City of London that the use of Article 50 may not take place until late 2017, which would delay the Brexit until late 2019.

Whatever the exit date, after the UK’s special status within the EU, it is being prepared for an extraordinary regime outside. In the EU, which he saw as a vast common market, Britain was already exempt from most common policies on borders, social rights, environmental obligations and financial and monetary supervision. In short, if Britain was in the EU, while remaining outside, now it will be outside, while being inside. Moreover, in his first public statement Boris Johnson, the figurehead of the Brexit, who became the new British Foreign Secretary, said that leaving the European Union did not mean leaving Europe.

An opportunity for Britain to get out of austerity

As far as Great Britain is concerned, the new government has two options: to continue and develop the previous policy, i.e. to favour the City over the industrial fabric, by accentuating its character as a tax haven. The proposal of the resigned Chancellor of the Exchequer, G. Osborne, was along these lines, as he wanted to reduce the corporate tax rate to 15 per cent instead of the current 20 per cent, a loss of revenue for the state financed by an austerity policy. However, since her inaugural speech, the new Prime Minister, Theresa May, has made it clear that she intends to break with this policy of widening inequality and is proposing a package of measures that looks like a stimulus package to support economic activity. Unlike the EU leaders, the eurosceptic Conservative Theresa May seems to be moving towards a policy that takes into account the vote of voters traditionally attached to Labour, precarious workers or former workers, who have clearly chosen, and against Labour’s campaign, the Brexit camp. This choice to support economic activity, as opposed to the continental stubbornness of a reinforced austerity policy, is also an attempt to avoid the break-up of Great Britain through an exit of Scotland and Ireland from the United Kingdom.

An indicator of the EU’s problems

However, it is for the European Union that the difficulties are likely to be the greatest. The only answer to the Brexit and the rising discontent with the EU will be to deepen and continue the eurozone policy implemented since 2010: deficit reduction. To put its money where its mouth is, the Eurogroup has just validated the European Commission’s conclusion on the « lack of effective measures » taken by Portugal and Spain to restore budgetary balance. This approach was confirmed by the Ecofin summit, which brings together the finance ministers of the 28 member states. While it has allowed these countries to escape sanctions, it does pave the way for further fiscal austerity measures.

As far as Italy is concerned, the third largest economy in the Eurozone, with a debt of 2,300 billion euros, the Eurogroup’s denial is total. Italian banks are burdened by 360 billion euros of bad debts and need capital of around 40 billion. Most of the institutions in the Peninsula are therefore heading towards an inevitable bankruptcy (with 20% losses, only one bank, Unicredit, would still be solvent). Under the new resolution rules of the banking union, creditors, shareholders and depositors will be called upon to contribute. Also, the Italian government is negotiating the right to directly assist banks with state support, which is now prohibited in the eurozone. Such aid would lead to an increase in Italy’s debt, already at 132.7% of GDP, and would lead the EU to demand further budget cuts from Italy. In the next elections, this would mean a victory for the Eurosceptic party, the 5‑Star Movement. An Italian exit from the eurozone and the EU would spell the end of the EU.

Denial of problems

On July 29, the European Banking Authority published the results of its stress
test
applied to EU banks to measure their vulnerability to external shocks. Only two institutions showed great weakness, the Italian bank Monte dei Paschi di Siena, whose failure was expected, and the Irish Allied Irish Banks, which also failed to meet the solvency ratio. The Banking Authority insists that the overall health of the banking sector has greatly improved since the 2008 crisis. The financial markets were more cautious, with banking stocks continuing to fall.

The scenario is that of a recession in the EU economy for a period of three years starting at the end of 2015, with the assumption of a 7% decline in EU GDP in 3 years. It is therefore not a simulation of a financial crisis, as in 2008. Moreover, the test considers the value of financial assets as a constant during the fictitious three-year recession period, whereas in the event of a financial crisis, such as the one in 2008, it falls sharply. And in the test, the actual price of the assets, as set by the market, is irrelevant, only the book value is considered. This choice allows us to work with obsolete data, on December 2015 bank capitalization figures. However, it has already decreased by 40% since that date and the market remains bearish.

The Center for Risk Management at the University of Lausanne has another valuation model, based not on book values, but on market prices of banking assets. Its results are much more negative than those put forward by the EBA. Recording the accumulated losses since December 2015, the recapitalization need of EU banks would be around 882 billion euros in June 2016.

These tests thus bring out a form of positive thinking that one would hope is self-fulfilling, a method of autosuggestion on the absence of seriousness of the current problems, reminiscent of the Coué method.

Widespread political instability

The Brexit is for the EU, less in danger in itself, than the catalyst for unresolved structural problems. It also produces a phase of instability in the world political relations, mainly in the relations of England and Europe with the USA. The Brexit is first of all a break with the political will of the United States to integrate Britain into the Union. The entry of England was the result of the intervention of the United States, which had to do it three times, the first two having been blocked by General de Gaule. The US Trojan horse function in the EU is much less important today, since all the top positions, Commission, ECB… are occupied by proconsuls and US law has direct force of law in the Union. However, Obama intervened directly to oppose Britain’s exit. He threatened to reduce economic relations with it and place the country second to the EU. It is true that while the Brexit does not in any way call into question US domination, it does complicate matters somewhat. Given its hegemony, the United States had come to favour agreements with the EU, to the detriment of bilateral agreements with member states. Britain’s exit thus complicates the US chain of command. The same will apply to the establishment of a large transatlantic market between the US and the EU.

More generally, Britain’s exit will mean that the EU will be of less importance to the US. This can only reinforce the current strategy of privileging its action at the level of NATO. This institution, thanks to the centrality of its new « crisis management » function through « counterterrorism », will play an even larger role in the US political leadership of European countries.

Jean-Claude Paye

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