The US Politico website ran an article on Saturday quoting 17 economists, assorted gurus & historians on Brexit, the UK exit from the European Union. As I ran through their postulations on the outlooks for 5 months out, and 5 years out, I thought so many of their conclusions could be utterly wrong because they didn’t understand the new world they were talking about, and they also didn’t understand how the old order would pull the bed covers over and pretend nothing had happened, and ordinary people would have trouble overcoming that suffocating blanket of ‘business (or power, or hierarchy) as usual’.
A couple of constructive points
In other media, a couple of Bloomberg quotes were pleasing. One from South African businessman Christo Wiese, controlling shareholder of Africa’s biggest retailer, Shoprite Holdings Ltd, who has made numerous investments in British retail: “I don’t think it’s the end of the EU, I think it’s the end of the EU as it’s currently structured. It’s always had unattractive features alongside its attractive features. This will make people sit up and say, ‘How can we make it better?’”
People in all walks of life may sit up, but leadership based on a negative often has trouble converting to the role of advocating & leading the positive. To test this, think locally, how a party in opposition in our parliament gets on when suddenly it takes over the reins of power. The adjustment is often difficult.
For Brexit to become positive, new leaders must emerge. And for Brexit to be positive for others, such as New Zealand, skills far beyond our government’s demonstrated leadership will be needed. Our government could not even understand its abysmal failure to manage any kind of agreed course with the Auckland Council it created, until some new blood (helping the process, but from outside the government camp) was instilled in the last year. And even with the opportunity for new understanding to emerge, the bluster, confrontational menacing & bullying have remained the primary tactics.
Britain has the offer of a political outsider, billionaire businessman Peter Hargreaves, though his belief that business acumen translates into an ability to understand & work with the nuances of political change may be misplaced. Bloomberg quoted him: “I have enormous experience of business, enormous experience of negotiation, enormous experience of economics, and I’m one of Britain’s most successful businessmen. If they don’t involve me, they’re crazy.”
Bloomberg also had an assessment of the instant loss by the UK’s richest in the hours after the Brexit vote – counting assets and subtracting based on currency & market shifts. The assumption is that the wealthy were all sitting on their hands. Even those advised by the staunchest supporters of Remain would have positioned themselves to gain either way.
Making money – and future risks
Jim Rickards, writing in Agora Financial newsletters from the US – and with US investors in mind – wrote in the immediate aftermath: “Since actual odds were 50/50 and the market was priced for 75/25, we recommended shorting the pound, buying gold and other trades that would benefit from ‘Leave.’ That way, we would not lose much if ‘Remain’ won, but we would make huge profits if ‘Leave’ won. That’s exactly what happened.”
He also projected difficulties arising far from the immediate UK-Europe focus: leveraged players who backed the wrong result would be forced to sell, and forced selling can deteriorate quickly into calamity: “When markets move to the extremes we just saw, contagion sets in. Leveraged players have to sell liquid assets to get cash to meet margin calls on the illiquid losing positions.
“This moves selling pressure from obvious places like sterling to less obvious places like Asian stock markets. The selling pressure spreads around the world. Soon people begin to panic and everyone wants his money back. A global liquidity crisis breaks out.”
That affects multiple markets, multiple sectors. New Zealand has, like many countries, been subject to an onslaught of asset investment, hiking up prices of houses in Auckland & Sydney & San Francisco (all markets where the countering provision of extra infrastructure & extra stock had lagged). Along with low central bank interest rates, commercial property yields have been slashed.
Shortly before the global financial crisis interfered with the notion that you could make money without even having to think about it, the stock reaction to my question of how long yields would keep falling was ‘Forever’. On post-gfc resumption, yields have continued their decline – sub-5% is commonplace for food outlets with strong cashflow and sub-6% is becoming commonplace for less likely market leaders such as standard office stock in good condition and well located.
Commercial property throughout Europe has been trading on very firm yields, new markets have been booming and investment funds have been reorganising their portfolios. US investment funds have been sending billions of dollars across the Atlantic to buy property throughout Europe.
Just look at one word from Jim Rickards: contagion.
But, while there will be some positions that can’t be covered, will they really affect wider markets to a startling, adverse degree?
Let’s go back to the views expressed in the Politico article: a summary of most of the comments, with quick comments from me.
It’s chaos – oh?
The Politico story, How Brexit will change the world, was a grab bag of quick responses from 17 US economists, foreign policy gurus & historians. As I read down the page, the feeling grew that reality was often missing. While there was plenty to cogitate over, it was also a fine example of today’s dominating immediacy rule: It doesn’t have to be right or thought through, it just has to be first.
As I read, I summarised to myself, then frequently thought a counter view more likely. My suspicion began with the intro: “The results of the Brexit referendum are in, and it is chaos.”
Chaos? Quick change, yes, but chaos? Brexit has been about economics, finance to some degree, nationhood, the petty rules & suffocating red tape that the Brussels bureaucracy seems to have specialised in these last 40 years, and – the last straw for many English – the arrival on their shores of more foreigners than they care to welcome.
The British speak in a range of dialects that make an antipodean wonder what this language, English, really is. One thing about the speakers of all these dialects unites them: They’ll visit the Continent, they’ll get drunk in their own groups and behave badly on its streets, but basically, they don’t like foreigners. And Europe, for all Britain has supposedly been officially part of it for 4 decades, is full of foreigners.
The world’s languages can all be heard on Oxford St, and large groups of foreigners from the former colonies have made the UK their home, partly the result of ending colonisation, but that doesn’t mean the English are going to take a shine to foreigners.
And that view, rational or not, supersedes all else. While oil income has helped lift Scotland’s economy, the English regions beyond the property-booming London have struggled. At the same time, they’ve seen jobs taken by migrants from poorer European economies.
Given the chance, their anti vote was understandable, even if it means harder times.
The first visible reactions to the Brexit vote were market shifts: currency down, sharemarket down. Market traders overreact like that, always, everywhere. That’s not chaos, that’s perfectly normal.
Among the norms to follow, some of the slump will be attributed to overreaction and prices will edge up. Speculators will enjoy this period. Politicians will talk out of one side of their mouths about controlling calamity without having the expertise to act or decide appropriately, and their thinking will be conditioned by the elite environment of the tier of society that’s permanently in charge. ‘Yes Minister’ is most likely to prevail.
To understand my take on the views expressed by these distinguished commentators, you should note 3 points (my view): Quantitative easing has been used to help those who were at the centre of creating what became an international problem; austerity was inflicted on those who used inappropriately supplied largesse; neither, to the extremes they’ve been taken, is a sensible solution.
Now to my summary of Politico’s helpful spread of views – notably, from that elite environment – and my take on them:
Danielle Pletka: A wake-up?
“Brexit could be a wake-up call, or it could be 1933 all over again,” said Danielle Pletka of the American Enterprise Institute. Ms Pletka saw a return to being a common market-plus if the wake-up call was acknowledged and envisaged Brussels becoming more serious about immigration & refugees, thus revitalising European Union foreign policy and pushing for real solutions in Syria. Failure would mean years of fractured politics, anger, dangerous decisions, isolationism and worse
Me: Brexit should alarm the European bureaucracy into a repair, especially reducing the complexity & all-encompassing, suffocating nature of its regulations. The European bureaucracy created a currency that is not matched to national aspirations. The 2 have to be matched or a federal system introduced. That should have been done, hasn’t been done, won’t happen in a hurry. Brussels is more likely to write regulations about migration & refugees than resolve anything, proving an exasperating & intransigent block.
Dean Baker: Hysteria could be reversed
Dean Baker, co-director of the Centre for Economic & Policy Research in Washington DC, said the initial market hysteria would soon be completely reversed outside the UK and a strong rally was likely to follow Donald Trump’s defeat in November. In the UK, the London real estate bubble could burst – the fault of those who allowed it in the first place, not of the Brexiters – leading to slow growth if not a recession, and the UK would no longer be viewed as a safe haven for the world’s rich. Jobs in the UK financial sector would go as firms seek to relocate to countries still in the European Union. In 5 years, he expected the European Union to have turned away from austerity and be back on a path of high employment & healthy growth.
Me: Mr Baker believes the elites will be swayed by their electorates to give up austerity. However, banks will fight for every cent owed until they’re offered a deal that earns them more. The Europe system faults will remain in place but austerity, like any measure, has a lifespan and should already have been eased. Britain is likely to examine its trade options more closely and look to create opportunities. That could mean trading more openly with the rest of the world, rather than closing the shutters.
Richard Haass: A poorer disintegrating UK
“In 5 years, there will no longer be a United Kingdom,” said Richard Haass, president of the Council on Foreign Relations. He saw the UK being immediately poorer, markets elsewhere recovering, but the weakening of sterling adding to the economic woes of Japan, Europe & beyond. Any contagion reaching the US would hurt Clinton, help Trump. In 5 years, Scotland would be independent & part of Europe, and Northern Ireland might join Eire, thus also staying in Europe.
Me: Oil has helped the Scottish economy prosper; looking beyond oil, will Scotland still prosper, and will Europe still want it? Religion will continue to play a divisive role in Ireland; political union could evolve if London chooses to concentrate on England.
Mr Haass also saw several other countries leaving the European Union, which would then consist of a Eurozone core and an outer ring of countries with tailored ties to Brussels. The US would turn to partner other countries in other regions.
Me: Countries will leave if they don’t benefit. They’ve joined because they saw gains from a European market and from assistance in trading with the rest of the world. Brussels will need to simplify the rules for internal trade, align financial rules & currency, start writing a range of international trade agreements that encourage outsiders’ investment in European business, much like the NZ government is encouraging firmer links for new technological & scientifically based businesses here with businesses overseas. It’s the same as rewriting the Resource Management Act: enable, instead of starting by saying no. Europe’s millions of refugees will be a festering problem so long as they remain refugees; they need to become productive, making them accepted, and the autocracies back home need to be overcome.
Mohamed El-Erian: New leader, election & a deal?
This year, said Allianz SE chief economic advisor Mohamed El-Erian, the UK Conservative Party would unite behind a new leader and prepare for a general election. He saw discussions continuing slowly on a type of association agreement for Britain with Europe, but other European countries also having to deal with anti-establishment movements.
Economic growth would slow, financial market volatility pick up, central banks would be seen as less effective, but in 5 years the UK would be moving forward. The shrunken European Union would be more manageable & harmonious, based on a reinvigorated France-Germany partnership.
Me: A UK election will only happen before the scheduled date of May 2020 if the Conservatives lose their majority, which could occur if the party tries to negotiate a way round the Brexit vote instead of accepting it. That outcome is distinctly possible, given the Brexit vote arose through the failure of the political elite to understand or accept the tide of opposition to business as usual.
Who among the European Union’s 27 other members would pull out? The founders & early members from Western Europe might expect others to leave, but wouldn’t pull out themselves, and the East European additions have gained from being drawn into capitalist markets. The French might debate until eternity which side of a tractor to attach the spare tyre to, but they are intrinsically Europe. The union should survive, albeit with a more federal form.
Ian Bremmer: Down to a European core?
Eurasia Group president & New York University global research professor Ian Bremmer saw the world becoming less polar, international relationships, standards & security more fragmented, the UK in recession this year but less of a hit elsewhere. In 5 years, he saw a “core” Europe centred on Germany, reasonably integrated politically & economically, but the broader European Union a failed political & economic experiment.
Me: Austerity, rigidly applied, is a first principle of the International Monetary Fund for borrowers which stray. Europe showed it wasn’t a union when it allowed Greece to borrow beyond reason and then to be attacked in this way and, until Brussels demonstrates better understanding of the parts that make up the whole, the whole must falter.
John McLaughlin: Others to leave?
John McLaughlin, distinguished practitioner in residence at the Merrill Centre for Strategic Studies at Johns Hopkins School of Advanced International Studies, and the US’s acting director of central intelligence in 2004, saw countries such as Poland, the Czech Republic, Hungary & possibly the Netherlands facing pressure similar to the UK’s to leave if the UK can show the damage seems manageable.
Me: Brexit presents an opportunity to push for constructive change. A widespread view seems to be that that won’t happen.
Dennis Ross: It could strengthen NATO
Ambassador Dennis Ross, distinguished fellow & counsellor at the Washington Institute, who was a foreign policy advisor to Presidents George HW Bush & Bill Clinton, said immediate fears of market tumult might be overblown: “The fissures in the EU today may actually serve to strengthen NATO. Not only may this be a boost to NATO as a way of preserving European security, it could bolster NATO as the forum for manifesting European weight internationally.”
Me: From time to time I wonder why politicians seek the advice of people with such a narrow viewpoint that the politician should already know what the advice will be before it arrives.
Stephen Sestanovich: Be an autocrat
Stephen Sestanovich, a professor of international diplomacy at Columbia University’s School of International & Public Affairs and a senior fellow at the Council on Foreign Relations, said economic turmoil brings losers all round, but that’s too narrow a lens: “The message of the Brexit vote, whether or in what fashion Britain actually leaves Europe, is simple: be a state. Better still, be an autocrat. Those who come out of this turmoil looking better are those with the capacity to make crisp, coherent political decisions and stick to them.” He said US institutions were too much like those of the European Union, which was why people in both were saying ‘Give us our country back!’ Worse, the US depended more than Russia & China on its ability to craft mutually beneficial arrangements with allies & other friendly states (such as the Trans-Pacific Partnership & Transatlantic Trade & Investment Partnership), and that ability might also decline.
Me: Openness to differing opinions is an integral feature of democracies. Refusal to acknowledge them, ordering that rigid austerity as happened in Europe – after the US ordered up year after year of quantitative easing (lending to your mates & making outsiders pay) – is a recipe for failure.
Kori Schake: A more protectionist, less innovative EU?
Kori Schake, a research fellow at the Hoover Institution, said the main Brexit consequence would be a European Union that grows more protectionist & hostile to innovation, less stalwart internationally, with governments less confident in their actions, debtor countries arguing their publics demand less austerity and lender countries arguing the opposite.
Me: This argument returns to the point of aligning currency & aspirations. It also assumes the elite will remain the elite, essentially with unchanged views. Brexit should be a step towards innovation in Europe as well as in the UK and, if Brussels tries to close down argument, I’d expect supporters of change to outgun the incumbents.
James Galbraith: Political divide will deepen
James Galbraith, economist, friend of & advisor to former Greek finance minister Yanis Varoufakis, former executive director of the US Congress joint economic committee, a professor of government at Texas University and author of Welcome to the poisoned chalice: The destruction of Greece and the future of Europe (published 21 June by Yale University Press), said immediate economic effects might be slight, although British exports could pick up if sterling’s drop stuck; and “if the world gets skittish, the $US will rise and US exports will suffer”. As the UK Independence Party’s voters folded back into the Tory Party, the far right would take over the British government. “This will provoke a new referendum leading to Scottish independence. Meanwhile right-wing anti-euro parties are calling for exit referenda in Holland & France. The political division between north & south Europe—as Spain, Portugal & Italy move left – will deepen.
Professor Galbraith expected the structures of European Union law, regulation, fiscal transfers, support for science, open commerce, open borders & human rights to be eroded in Britain and ultimately, in important respects, undone.
Me: The Tories hold an absolute majority of 330 in the 650-seat parliament, a 101-seat lead over Labour, and are under no pressure to change anything in a hurry. The next election is not due until 2020. It can let those European rules slide with little comeback, but it will have to act quickly to retain London’s place as Europe’s leading financial centre. The fall in the exchange rate will encourage foreign investors in, while hurting those who didn’t cover enough for the decline.
Julianne Smith: Deeper integration among EU remnants?
Julianne Smith, director of the strategy & statecraft programme at the Centre for a New American Security, saw a dark future in Europe – in the short term, neither will nor resources to address a long list of global challenges, including Russian sanctions & countering Islamic State. Longer term, she saw the European Union unravelling, although she also the possibility of European integration deepening.
Jared Bernstein: Fed to hold rate down
Jared Bernstein, a senior fellow at the Centre on Budget & Policy Priorities, saw sterling down, $US up, US trade deficit up, Federal Reserve holding off rate hikes.
Larry Korb & Matt Wackenreuter: Downside could be mitigated
Larry Korb, a senior fellow, & Matt Wackenreuter, an intern at the Centre for American Progress, said it could take up to 2 years to finalise the withdrawal agreement. If that agreement allowed the UK to continue to be part of the European Union’s “single market,” many of the short-term problems would be mitigated.
Laurence Kotlikoff: Job shifts & boycotts?
Boston University economist Laurence Kotlikoff, a US presidential candidate in 2012 & (since Friday) this year, saw British exporters moving their businesses to the Continent to avoid European Union tariffs, young Britons being sent home because they no longer have a valid work permit for Europe, the rest of Europe boycotting British products, and other members of the union heading for the exit.
He said the biggest concern was geopolitical: “The European Union, notwithstanding all its flaws, has helped keep the peace in Europe for decades. Heaven forbid if the type of nationalism we are seeing in the Leave vote takes full hold of other EU members. We could yet see European countries doing what they have done for centuries – physically attack one another. And this says nothing of the manner in which Russia will respond to this weakening of the West.”
Kathryn Lavelle: Impact not far-reaching?
Kathryn Lavelle, a professor of world affairs at Case Western University and a global fellow at the Wilson Centre in Washington DC, foresaw the consequences being less far-reaching than many predicted: “Every corporation that does business in the UK & the EU will have an incentive to lobby Brussels to make the ‘divorce’ as amicable as possible.”
Politico, 25 June 2016: How Brexit will change the world
Attribution: Politico, my comments.