Wise old saying: “Be careful what you ask for, you might just get it.”
Perhaps someone should have reminded the British of this before they voted, or even began the referendum process. The result was a surprise to the pollsters, the leader of the “Leave” campaign, and many of those who voted to exit.Its not clear what happens next or what the repercussions will be. Britain’s economy is so closely tied to the EU that its impossible to say what will happen if they try to disentangle it. Similarly, the legal implications are too complex to predict at this point in time. It is also possible that Article 50 will not be implemented. The vote, after all, was not binding, only advisory.
Below is a sampling from list of the possible economic consequences to the BREXIT vote published by the Globe and Mail:
- Britain’s economy would grow more slowly outside the EU than if it stayed in, according to a raft of projections made in the run-up to the referendum by the government, the Bank of England, think tanks, international organizations and hundreds of academics.
- The fall in sterling, which on Friday hit its lowest level against the dollar since 1985, could help exporters – although demand in many countries around the world remains weak.
- The OECD and the IMF have said a Brexit will hurt the rest of the EU and affect other countries further afield. The OECD has said output in the EU, not including Britain, will be around 1 per cent weaker by 2020 than otherwise if Britain left bloc, a palpable hit for a region which is growing only weakly.
- The OECD has said there could be deeper economic fallout if a Brexit undermines confidence in the future of the EU, a scenario not included in its forecasts.
- BoE Governor Mark Carney responded to the vote quickly, saying the central bank was ready to provide 250 billion pounds of additional funds to support markets. He also said the Bank will consider additional policy responses in the coming weeks.
- Before the vote, Carney said it was too simple to assume the Bank will cut interest rates from what is already a record low of 0.5 per cent to cushion the economy after a Brexit vote. The BoE says it would have to weigh up slower growth against higher inflation caused by a weakening of the pound.
- Britain racked up its biggest current account deficit on record last year, equivalent to 5.2 per cent of economic output. The shortfall reflected higher flows of dividends and debt payments to foreign investors than similar flows into the country, as well as its wide trade deficit. Mr. Carney has said a Brexit could test the “kindness of strangers” who fund the balance of payments deficit.
- Mr. Osborne said during campaigning for the referendum that he would have to raise taxes and cut spending if Britain voted to leave the EU to prevent the slowdown in growth from hurting his push to bring down Britain’s still large budget deficit. After Mr. Cameron’s resignation, it was not clear if that plan would be maintained.
Sterling and gilts
- Sterling plunged to a 31-year low on Friday, its biggest fall in history. George Soros, the billionaire who earned fame by betting against the pound in 1992, said it could go as low as $1.15. On Friday, it was trading at around $1.39.
- Most forecasters have said Britain’s unemployment rate – now at a 10-year low of 5.0 percent – would rise after leaving the EU, although after the financial crisis Britain managed to avoid job losses on the scale seen in other countries.
- As seen after the crisis, wages will probably bear the brunt of any post-Brexit slowdown, according to the IMF. Britain’s National Institute of Economic and Social Research think tank estimated real consumer wages will be between 2.2 per cent and 7.0 per cent lower in real terms by 2030 than if Britain had stayed in the EU.
- World leaders from the United States, Japan, Germany and France have warned Britain that leaving the EU would hurt its standing as a global trading power.
- U.S. President Barack Obama said Britain would join “the back of the queue” for talks with the United States. This week, French President Francois Hollande said leaving the EU would put at risk Britain’s access to the single market.
For the full list see: http://www.theglobeandmail.com/report-on-business/international-business/european-business/what-brexit-could-mean-for-the-uk-economy/article30614021/
“research that has looked at the effect of refugees around the world suggests that, in the longer run, this view is often wrong. From Denmark to Uganda to Cleveland, studies have found that welcoming refugees has a positive or at least a neutral effect on a host community’s economy and wages.
…beyond the upfront costs of processing and settling refugees, the perceived burden of refugees on a host economy may not be as significant as it seems. “There’s not any credible research that I know of that in the medium and long term that refugees are anything but a hugely profitable investment,” says Michael Clemens, a senior fellow who leads the Migration and Development Initiative at the Center for Global Development, a Washington think tank.”
An interesting look at the Greek financial crisis as part of a larger systemic problem in the management of the EU eurozone, one that will not get fixed even if a solution to the Greek situation is found.
“What is clear is that the underlying problems of European monetary union – macroeconomic divergences and lack of fiscal policy coordination among a group of countries bound by a single currency and a single monetary policy – have not gone away. Unless these problems are addressed, even a Grexit is unlikely to provide more than a temporary respite for the Eurozone. Without reforms that bring the Eurozone toward closer fiscal integration, restore the severely compromised independence of the European Central Bank, and eliminate the massive debt overhang plaguing the Eurozone’s southern periphery countries, the future of the single currency may be bleak and brief……
Why is this the case? The current episode has highlighted and magnified three potentially fatal weaknesses of the Eurozone, none of which bodes well for the long-term sustainability of the monetary union.”
Here is an overview of the Greek situation, covering the decision to impose capital controls, some background on how capital controls work, and some of the potential outcomes of the crisis. Capital controls prevent capital flight. That is, everyone taking their money out of the banks and the country and therefore undermining the country’s financial institutions. This sounds like a reasonable policy, though one of the ironies is that once people think capital controls are going to be put in place, they have an extra incentive to take their money out of the bank fast so they don’t get caught. In the short term, they also reduce the money available for people to spend and therefore depress the economy further. In the long term, they can scare away future investment because potential financiers are afraid they will lose control of their funds once they invest in a country with a history of imposing capital controls. This is why the current global free-trade regime places so many restrictions on the use of capital controls. If investors feel secure, they will, in theory, put more money into the global economy thus spurring growth etc… etc… Nevertheless, there is considerable debate about whether it is better to break with the established economic wisdom when a country is faced with crippling debt as Greece is, or some other type of economic melt-down. Malaysia, for instance, used capital controls to help deal with the Asian financial crisis of the late 1990s.
“After bailout talks between the leftwing government and foreign lenders broke down at the weekend, the European Central Bank froze vital funding support to Greece’s banks, leaving Athens with little choice but to shut down the system to keep the banks from collapsing.”
“Banks will be closed and the stock market shut all week, and there will be a daily 60 euro limit on cash withdrawals from cash machines, which will reopen on Tuesday. Capital controls are likely to last for many months at least.”
-Greece imposes capital controls as crisis deepens
“Basically, a capital control is when the government tells you that you are no longer allowed to move your money around freely.
A government can use capital controls to order its banks to impose strict limits on daily withdrawals and overseas transfers of cash. It can also impose other measures such as limiting foreign exchange transactions.
In this case it would be to prevent euros flowing out of Greek banks – to overseas banks, into a different currency, or to be stashed under the mattress.”
-Greek debt crisis: What are capital controls?
“Until Saturday the last-ditch option to cover the IMF payment for Athens was to strike a deal on reforms and make available 1.8 billion euros worth of profits made by the European Central Bank on purchases of Greek bonds during the debt crisis.
But because Greece ended talks on a deal last night and called a referendum, the money cannot be disbursed and Greece is on course to default on Tuesday.”
-Factbox – Possible scenarios for Greece after a default
All Greek to you? Greece’s debt jargon explained
In this article, Greece’s new finance minister, Yanis Varoufakis, explains his political outlook and how it developed. Agree, or disagree, the ideas he presents here are the product of careful consideration.
“Almost all schools of thought, including those of some progressive economists, like to pretend that, though Marx was a powerful figure, very little of his contribution remains relevant today. I beg to differ. Besides having captured the basic drama of capitalist dynamics, Marx has given me the tools with which to become immune to the toxic propaganda of neoliberalism. For example, the idea that wealth is privately produced and then appropriated by a quasi-illegitimate state, through taxation, is easy to succumb to if one has not been exposed first to Marx’s poignant argument that precisely the opposite applies: wealth is collectively produced and then privately appropriated through social relations of production and property rights that rely, for their reproduction, almost exclusively on false consciousness.”
Peace talks in the Ukraine collapsed today after only a few hours. Here is a brief timeline of the crisis.
Here is Paul Krugman’s take on the Greece-Euro crisis:
“In the five years (!) that have passed since the euro crisis began, clear thinking has been in notably short supply. But that fuzziness must now end. Recent events in Greece pose a fundamental challenge for Europe: Can it get past the myths and the moralizing, and deal with reality in a way that respects the Continent’s core values? If not, the whole European project — the attempt to build peace and democracy through shared prosperity — will suffer a terrible, perhaps mortal blow.”
Analysis of the Syriza victory in Greece and what it means for the EU courtesy of the BBC:
“There are some things during the eurozone crisis that we were told would never happen.
The European Central Bank would never flood the market with new money, and Greece would never take a gamble with the radical left.
The past few days have overturned those assumptions, making this week a potential turning point in the recent history of the European Union.”
Greek elections: What now for the euro? http://www.bbc.com/news/world-europe-30906153
“A Pew Research Center survey conducted last year shows that the French held more favorable views of both Jews and Muslims than many other Europeans. Indeed, 89% of French adults held favorable views of Jews, while 72% felt similarly about Muslims.”
A sober analysis by Olivier Roy, an expert on Political Islam and broadly consistent with an earlier post:
“Radicalized young people, who rely heavily on an imagined Muslim politics (the Ummah of earlier times) are deliberately at odds with the Islam of their parents, as well as Muslim culture overall.
They invent an Islam which opposes itself to the West. They come from the periphery of the Muslim word. They are moved to action by the displays of violence in the media of Western culture. They embody a generational rupture (parents now call the police when their children leave for Syria), and they are not involved with the local religious community and the neighborhood mosques.
These young people practice self-radicalization on the Internet, searching for a global jihad. They are not interested in the tangible concerns of the Muslim world, such as Palestine. In short, they are not seeking the Islamization of the society in which they live but the realization of their sick fantasy of heroism (“We have avenged the Prophet Muhammad,” claimed some of the killers at Charlie Hebdo).”