Tag Archives: Brexit

Banking, Britain, Economic, Government, Politics, Society

Carney says leaving the EU could restore faith in democracy

BREXIT

THE Bank of England Governor has said that Brexit could restore faith in free trade and democracy if the UK leaves the EU with a deal.

In a statement that is sharply at odds with his previous warnings that Brexit could spark chaos, Mark Carney said that a managed departure would show voters that they matter and encourage them to trust the parliamentary system again.

But he also warned that a No Deal Brexit would spark an economic shock – something which he says the whole world should be trying to avoid.

The Governor said millions of workers feel let down and left behind by globalisation – and the only solution is to give power back to the people.

He added that a Brexit deal may be a step towards a world where families are comfortable with free trade because they feel in control.

The Governor said: “In many respects, Brexit is the first test of a new global order and could prove the acid test of whether a way can be found to broaden the benefits of openness while enhancing democratic accountability.

He said Brexit could lead to new “international cooperation”, allowing for better cross-border trade deals and a more effective balance of “local and supranational authority”.

Mr Carney’s backing for Brexit if a deal is struck marks a major change of tone.

He has long been accused by Eurosceptics of opposing our departure from the EU and whipping up Project Fear.

And in the run-up to the referendum, he was attacked for politicising the Bank of England when he claimed Brexit could trigger a recession.

Last year, Mr Carney claimed the vote to leave had cost households £900 each by damaging economic growth – and he has always been one of the loudest critics of No Deal.

The Bank also claimed No Deal could tip the UK into its worst recession for a century, knocking a third off house prices and triggering a dramatic surge in unemployment.

Mr Carney warns again that a deal is needed to avoid chaos – although he does sound more upbeat about the future following an orderly exit from the EU than he has done previously.

The Governor said Britain’s departure from the European Union comes at a time of growing risks for the global economy. The Canadian also said that No Deal would be “a shock for this economy”, and that UK investment has not grown since the referendum of 2016 was called, saying it had “dramatically underperformed”.

Mr Carney used his speech – given to senior business figures at London’s Barbican – to warn them that China is increasingly risky and businesses around the world are taking on worrying levels of debt.

He said: “China is the one major economy in which all major financial imbalances have materially worsened. While China’s economic miracle over the past three decades has been extraordinary, its post-crisis performance has relied increasingly on one of the largest and longest running credit booms ever.

A 3 per cent drop in the Chinese economy would shave 0.5 per cent off the UK, he warned.

On Corporate debt, he said a surge in high-risk business lending has worrying echoes of the US boom in unsustainable loans which led to the 2008 financial crisis.

Mr Carney also took a swipe at Donald Trump, who has cracked down on imports from China. The US President once tweeted: “Trade wars are good and easy to win.”

Mr Carney batted away Mr Trump’s casual brag, saying: “Contrary to what you might have heard, it isn’t easy to win a trade war.”

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Banking, Britain, Economic, Financial Markets, Government

Brexit: Economic shocks can be positive

BRITAIN: ECONOMIC

A NO DEAL BREXIT would be an economic shock on the scale of quitting the gold standard for a second time in 1931, the 1967 devaluation of the pound and being ousted from the exchange rate mechanism (ERM) in September 1992.

But such shocks, if they trigger the right policy response, don’t necessarily have to be negative.

That is why it is fascinating that the Cabinet Office is now contemplating about what “Project After” Brexit actions should be.

It should come as no surprise, then, that both the Bank of England and the Treasury have similar thoughts.

In the immediate aftermath of the 2016 referendum to leave the EU, Mark Carney played a central role in shaping fiscal policy. Interest rates were cut by a quarter of a percentage point, a £60bn round of quantitative easing (QE) was launched and an emergency £100bn line of credit for the banking system was created.

In the event of a No Deal Brexit the Bank should be able to do more. Threadneedle Street is known to believe, however, that monetary easing becomes less effective with each successive episode.

Brexit poses more of a shock to the supply-side of the economy. That means fiscal and trade actions could be more effective.

The Government – and the Chancellor Philip Hammond – is in the fortunate position of having the fiscal space to act. The budget deficit has been dramatically reduced, but debt at 81.5pc of output, and falling, remains high. Compared to Italy, Japan and the US, it is far less threatening.

Post the financial crisis, markets are much more tolerant of debt, and low interest rates mean that it is more easily serviced.

What should the Treasury do? The case for speeding up infrastructure spending, particularly in the North, with HS3 across the Pennines a priority, is indisputable, as is the need for better and improved commuter routes into Manchester, Leeds and other northerly centres.

The most direct and easiest way of shoring up confidence would be to cut taxes. Corporation tax has already been reduced quite sharply to 19pc and is due to fall to 17pc in 2020. The reduction to 17pc could be made with immediate effect and it may be the opportunity to go even further, if not down to Ireland’s 12.5pc. Gaining a competitive edge is going to become increasingly prescient.

The best way of putting cash directly into the pockets of all consumers would be to lower VAT from the current 20pc back to 17.5pc, or even 15pc, on at least a temporary basis.

Most of the doomster predictions about Britain’s prospects post Brexit have related to international trade and shortages of vital imports such as pharmaceuticals.

 

DREDGING Ramsgate harbour might help. But within international commerce, money speaks the loudest. If Britain were to cut all tariff barriers and import duties to the bone, global enterprises would rapidly deploy their best logistical skills to make sure the shelves in NHS hospitals, pharmacies and supermarkets are fully stocked.

Such policies might seem extreme. One of the biggest concerns is that with parts of the economy already operating at near-to-full capacity, too much fiscal and monetary easing might unleash an inflationary bubble which would be difficult to burst.

Renewing and creating new infrastructure is the number one priority with new runways at not just Heathrow, but Gatwick, part of that.

But when, as Remain supporters like to say, the country is on a cliff-edge and social cohesion is threatened, it is important to think outside the box.

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Britain, Economic, European Union, Government, Politics, Society

The EU has a natural propensity to haggle

BREXIT

LONG before the people of the UK voted to leave the EU in the 2016 referendum, before the term Brexit had even been coined, it was Grexit that was preoccupying the minds of Eurocrats.

Greece came close to crashing out of the single currency on at least four separate occasions after a vast black hole opened up in the country’s accounts in 2009.

At one stage in 2012, the British banknote printers De La Rue was asked by the government in Athens to make contingency plans to print new drachma notes (Greece’s pre-euro currency) in preparation for what many called the “Double D” solution to the economic problems Greece was facing: default on the country’s debt and devaluation with the return of the drachma.

Today, Greece remains one of the 17 members of the eurozone – and this fact alone should lift the spirits of the UK negotiators. Armed with her newly acquired Parliamentary majority, Theresa May returns to Brussels seeking at the very least to put a time limit on the Irish backstop deal she signed up to.

Each time a Greek default loomed into view, threatening the stability of the eurozone and raising the possibility that Italy or one of the other member countries might also head for the exit, the main protagonists – the hard-line German-dominated European Central Bank (ECB) in Frankfurt and the European Commission in Brussels – caved in and authorised a bailout.

Last-ditch negotiations, usually conducted over a weekend when the financial markets were closed, would typically go into the early hours of Sunday morning.

Late-night deals were hatched against a backdrop of TV screens showing central Athens on fire and anti-austerity protesters ripping up flagstones in the capital’s Syntagma Square.

The first £38bn bailout was agreed in the dead of the night on April 23, 2010, by the troika of the ECB, the European Commission and the International Monetary Fund. It was one of several rescue packages for Greece, some of which required a change of government to get them over the line.

 

WHAT happened to Greece is typical of the Eurocrat tendency to fudge, to muddy the waters and eventually to seek compromise in a crisis situation.

Indeed, the history of the EU is littered with examples of Britain locked into eleventh-hour talks with eurocrats as the UK has sought changes in our terms of membership.

John Major worked through the night in 1991 to secure Britain’s opt-out from the social chapter of the Maastricht Treaty which would have dictated working conditions in Britain and could have undermined the labour market reforms pioneered by his predecessor Margaret Thatcher. Indeed, she herself was a fierce negotiator in organising rebates from Brussels from the UK’s oversized contributions to the EU budget. In 1984, in the imperial grandeur at the historic palace of Fontainebleau in France, European leaders painfully conceded the famous British EU budget contribution rebate – or as the French sarcastically called it “le chéque Britannique”.

And let’s not forget that in the teeth of his promise to hold an in/out referendum, David Cameron returned from Brussels in the early hours one day in February 2016 with draft reform proposals agreed by European Council President Donald Tusk which he claimed would give Britain “special status”.

In the event, the pledges made by Brussels were so anaemic that they failed to convince British voters that sovereignty could be maintained by voting remain – a huge mistake by the eurocrats who failed to recognise the strength of anti-EU feeling among large swathes of the UK population.

Both in national negotiations and in commercial transactions, reaching an accord more often or not comes down to the wire.

With the clock now ticking inexorably to March 29, the desperation of the leaders of the other 27 EU countries to avoid an economic and financial crisis at the very moment that Germany and the eurozone are facing the bleak prospect of recession may be Theresa May’s best hope. This is regardless of how unyielding Brussels negotiators have been to date and their willingness to play havoc with business confidence and financial stability by its brinkmanship.

 

THE potential loss to Brussels of a £39bn one-off payment to a Commission cash starved as it is following years of economic slowdown, could potentially be a bargaining chip for the Prime Minister in the last-chance saloon.

In the final analysis, the anecdotal evidence of what the late-night sessions in Brussels, Nice, Maastricht and other destinations should tell us, is that it’s Germany and, to a lesser extent, France which decide.

Besieged by increasingly hostile populist movements, neither Berlin or Paris will want to make political life tougher than it already is.

The politics of the EU, at their most raw, are little different to those of the bazaar. The natural tendency should be now to relish an aggressive haggle but then, eventually, to compromise.

. See also Should we really despair over Brexit? Europe is in a mess.

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