With the world economy on the brink, Brexit negotiations aren’t the place to settle political scores
The British split from the European Union needs to handled with maturity and cool heads
“The Brexit vote has the potential to create new headwinds for economies around the world, including our own,” said US Federal Reserve governor Jerome Powell on June 28 in what could prove to be an understatement unless politicians in Europe avoid grandstanding and face facts.
The harsh reality is that if Great Britain’s exit from the European Union is mishandled, it could turn into a Lehman moment with implications for Asia and indeed the global economy.
It’s time to dust off International Monetary Fund (IMF) Managing Director Christine Lagarde’s memorable phrase from June 2015 on Greece’s plight and make sure there are “adults in the room” for the negotiations.
Perhaps the start point should be the existing trade relationship between the United Kingdom (UK) and the European Union (EU) in general and with Germany in particular.
“In the three months to April 2016, the UK’s trade in goods deficit with the EU widened by £0.6 billion, to a record three monthly deficit of £23.8 billion,” said the British Office of National Statistics on June 9, underlining the fact that the EU sells a lot more to Britain than the United Kingdom exports into the EU.
A bitter divorce would therefore have material negative impacts on EU exporters and would not be in the EU’s self-interest.
In the case of Germany itself, 2015 data released on June 20 by the German Federal Statistics Office, places Britain as Germany’s third largest export destination behind the United States and France.
Germany ran its second-largest trade surplus with the UK, exporting some €89.3 billion of goods there while importing British goods to the value of €38.3 billion.
In contrast, Germany ran a trade deficit with China, exporting some €71.4 billion of goods there while buying in some €91.7 billion of Chinese goods.
Seen in that light, a bitter Brexit divorce that hits demand in the German and British economies might also have negative implications for China’s exports to both nations.
Now understandably the European Union will not wish to encourage the notion that leaving the “club” comes easy, although some would also argue that such an attitude is hardly an attractive trait, but surely a level-headed approach needs to win out.
A succession of euro-zone crises has, in each case, seen the can effectively kicked down the road, and every time, as the German taxpayer sees it, Germany has effectively picked up the tab.
Therefore if the German economy takes a hit as a consequence of a bitter divorce between Britain and the EU, then Germany’s ability to keep funding the unresolved problems of other countries in the euro zone becomes harder even as the economies of those same nations are also negatively impacted by deterioration in trade with the UK.
As regards the view from China, or indeed Asia as a whole, the departure of Britain, a net contributor to the EU’s coffers, can hardly be seen as a positive for the European Union.
Globally, investors have logically sold the British pound on the referendum outcome but they have also sold the euro.
Even the yuan has weakened versus the greenback as global investors have eschewed risk in the aftermath of the vote for Brexit and opted to place their money into safe havens.
That has largely meant, at least for the moment, capital flows into the US dollar and in particular into the safe haven provided by the US Treasury market.
If the markets conclude that calm heads will prevail in the Brexit negotiations there is no reason why the situation should worsen. It might even reverse somewhat. But if markets draw the opposite conclusion then there is potential for massive global economic dislocation.
The bitterer the Brexit negotiations become the more nervous markets will get and that nervousness, based on the Lehman experience, results not only in continued flight into US dollars but also the hoarding thereof.
Commercial banks become wary of lending to other commercial banks and the plumbing system that is essential for the smooth working of the international banking system becomes blocked.
That’s a global problem, even with central bank swap lines in place, as commercial banks have to fund trillions of dollars of loans.
Negotiating the terms of the UK’s departure from the EU might be nominally a European matter, but if it goes ahead, the world economy is at risk if the divorce becomes rancorous. Asia must hope that there will indeed be adults in the room when negotiations proceed and that an appreciation of the greater global economic good trumps the desire for political point-scoring.