How trouble in Europe might trigger a global debt crisis
Richard Harris says the EU has more to lose than the UK in the Brexit battle, for Britain’s departure might mean the beginning of the end of European federalism. And if the euro splinters and weakens against the US dollar, it may hurt those countries with dollar debt
Travelling around Europe makes one fully appreciate the European Union project. The four freedoms allow access through borders across the continent for goods, services, money and people. You can use your smartphone everywhere for no extra charge, consumer rights are uniform, and it is a blessing to spend one set of banknotes in most countries.
These laudable aims have been brought into reality by the EU, but dangers lurk. The federalists who run the European Commission on a day-to-day basis demand that one size should fit all. However, the individual countries sometimes require different sizes in varying areas of policy. The democratic Council of Ministers spends much of its time fighting domestic political battles at a continental level, so the commission can easily outmanoeuvre them.
I recall talking to a former Andorran finance minister about negotiating with the EU over the Financial Action Task Force’s rules on money laundering. The Europeans put him in a room and said, “Just make this easy for all of us; stay here until you sign our document.” It was less of a negotiation and more of a command from an appointed functionary to an elected representative.
The tactics were the same in 2015 when Yanis Varoufakis, the then Greek finance minister, was negotiating Greek debt solutions with the EU (see his book Adults in the Room). Greece is bigger than Andorra and its huge debts threatened the security of the European financial system (aka the beloved euro). The many competing entities seemed to argue against their own interests to save face, positions or jobs, and it made honest negotiation impossible. Agreements reached in private were often ignored in front of the cameras.
In Greece’s case, the EU caved in to political pressure from Germany – Chancellor Angela Merkel, and her then finance minister, Wolfgang Schäuble. Eventually, various players, including the International Monetary Fund and the European Central Bank, cowed the Greek government into submission – into signing a loan deal it could never pay back.
The EU bully tactics worked for nearly two years on Britain, too, as British negotiators failed to recognise Europe’s well-flagged tactics. Arrogant European civil service mandarins will not compromise on the indivisibility of the four freedoms and insist on preserving the status quo, including their fat pay packets. But unlike Greece, Britain can afford to just leave.
The EU has more to lose than Britain, for an easy Brexit may encourage the beginning of the end of European federalism. More importantly, the power to ratify the Brexit deal rests not with negotiators but with the British Parliament, in which no side has enough votes to get any kind of deal through. I cannot see anything other than a “no deal” on a British exit from the EU – or more accurately, a “no-deal deal”.
In that event, the British government is preparing temporary arrangements to preserve trading links. A no-deal deal should cost both sides a great deal in lost economic activity but unofficial arrangements could keep things going such that all sides may be able to declare victory without sacrificing their principles.
But there are only so many big battles Europe can fight for the single currency before it splinters and possibly triggers the next global financial crisis. Yet another battle began last week between the EU and “disobedient” Italy over the latter’s budget plan. Any splintering will be intensely damaging to the euro and to one of the most important relationships in the world’s biggest marketplace – the dollar/euro cross-rate.
Why is this relevant to Hong Kong? Any dramatic weakness in the euro means dramatic dollar strength. The world’s Achilles' heel is that about 30 per cent of the global debt mountain is denominated in dollars. A rising greenback will put severe pressure on confidence in the ability of countries and companies to pay back the debt.
This is unlikely to happen just yet. Global trade tariffs, China’s weakening growth, a rise in US Treasury rates, even a cack-handed ejection of a journalist from Hong Kong – all these could have butterfly effects, causing corrections in stock markets like we are seeing at the moment. But there’s a big difference between a correction and a crash: a real global crisis needs a real global cause. And that could just be sustainable strength in the dollar/euro cross-rate.
Richard Harris is chief executive of Port Shelter Investment and a veteran investment manager, banker, writer and broadcaster, and financial expert witness