by Damon de Laszlo, ERC Chairman

Damon de Laszlo

Damon de Laszlo

Brexit continues to give one the feeling that we are living in a waking nightmare.

Since I last put pen to paper on the 11th December, which I take the liberty of attaching as a reminder of how far we haven’t got, Parliament has substantively voted down the Prime Minister’s Brexit deal – 432 to 202.

British negotiators have achieved the virtually impossible situation of alienating everyone by sticking doggedly to a deal that is not a deal and would have left Britain virtually for ever in a limbo relationship with Europe.

We now seem to be faced with the default option of leaving without a deal, or an extension of Article 50 to provide more time for negotiation, which is effectively what the government proposed ‘deal’ is, but the extension option would have to be agreed by the 27 EU members as well as the Commission and the European parliament, an unlikely idea.  While ‘no deal’ could cause some havoc – this is an understatement – the reality is that the pragmatic result will prevail:- Ten thousand lorries a day will NOT back up on the motorways of France and Britain – unless the governments in France and Britain decide to cause this to happen.  The French have already put in place plans to deal with customs and veterinary problems with a fifty-million euro budget allocated, and have further announced that they would allow UK companies and professionals to continue operating on French soil for the time being.  We await a similar announcement from the British government.

On the financial services front we have seen, largely unheralded in the British Press, agreements being reached on derivative trading and investment management. EU and UK regulators realise that bringing the financial services industry to a halt on the 29th March would cause complete financial chaos across Europe.  The recent publicity about the problems of the airline industry at Brexit have been given time to be sorted by Brussels announcing that the deadline for shareholder make up has been extended by seven months and other regulatory requirements are likely to be ameliorated, at least for a period.

The Irish border issue seems to be discussed in some abstract form of an almost religious nature.  Ireland has already said it will not build a border, the British government has said the same, so it is difficult to follow who is actually going to do the building – perhaps Trump!   The current border is open despite different tax rates for VAT etc.  There would be an issue in the longer term if an agreement was not sorted out,  as trade could be diverted through Ireland, avoiding punitive EU tariffs on food and cars.   Or I must be missing something?

We are faced with the problem that those who are worried about the direction f travel of Europe into a Federal state with its own army etc. and its lack of democratic accountability, are a diverse group without cohesive leadership.  The Remainers, on the other hand, are happy to disregard the referendum and believe in Europe, largely with its direction that it is a statist institution where the messiness of local politics doesn’t carry through into the government of the whole project.  Remainers are, therefore, happy to maintain the status quo or push the final decision into the future.  Proposals floated for another referendum, or an election require the suspension/postponement of Article 50 and would create a nightmare of political polarisation that would discredit the democratic processes.

The economy so far has proved extraordinarily resilient in spite of all the disaster scenarios that have been promulgated but pushing the negotiations beyond the 29th March into an indefinite period of limbo would start to have a really damaging effect.  The Prime Minister observed over a year ago that ‘no deal’ was better than a bad deal.  By ‘no deal’ she was implying the so-called Hard Brexit, but no deal and endless negotiation wouldn’t be bad, it would be catastrophic.

The world, however, continues with more serious issues.  The USA is proving robust and producing steady growth in spite of having, or perhaps because, there is little by way of actual government.  The US/China trade spat is, however, potentially dangerous.  If Trump does not resolve the 25% tariff impost on China’s goods that is looming in the next few months, there could be a lot of damage to both economies.

Europe as a whole is on the verge of tipping into recession as its dependence on the German economy is becoming more and more apparent.  Germany, in turn, is highly dependant on global exports, particularly for motor cars, as motor car demand has dropped between 15 – 20%, which is exacerbated by the abrupt change of demand away from diesel cars.  This particular problem for Europe will be compounded if the political will is not found to sort out trade on the UK/European border.

With US elections looming next year, it is probable that US/China trade issues will be resolved in the fairly near future and provided Britain exits the EU on the 29th March, the tariff and legislative issues will get sorted relatively quickly.  Then the global economy can continue growing at a steady, albeit slow rate.

The sound and fury of the current debate is obscuring the possibility for stable global growth for the foreseeable future.

 

Damon de Laszlo
February 4th, 2019

 

Posted by Aimée Allam