by Damon de Laszlo, ERC Chairman
As we head towards the end of March, I am reminded that I guessed some twelve or thirteen months ago that Brexit would be postponed. Today one can only observe that the British Prime Minister has managed to create a staggering mess. Sadly, one must use the expression “pig-headed” to describe her continuing advocacy for a “deal” that creates a potentially long-term stalemate in negotiations and pretending that it meets the Referendum direction to exit the EU. Her own failure to keep her word that “no deal is better than a bad deal”, and her proposal that the agony of uncertainty should be prolonged, makes one suspect that her plan is to create such a mess that we remain in the EU at almost any price. Whether one believes that Britain would be better in or out, no one should be under the illusion that further prolonging the debate is not going to do far more damage to Britain’s economy than any Brexit scenario. It will also create collateral damage to the European economy, as well as making the British government look completely ridiculous. The damage to the concept of democracy will also be damaging to Western democracy’s standing in the rest of the world. The Prime Minister’s most recent act of blaming Parliament for the mess that has been created by her own lack of leadership and inability to conduct competent negotiations, is simply appalling. It’s difficult to say at this moment how a good outcome can be achieved in anybody’s judgement from our current position.
Looking for more optimistic green shoots? – global economies seem to be holding steady. The USA has the highest employment that we have seen in many years and wage growth is beginning to pick up, while inflation remains on the downward or flat trend, and there are signs that productivity is improving, which helps wage growth and general prosperity.
China is going through a major readjustment, heralded over five years ago, from an export-led industrial economy to an internal service economy with a more sustainable level of growth. China’s wages are rising and with it a general improvement in the standard of living of the world’s most populous country. The only major worry from the Far East is how far and how controlled the government will be in flexing its muscles on the world stage, but to date it has been highly disciplined in testing its expansion and influence in the world. It certainly seems to be discovering and learning from its experiments in its own particular form of economic colonisation in its ‘belt and road’ initiatives.
Asia in general is economically growing and enjoying a steady increase in prosperity and so far most of its political institutions are holding together, superficially possibly better than in the West.
Europe has its own very particular form of economic problems, the straitjacket of the EU and single currency creates enormous tensions between north and south, which has brought the economy as a whole to near zero growth. This has been exacerbated by a rapid slow-down in Germany’s industrial export- based economy as its markets in the US and China have slowed down.
The EU as a whole faces massive budgetary problems, even before it considers the enormous potential loss of revenue from the UK, the second largest contributor to the EU budgetary pot. The news from Europe is that the downward trajectory of growth seems to be flattening and it does not look as though it will run into a recession, particularly as Spain is starting to produce a significant economic recovery. The Spanish economy is beginning to benefit from the reforms it put in a number of years ago to its labour laws and managed to achieve a 2.5% growth in the last year. This is beginning to mitigate the pain from the massive unemployment and the painful drop in real wages that has happened since the financial crisis.
It is an economic lesson that, if your currency is not free then the only way that an economy can be rebalanced is by depressing wages, exceedingly unpleasant medicine.
Germany, by contrast, is suffering in the other direction. It effectively has an undervalued currency which is pushing its relative wages up and will cause domestic economic problems going forward.
We are not in a bad place economically, although politically the world is fractious and unhappy.
Damon de Laszlo
March 21st, 2019