Wednesday, October 26, 2016

Future Tense

I think the major shock about the UK vote to leave the EU was the transformation in British culture that the vote seems to represent. From having been in the vanguard of the global economy and the globalized society, the UK seems to have rejected much of what it seemed to stand for. The aftermath of the vote- racist statements, racist attacks and all seemed to have turned the conventional wisdom about Britain on its head. The country was not as open or tolerant or globalized as it purported to be. This is despite the fact that a significant faction of the Leave campaign believed that the the problem with the EU is that it is not globalized enough. The reality is that whatever the Libertarians amongst the Leave camp thought they were getting, it is now all too clear that the isolationists, not the globalizers, are the big winners from the vote... at least so far.

If Brexit is a process, not a destination, as we are now being told, then it is still totally unclear what the destination might be. One nasty shock for the incoming May government has been that the option that would probably be accepted by the majority of the the UK- a kind of associate membership of the EU, via either the EEA or some kind of bespoke agreement- now looks by far the most difficult solution to bring off. The confrontational attitude adopted by the UK government has met its match in the Juncker Comission, which has wasted little time in inflicting as many petty humiliations on the new PM as possible. The appointment of Michel Barnier as the Commission's negotiator was the first, followed by the repeated cold shoulder to the UK at every meeting, including forcing Theresa May to wait until 1 am to address the meeting of the European Council. I suppose we can hardly blame the Commission for taking the hump against the UK, particularly since it reflects the deep anger that many governments feel about what the UK is trying to do. As Xavier Bettel, the Luxembourg Prime Minister Minister puts it  "Before they were in and they had many opt-outs; now they want to be out with many opt-ins.

Meanwhile Conservative blow-hards, such as Bernard Jenkin, insist - with precisely no evidence- that a total withdrawal from all form of EU collaboration was what was voted for on June 23rd. 

The choice is becoming stark: national humiliation as we create mayhem in much of our economy and face a serious and prolonged economic crisis through breaking all ties to the EU, or national humiliation as we seek to reverse the decision taken on June 23rd. As the storm clouds gather, there are more than a few people in London and in Brussels who believe that the UK may indeed change course. The Conservatives have sought to own Brexit, but now it is clear that whatever Brexit does in fact mean, it is bad and the Tories will get the blame. The big swing in Witney and the likely gain of Richmond Park is putting the Lib Dems back on the map, and despite the current high poll ratings for the Conservatives, the reality is that these leads could be very shallow indeed. 

Yet despite the growing economic and political storm in London, we can not ignore the abject failure of the Juncker Commission. The hapless former Premier of Luxembourg has now presided over the debacle of Brexit and the seeming collapse of CETA with Canada. This second failure is possible of even more moment than the first. The fact is that the crisis in CETA speaks to the very worst paralysis of the EU, and a failure to ratify would demoralize even the most fervent defenders of the Commission. Whereas the Commission has little choice but to be reactive to the UK, they have proven unable to be proactive to address the problems with CETA ratification. Clearly this bodes very badly for the far more complicated discussions to come with the UK. The fact is that the Commission may not be able to deliver any kind of soft Brexit- regardless that this is the majority will in both the UK and the rest of the EU.

Faced with the choice, it may become literally impossible for the UK to withdraw. Certainly there are voices on both sides of the channel that are beginning to think that, as the political pendulum swings in the UK strongly away from Brexit, that the British may opt for the economically less painful version of national humiliation rather than another. The paralysis that the Juncker commission has engendered does not seem to have been shaken by the prospect of the British departure, but just possibly it might be shaken up by a British lack of departure. 

Maybe the Brits will return to the global future after all.

Wednesday, October 12, 2016

The Markets verdict on Brexit is coming & it will be ugly

80% of the British press is under the control of off-shore domiciled billionaires. These shadowy figures: the pornographer Richard Desmond, the sinister Barclay Brothers, the oafish Harmsworth, and the borderline criminal Rupert Murdoch have established a hard right-wing agenda. The press, especially titles owned by the creepy and boorish Mr. Murdoch, have a well merited reputation for powerful lobbying in support of an extreme right-wing agenda. Since the referendum, their shrill support for the ending of all ties to the European Union- the so-called hard Brexit- has pushed the Conservative government to ever more hardline positions.

However, despite the propaganda and the contempt that these newspapers have directed towards the near majority that preferred to stay in the EU, reality is- finally- beginning to bite.  The extreme position adopted by the May government has a price, and it is one that very few people on any side of the referendum debate would have been prepared to pay. The fact is that there are many fundamental reasons why a "hard Brexit" would cause significant economic damage, and the problem is that even the large-scale devaluation of Sterling that has taken place since the referendum debacle will not much ease the crisis to come.

The conventional wisdom is that the fall in Sterling will reduce costs and make exports competitive, but this is to misunderstand the huge changes in the global supply chain over the past few years. British exports in manufacturing are largely made from components that are imported, therefore the conventional wisdom that a devaluation makes the UK a more competitive exporter no longer truly holds. All that is going to happen is that the country will reignite a level of inflation that will erode the currency still further, without any improvement in the UK current account. In the quest for greater productivity there will be a need to shed jobs, while the government sector now faces a double whammy of a lower tax take, a higher social security bill, and rising gilt yields, and confidence in the UK continues to fall. 

Hard Brexit is a vicious circle. The expulsion from the single market that  Mrs May now says could happen in January 2019 is going to cause a rout in several critical sectors of the UK economy. Confidence is being eroded to the point that Credit ratings are coming under critical review and the negative outlook is being priced in. As long as Hard Brexit is the policy, there is no technical support for Sterling in the medium term above about 95 Euro cents, and if the Market continues to take a dim view of the competence of the May government, we could even see Dollar Parity in the short/medium term. The currency rout now taking place is already beginning to see the beginning of a rout in gilts- a 5% yield may be surprisingly close, and as we know this could in turn lead to the overstretched mortgage market also being pushed to breaking point, with a breakdown in property prices quick to follow and a major banking crisis the inevitable coda. Meanwhile the lackeys of the right wing press, like Ambrose Evans-Pritchard, suggest that the prospect of this major discontinuity is a good thing. According to their world view- backed up by whatever bat-squeek of hope they try to find in the gathering gloom- the UK was over indebted and living high on the hog, so that a collapse was inevitable. Yet the fact is that the market is delivering a verdict on the politics. Any sign that Brexit may be soft rather than hard and Sterling recovers a smidgeon. 

Yet Mrs. May made her case: "If you are a citizen of the World, you are a citizen of nowhere" is a phrase that will haunt the rest of her premiership. Business hates it. Universities loath it. It is a contemptible manifesto of Little Englander provincialism, and it will ultimately fail. The price, however, will be the prosperity and the stability of the the UK.  On June 23rd the British people did not vote to make themselves £66 billion poorer- and the absurd lies published by the verminous Mail, Express et al does not change the fact that the consequences of the vote will be deeply unpopular.

Mrs May currently has a Parliamentary majority of 12. Over twenty seats are currently the subject of Police investigations as to the legality of the Conservative expenses claims. That is not something the right wing press wishes to discuss.

As the chill winds of the Brexit Autumn turn into the bitter frost of Winter, one wonders how far the Tories can push the Bond Market before it bites back. Then the posturing fools of the billionaires' supporters club can face the wrath of the rest of us.