In response to an FT article by Martin Wolf on 29th November 2016, entitled ‘A smooth post-Brexit transition will be vital’
“The UK is a representative democracy. The repository of the sovereignty is parliament. It has to oversee Brexit. But only the government can decide how to proceed.
In so doing, it must remember what voters did not decide in the referendum: they did not vote to turn the UK into Singapore; they did not vote to make the UK’s relationship with the EU the same as Japan’s; they did not even vote explicitly for immigration controls. These options were not on the ballot.
It is consistent with leaving the EU to remain in the single market like Norway, enjoy a free trade arrangement like Switzerland, or be inside the customs union like Turkey. Brexiters may believe they know what Brexit means, but that is to be decided…
An exit deal must be ratified by March 2019. To have any chance of that, it must be agreed some six months before then. If, as seems likely, it takes at least two months for the EU to agree a response to the UK’s request, that leaves 16 months, at most, for the negotiation. Worse, the German elections occur next autumn. In practice, that might reduce the slot available for serious talks to about a year” – Martin Wolf
Thanks Mr Wolf. You have analysed the key ingredients of the forthcoming Brexit ‘casserole’ – the trading arrangements. You are also correct to emphasis the time pressure on this process – the time spent in preparation of the ingredients is important, as is the time in the ‘oven’ of the negotiating process. Anyone who likes a good Indian meal, as I do, will know the expression ‘never hurry curry’. In my experience the same thing goes for any good meal…and the same thing goes for any good negotiation or trade deal.
The area that I think needs more analysis is the ‘heat’ of the oven – the political and financial environment in which this is taking place. Again, you are right to mention the upcoming election in Germany. I believe the elections in France and the Netherlands will also play a crucial role. But of equal importance in my view…we need to look at the prevailing financial and monetary conditions - in short I believe this oven is going to get very hot.
Since the financial crisis the ECB has ‘contained’ a systemic banking crisis that has threatened to break out periodically - one that has required emergency action in Ireland, Cyprus, Greece and Portugal. It has also had to manage significant threats from Italy, Spain and latterly even Germany - with the weakness in the balance sheet of Deutsche Bank. In order to prop up the value of collateral on bank balance sheets, the ECB has reduced interest rates to negative territory, and raised bond prices way beyond any realistic assessment of their mark to market value, through its QE funded bond purchases.
Today, the weakest point in the banking system appears to be Italy. Irrespective of the choice that Italy makes in Sunday’s constitutional election, it looks to be on the verge of a major banking and economic crisis. The problems go deeper than just the banks. The underlying issue, which has received insufficient attention in my view, is the health of Italy’s private sector, as expressed through its non-performing loans. These currently stand at 18% of GDP. Bad enough you say…but it’s worse than that. Why? Because:
1. The public sector in Italy is 52% of GDP
2. The NPLs are concentrated in the private sector
3. Ergo NPLs are 40% of private sector GDP
4. The NPL problem is probably under-reported and worse than officially recognized. If we are honest – problems always are whether you’re looking at issues in London, New York or Timbuktu.
The upshot is that even if the banks are successfully bailed in or out, it will not resolve the underlying problems in the economy.
My purpose here is not to pick on Italy, or even to criticise the central bankers (I’ll leave that for another day!). The larger issue is that any realistic analysis of the challenge facing the British government and the EU right now…has to include a long hard look at the bigger picture…which is this:
We are still in the midst of a financial crisis that broke in 2008, which was papered over…with paper. None of the systemic problems have yet been solved. Any meaningful solution will have to be systemic – which includes debt forgiveness and restructuring, reform of the monetary system and bond markets, as well as changes to fiscal policy and taxation.
So…important though it is to get these negotiations right for the UK and the EU, the challenges we face as a continent, are much larger than Brexit…but even worse than that…the can is still being kicked down the road.
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Postscript:
One reader suggested that in this piece I was ducking my earlier decision to vote leave. In case my position is unclear to anyone, here is his challenge and my reply:
Other reader: “Yes and all Brexit has done is provide more cover & distractions to allow the can to get kicked even further down the road.
And you in your infinite wisdom were an advocate of this idiocy.
In your much admired and recommended (by me included) and wise other posts you have identified major problems at the heart of global financial and economic system.
Brexit in no way solves for or even steers us towards remedies for any of this. And most certainly not of all in the UK, with the nutters we now have running things.
On this issue you were as blind a fool as to compare with all those you frequently rail against.
But you seem to be ducking your head on responsibility now”
MarkGB: Our policymakers need no further excuses to kick the can down the road. They kick the can down the road because they are scared and they don't know what to do.
As for ducking my head - No - I would vote to leave if the vote was tomorrow, for the same reasons as before. Politically - because I'm a 'small government classical liberal' for want of a better phrase. Economically, because I believe that further centralisation in a economy that is a dynamic complex system (not an equilibrium system) is a recipe for disaster.
Re this piece I concentrated on the big picture because that is what I believe to be crucial - Brexit or no Brexit.