The second part in a series of posts written a year ago.
By Pat Geary
This post was written on June 21, 2016
“Those who got the twentieth century right, whether in anticipation [..] or as contemporary observations, had to be able to imagine a world for which there was no precedent.”
The EU Economy
There is no conflicting that the UK formally leaving the EU will have a negative impact on financial markets – stocks, bonds and currency. The markets do not like uncertainty and the vote to leave is a vote for uncertainty. These effects are short-term, which can be rectified. However, a vote to stay in the EU will undoubtedly have a negative impact on the long-term economy of all its members, unless drastic changes are made.
There is no way to see the EU making a large change to their modus operandi. Recent history shows they are going to just keep on trucking. This has not worked out economically. Poorer nations are strangled under austerity and powerful countries (i.e. Germany) are forced to pay for it. The big picture shows that Europe is indeed the “sick man of the world” in terms of economic growth. Governments have been forced to pay and prop up the failing economy in Greece. European growth has been stagnant since 2008.
Not good. That is not the direction of a “recovery”. GDP growth rates since 2013 have improved, but are anaemic.
Combine the present with the prospects for the future. Over the long-term, the UK will be tied to a region that is likely to have uncertainty actually increase. There is no escaping uncertainty. Just because you know how things are today, does not mean you will know how things will pan out under the status quo tomorrow. It is very likely that the EU will crumble with or without a UK leave vote. Forces are rising in countries like France, the Netherlands, Austria and Germany – major contributors to the EU. Forces are resisting the EU in lesser powerful countries like Hungary, Poland and Greece. It is inevitable that someone will leave, which will be the first domino in a long line. This will wreak havoc on the European economy for years. There is no escaping this. The only way to reduce the impact on the UK economy is to remove itself from this part of the world and to begin to look elsewhere, to diversify its options for trade and growth.
What bothers me more is the fear mongering that is coming from the UK government, the IMF and other elite powers about the effects on the UK economy of a leave outcome. This happened during the national elections with the Tories and their tactics towards a vote for the Labour party. The tactic worked and they are betting it will work again. An assortment of economists have come out and said that GDP will decline by 2.2% in the UK by 2030. It is important to remember who produces these numbers and the agenda they have. All of these figures come from sources that have the most to lose from a leave vote, in the short-term. These economists and journalists will not be receiving a salary in 2030, they don’t really care what happens then. They only care what could happen to their wallets now.
People are being forced to vote with their wallet. It’s a strong tactic. That’s exactly what the elites want. It’s the only way their interests can be aligned with the common people. People can be conflicted on other issues such as immigration, but any support for more immigration by the government isn’t guaranteed to bring the peons in-line. At least not all of them. What better way to scare people and get them in-line than to tell them they will be poorer?
The EU can only succeed if it maintains the Euro and merge fiscal and monetary policy. The separation of these systems is not working and creates a merger of fiscal policy in any case, and one that is imposed – just ask Greece. The only options is to create a European superstate and will only lead to bitterness and resentment in many countries.
It is difficult to refute any of the short-term effects on the UK economy faced with the uncertainty of a leave decision. The long-term is less certain. Any numbers from economists should be ignored in this sense. Since when have economists and the IMF been correct about growth projections over the long-term? Did they predict the 2008 financial crisis? There will always be black swans, and the biggest risk to a black swan is something happening in Europe over the next few years. It’s time to limit the exposure to such black swans. They will always have some effect, but the UK does not need to be so close to it, or at least tied to one more black swan event than is necessary. We do not want to fund anymore bailouts than we already will have to.
The problem is these forecasts are based on isolating the British decision to leave the EU and assume everything else is status quo. This is not how the world works. There is no precedent for the set of circumstances this world operates under the circumstances of Britain leaving the EU. Everyone knows that Central Bank decisions since 2008 are leading global economies towards a global collapse and lack of confidence in fiat currencies. Brexit is just one event that will help to unleash what is inevitable in the next few years, but it is minor in comparison to what is coming. The US dollar might be the benefactor now, but its prospects are just as grim as any major western government that is heavily indebted. There are so many other possibilities. These possibilities could be damaging to Europe, which is barely staying together almost a decade after the global financial collapse.
What good is the EU if it is doomed to fail? If the UK does not leave, someone is inevitably next. The union was originally set up as a free trade arrangement, so what is the purpose of political union? The amount of regulations set by the EU are known to wreck exorbitant costs on small and medium size businesses, which make up the majority of employment in the UK. The free trade arrangements within the EU work in Europe, but they are quite restrictive for the British outside of the EU.
Many pose the threat of tariffs if the UK leaves, but the EU needs the British economy more than it needs the EU. Canada has been trying to negotiate a trade agreement with the EU for almost a decade and it’s still not done. That’s because 28 nations must fall in line for this. It would be more effective for the UK to negotiate a bi-lateral arrangement with such countries. If the EU thinks it can blackmail the UK into forcing free movement of its people for any trade deal, well, then be my guest. Britain can go on working with the rest of the world, which has difficulty trading with Europe. If the EU imposes harsh conditions on the UK, they then risk the likelihood other nations will follow Britain’s example.
Britain will be fine. Whatever the decision, they will figure a way out. The country was fine before the EU went on its hell-bent drive towards expansion, and it will be fine after. It wasn’t that long ago that all of the major economists were saying that Britain would be left in the dark by not joining the Euro. We didn’t listen to them then. Here’s one thought from a heavy hitter in support of a paper that suggested the UK should join the Euro back in 2002:
“It is for Britain to decide whether or not to join the euro – and I’m American. But it’s important to all of us that Britain flourishes. And this American can only admire the strength and clarity of the economic analysis in Why Britain Should Join the Euro. The argument is surely right.”
– Paul Volcker, chairman of the US Federal Reserve Board 1979-1987 (2002)