UK: The Kids Are All Right Post-Brexit
There has been a lot written about "chaos" in UK government and financial markets since the Brexit vote, so much so there are supposedly folks who voted for Brexit who want a do-over.
A few thoughts:
- Short term changes in financial asset prices, like bank stock prices or currency futures, are largely irrelevant in the long-term. The recent supposed "big drop" in US equities markets, for example, took the market all the way back to where it was in... March, barely 3 months ago. You will see buying in these assets in the coming days and the drop of the last few days will be largely forgotten soon. Financial markets don't react well to being surprised, but they will get over it.
- I don't see how the UK and the pound are necessarily weaker post-Brexit. The US is fine. The Swiss are fine. Heck, the Swiss have to constantly fight to keep their currency lower.
- Unlike other EU nations, the majority of UK trade is with non-UK nations. While trade with the EU will likely be on worse terms in the future (though the Swiss and Norwegians have pretty good deals), UK will be unshackled from the EU bureaucracy in negotiating new deals with the rest of the world. If the US President had any vision whatsoever, he would already have offered the UK a free trade deal, rather than being petty and saying the UK goes to the back of the line for exiting a transnational body the US would never join itself.
- Much of the "chaos" in British government can be traced 100% to the anti-Brexit folks. The Anti-Brexit folks very explicitly refused to craft any Brexit contingency plans, using threats of post-Brexit chaos to try to up the pressure against the Brexit vote. President Obama did the exact same thing with Obamacare, refusing to create contingency plans if the SCOTUS overturned key parts of the ACA, hoping to ratchet up pressure against that outcome. Had their been at least the outlines of a plan, they would be checking down it right now. Things I would do as PM on the trade front: 1. Demand the Swiss deal from the EU for Britain. 2. Approach major trading partners with offers of free trade deals. A British commonwealth free trade zone is a great idea.
J_W_W:
But if Britain were a free trade zone, how would the progressives exercise their controls over the people??
June 28, 2016, 8:44 amBloke in North Dorset:
The Swiss are just about to lose their deal because they voted against the free movement of people. Any trade deal with the EU will have to include the free movement of people, which will be a hard sell in UK at the moment.
There's some talk on the blogs I read about just declaring that we don't have any trade barriers and all are welcome. Economically sounds good, can't see it happening politically.
June 28, 2016, 9:08 amBloke in North Dorset:
If anyone is net rested in th background and possibilities of what could happen the excellent Economics Detective Radio has an interview with Sam Bowman of the libertarian leaning Adam Smith Institute: http://economicsdetective.com/2016/06/brexit-european-union-european-economic-area-sam-bowman/
June 28, 2016, 11:40 ammorganovich:
much has been made of the drop in bank stocks. it's simply not a big deal. it's just a trade getting wrong-footed.
http://www.marketwatch.com/investing/index/fx7/charts?symb=XX%3AFX7&countrycode=XX&time=8&startdate=1%2F4%2F1999&enddate=6%2F28%2F2016&freq=1&compidx=none&compind=none&comptemptext=Enter+Symbol%28s%29&comp=none&uf=7168&ma=1&maval=50&lf=1&lf2=4&lf3=0&type=2&size=2&style=1013
this is the EU bank index. yes, it dropped 20% in 2 days. but it was up 15% the prior week. it started to scream when the polls showed stay winning.
it's been getting crushed for a year. it's off maybe 6% from 8 days ago and currently rising.
this has been one of the most misunderstood events i've ever seen markets react to.
June 28, 2016, 12:10 pmZachriel:
Coyote: The Anti-Brexit folks very explicitly refused to craft any Brexit contingency plans
That would actually be the responsibility of political leaders advocating for the Brexit. As is apparent, they have no idea how to handle the situation.
Coyote: UK will be unshackled from the EU bureaucracy in negotiating new deals with the rest of the world.
UK GDP is smaller than the EU, about $3 trillion annual GDP compared to $15 trillion for the EU minus UK, so UK will negotiate from a weaker position. More important, it's very difficult to make deals with the UK, or UK corporations, when the rules are so uncertain and likely to change significantly. If Scotland moves towards independence, it further erodes the stability necessary for long-term trade relationships.
Meanwhile, London's banking sector, which generates a fifth of UK's GDP, will lose its EU passport. Banks will move to the continent. UK's credit rating has already suffered.
June 28, 2016, 1:24 pmRichard Elliott:
Not quite right on your 4th bullet. Lots of folks have been thinking about this for a long time, culminating in what is known as the Harrogate Agenda. They produced a road map which is detailed and very well though out, particularly on energy provision, which is one of the major reasons for the split, totally misunderstood by many commentators. Thousands of jobs lost because of inflated energy prices (climate change directives from Brussels). See here, but I warn you it is along read: http://www.eureferendum.com/documents/flexcit.pdf
June 28, 2016, 11:34 pmRichard Elliott:
Sorry coyote, I completely got your point backwards, you were right, but my comment is accurate despite that. Mea culpa!
June 28, 2016, 11:37 pmauralay:
The elephant in this room is that there is a plan, worked out in great detail, by Dr Richard North (Probably the grumpiest blogger in the UK!) His site is EUreferendum.com http://www.eureferendum.com. The plan, Flexcit, calls for a flexible renegotiation in stages. http://www.eureferendum.com/documents/flexcit.pdf.
June 29, 2016, 4:03 amAt 400 plus pages it is a bit indigestible but there is a shorter version.
Rumours say it is now required reading for Brexit civil servants but the media seems to have banned all mention.
The good doctor also discusses Non Tariff Barriers - all the rules and regulations which can hinder direct trade and can cost more to comply with than tariffs. (See the film "Rain Man" for an illustration of how frustrating this can be !)
Q46:
Economic plans - fatal conceit as outlined by F A Hayek. We do not want 'plans' (whoever makes them) we want it left to the markets to work it out - which they are already doing just fine. But anyway here's a plan: UK resorts to what it did before it ensnared itself in the European Project. That would be the 'plan' that made the UK the biggest mercantile empire the Planet has seen. But of course that was not a plan at all, just how it happened largely because for several centuries there could be no normal trade with Europe - Imperial Spain, Revolutionary France, Napoleon, the Prussians, the Germans.
Brexit - just like old times.
The balance of trade is in rest-of-EU's favour, they ship more to UK than vice versa: that puts UK in very strong position because harsh trade rules - on the 'you do it to me and I do it back at you in spades' - will have more detrimental effect on the EU than the UK, not least because whilst the UK's economy is growing, unemployment falling, the EU's (minus UK) economy is stagnant and double digit unemployment is chronic.
99.3% of UK businesses are small medium enterprise not 'corporations': very few export at all and even less export to the EU, yet have to tie themselves up in expensive EU red tape, which by the way is not just about products, but all aspects of employment and business. And many corporations which flourish in the UK and EU are US ones - last I checked the US was not in the EU and no trade deal exists between the EU and the USA.
The City of London is the World's, not the EU's, premier banking and finance centre, and has been for two centuries. Many of the banks there are non-European and established in London long before the EU (1993). When the UK rejected the euro, it was predicted banks would move out and the City of London would cease to be. The exact opposite happened.
Scotland is a net cost to the UK... actually a net cost to England... without it and it adding to the national debt, r-UK would be much better off, and outside the EU it will be without the massive contribution which comes out of the UK economy and goes into the EU budget to be squandered.
June 29, 2016, 4:43 amQ46:
Cameron told the EU yesterday that any trade deal between EU/UK could only be done with limits on movement of people.
June 29, 2016, 4:44 ammarkm:
In #3, "If the US President had any vision whatsoever": Obama certainly has a vision, but successful capitalism is no part of it.
June 29, 2016, 6:12 amZachriel:
Q46: That would be the 'plan' that made the UK the biggest mercantile empire the Planet has seen.
You do realize that British mercantilism was based on government protectionism? That it was backed up by its global military power?
June 29, 2016, 7:17 amNehemiah:
Obama is hoping to rule the world one day, Brexit is a step in the wrong direction.
June 29, 2016, 10:17 amMaddog:
Unilateral free trade would be the best action the UK could take.
http://www.maddogslair.com/blog/standard-of-living-is-the-stuff-we-import-minus-the-stuff-we-export
"MP: Here’s a formula summarizing Milton Friedman’s insights:
1. The stuff we import MINUS
2. The stuff we export =
3. Our standard of living
In other words, in economic terms, our standard of living is highest when we maximize imports and minimize exports, which is exactly the opposite of the political thinking, rhetoric and mercantilist policies we about from Trump and Sanders, which generally seek to maximize exports and minimize imports."
But our politicians are only persuaded by graft, and corruption, and that does not come from consumers, but from exporters, so pretty much all nations are stuck with then malignant economic need to export.
A second tier would be a free trade agreement among the Anglosphere, Nordic states, and Germanic states (although there would be no reason to limit such an agreement).
http://www.maddogslair.com/blog/time-for-an-anglosphere-nordic-germanic-free-trade-zone
And here is a post where I comment on Coyote's ideas:
http://www.maddogslair.com/blog/coyote-makes-a-good-start
Thanks for your hard work Warren!
Mark Sherman
June 29, 2016, 11:15 ammesaeconoguy:
Agreed, though euro bank stocks, specifically Deutsche and Credit Suisse bear watching.
Euro banks aren’t nearly as well capitalized as US, but in a large sense that is irrelevant, since Draghi has already pledged to do whatever it takes to salvage the situation.
June 29, 2016, 5:27 pmmarque2:
A good manager takes the time to plan for all obvious contingencies, like exit or remain. A politician will refuse to plan to try to.scare people. Cameron et el went for the scaring rather than good management.
June 30, 2016, 12:49 pmTruthisaPeskyThing:
from Warren: "I don't see how the UK and the pound are necessarily weaker post-Brexit. The US is fine. The Swiss are fine. Heck, the Swiss have to constantly fight to keep their currency lower."
July 1, 2016, 8:07 pmFear and herd mentality are strong drivers of the market in the short run. The veracity of that statement is supported by the return of U.S. equity markets to pre-Brexit levels . . . and a bit higher.
Exchange rates are much more complex. The British pound drops in value if demand drops because fewer buyers want it or if the British Central Bank increases its supply. Contracts to buy British goods in the next couple of years have not been cancelled, and only if EU buyers want to punish Britain would continental demand for the pound drop. Moreover, demand for the pound should increase as countries around the world have better opportunities to buy British goods. So I do not think drop in demand would explain a sustained devaluation of the pound. However, the British Central Bank - sensing anxiety and a crisis mentality -- undoubtedly will increase liquidity and thus the supply of the pound, so a sustained drop in the value of the pound is very possible.
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July 4, 2016, 8:18 am