The Guest Blog

Brexit, Schmexit…

Philip Geddes was European Editor for Financial Times Television for ten years in the 1990s. He then worked as an adviser to the Commission and other European bodies for 15 years.

Europeans, feel for the suffering voters of Britain ! Accustomed to short three week election campaigns, the long suffering British now face a four month campaign on the issue of Brexit. Exhaustion is already setting in. One commentator has resorted to Shakespeare in exasperation it is a tale, told by an idiot, full of sound and fury, signifying nothing.[1]

According to British media, the deal has changed everything…or nothing. It depends where your start point is. Continental commentators, on the other hand, think it may have set a precedent. Global intelligence company Stratfor said recently on Euractiv “the deal has put an end to the idea that all EU members will perpetually seek to integrate into a European superstate.”

If that’s right, the only logical thing is for the UK to vote for Brexit, and the EU to ignore that. The commonest line at dinner parties in Britain these days is that we sorted out Napoleon, the Kaiser and Hitler and kept the Soviet Union out of Europe (getting few thanks in the process) and we are fed up with sorting out mainland Europe’s problems. But if the deal is a real change, it would go completely against the dynamic of the EU today. The EU’s two central planks – the Eurozone and Schengen – will only work with more Europe, not less Europe. Indeed they may require full blown political union if the EU is to survive.

The Eurozone crisis has managed to keep off the front pages for a few months, thanks to several ECB policy fudges, huge quantities of easy money, and reader boredom, but it hasn’t gone away. The sluggish Eurozone economy is still the biggest drag on world economic growth, with the gap in competitiveness between the strong and the weak Eurozone nations remaining obstinately large. Many European banks with weak balance sheets are being kept afloat by cheap money from the ECB. It is only a matter of time before the next crisis – probably in the bond markets – hits the front pages again.

The German Government, (the biggest beneficiary of the €) seems about to ensure this happens. A government proposal to impose “haircuts” on the holders of sovereign debt – extraordinarily reasonable to long suffering German taxpayers – and backed by the Bundesbank and Wolfgang Schauble, the Finance Minister, would strike a fatal blow to any common currency zone. A central principle of single currency is that the debt of one is the debt of all. You are probably pretty keen on that idea if you are one of the Italian banks which – courtesy of cheap ECB funds – are holding €400bn of Italian government debt.

Haircuts are not very attractive to those with little hair in the first place. Ask the Americans (who have had a common currency zone for 200 years) – in 1839 the states of Maryland and Pennsylvania defaulted on loans in defiance of US federal authorities. The result was a prolonged collapse in US government debt values, and the proposal in London, holder of most US debt, that a ‘lunatic asylum for the American nation’ be created[2]. In fairness, Professor Peter Bofinger, one of the wise men on Germany’s Council of Economic Advisers, has described the move as “the fastest way to break up the Eurozone.”

The Schengen migration crisis also requires determined common action and more, not less, political union. Currently – and my maths may not be up to date – 9 EU Member States are in breach of EU law or international agreements in their reaction to the migrant crisis. And it is only going to get worse in the coming year. In January at the World Economic Forum in Davos, Christine Lagarde of the IMF predicted that 1.3m irregular migrants could seek entry into the EU in both 2016 and 2017. Europe is already a long distance away from any solution to a problem that is going to get worse.

The debate on the consequences of the UK leaving the EU has so far concentrated on what might happen to Britain. But what would be the impact on the EU if Europe’s 2nd largest nation, with the 2nd largest – and fastest growing – economy in Europe, votes to leave ?

In an article a few months ago, I likened the EU, in the eyes of the media, to the liner Concordia, steering ever nearer the rocks. If the business class passengers take to the lifeboats, what message of confidence would that send to other passengers ?

[1] William Shakespeare, Macbeth Act 5, scene 5

[2] Inside the Bank of England, by Philip Geddes published 1987 Boxtree

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