The government is selling a deal to “deliver Brexit” by effectively tying the UK to the EU as a subordinated state without a clear way and time to leave. The “only deal” in town has been duly propped up by the scenario analyses – not forecasts – of the Treasury and the Bank of England, helpfully showing that any form of Brexit means less prosperity but leaving without a deal brings real pauperisation for the UK.
These claims are enthusiastically supported by the good and the beautiful such as Jean-Claude Trichet, former governor of the ECB, who appeared on television to warn that “no deal will be a disaster”; a rather bold prediction from the central banker, who singlehandedly helped aggravate the already brewing Euro crisis in July 2011 by raising interest rates to guard unthreatened price stability.
The scenario analyses have been torn to shreds by many, but one crucial aspect is missing. Models are by necessity simplifications of a complex reality and therefore hold some factors constant to be able to model the change of others. The government models hold the EU as a constant for the UK, but the EU is itself changing and merits a scenario analysis.
Last year, Remainers were holding up the “economic miracle” of the Eurozone as proof of what a huge mistake Brexit was. This year, Eurozone GDP growth has been lacklustre, with Germany contracting in the third quarter for the first time since 2015. France has had to modify its official forecast from the initial 1.9% to 1.7% this autumn, but some private forecasters go even lower. Italy’s forecast has also been cut back.
Business sentiment is accordingly subdued. The Gfk Group Consumer Climate Study expects “German consumer climate to end the year with losses”. Purchasing managers’ indexes (PMI) have been declining for about a year. The European Commission’s economic sentiment index has been falling for 11 consecutive months.
Several factors are at play, such as German automakers’ emission standard woes, trade war fears, and Italy’s budget challenge. The weightiest reason, however, is that the ECB’s massive asset purchase programme of EUR 2.6 trillion had its effect fully deployed by last year and is now starting to taper off. Should the ECB end its quantitative easing program as announced earlier, this will have serious consequences because all the trillions could not tape over the eurozone’s structural flaws that guarantee future problems.
“The terrifying list of things that don’t work in the eurozone”, a title in French economic magazine Les Echos in 2016, has got even longer, producing increasing imbalances.
There is an ever-widening gap between the fiscal position of the North and the South. In the first quarter of 2018, the Eurozone general debt to GDP ratio was 86.8%, but this number hides a wide range of positions from the absurd 180.4% for Greece and 133.4% for Italy, to 62.9% for Germany and 55.2% for The Netherlands. France’s public debt ratio has sharply increased in the past decade. The Target 2 settlement system’s close to one trillion-euro surplus in the favour of Germany reflects extreme structural imbalances. The crisis forced the EU to officially recognise this, so in 2011 it introduced the macroeconomic imbalance procedure “to identify, prevent and address the emergence of potentially harmful macroeconomic imbalances”. However, these can’t be eliminated because the EU is not a country and surplus countries, primarily Germany, refuse to mutualise eurozone debt. Uniform economic rules enforced for very different economies produce further imbalances.
Thus, the EU is left with calls for ever more Europe, expert studies on reforms that increasingly resemble a wish list to Father Christmas and magical tricks such as Esbies, European safe bonds which are not eurobonds but “safe” instruments created by pooling sovereign member state bonds.
The next crisis will find the eurozone with deep structural problems, record indebtedness, banks still burdened with legacy bad loans, the ECB short of tools to mitigate the effect, and a political viper’s nest of clashing interests and rebelling “flyover country”.
The EU has three options.
The leadership understands that forced federalisation would be met with strong resistance. Surplus countries are unwilling to share their wealth, and all members refuse to give up complete sovereignty. The EU will continue to muddle through in a way that staunch remainer Wolfgang Münchau of the Financial Times called “managing its relative economic decline”.
The optimal solution would be for leaders to draw the logical conclusion from the major disasters of the past years, give up the impossible dream of the superstate and start planning an alliance based on genuinely shared interests. Brexit would be the best opportunity to launch this exercise by negotiating in a constructive way instead of alienating a former member state and ally. Alas, this is the least likely outcome because the EU leadership is wedded to the abolition of the nation state, is used to ruling rather than governing, and the ruling classes have too much vested interest in the game.
The third possibility is that the leadership will realise that the experiment has failed but refuse to abandon it. In a hopeless situation, sometimes the best defence is attack. Merkel has called on EU countries to “give up more sovereignty”, and on France to share its Security Council seat with the EU, in practice strengthening German dominance. Merkel and Macron have both called for a “real European army”. The migrant situation, terrorism and civil unrest à la française may be construed a justification of extraordinary measures. It is just one step from here to rely on a “European army” to help member states keep “law and order”.
Which scenario would the UK be part of?
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