Tag: Greece

Why We Should All Vote Against Brexit

Author
Angus Dent
Date

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This post is made largely in response to an article written by Nicolas Stone for Economics21 and reproduced in CapX, see http://www.capx.co/external/americans-should-urge-brits-to-vote-for-brexit/.

I would summarise the argument put as:

  1. The EU is an undemocratic mess that restricts trade and therefore prosperity.
  2. The UK’s trade with the EU is in terminal decline, whereas its trade with the rest of the world is increasing.
  3. The UK should therefore get out before the EU drags it down in to the mire of economic stagnation that currently afflicts the remainder of the member nations.

I agree that the EU is an undemocratic mess that over-regulates and thereby probably restricts trade. The UK joined the then European Economic Community on 1st January 1973. That’s more than 42 (yes, forty two) years ago. The problems occurred on our watch! This was not something that was forced upon the UK last week. This is something that the UK allowed to happen to itself while it was disengaged.

I do not agree, however, that the EU’s economy is in terminal decline… and maybe the stats don’t really say that either. There’s always a risk of fighting the last war when using statistics, which focus retrospectively. While the 2Q15 GDP growth figures for German and France are lacklustre, those for Spain appear to be better. Even as I write now from South-West France I see signs of a recovery, with homeowners beginning to work on their properties once more.

Source: http://www.cer.org.uk/sites/default/files/imagecache/spotlight_pages/images/spotlight/in_the_press/2014/commission_smarket_sm_sl-1402405845.jpg
Source: http://bit.ly/1HVvcCD

Our nation’s attitude to the EU has always been to reap the benefits of free trade and avoid the harder stuff, leaving that to the Brussels-based bureaucrats and in the process turning those bureaucrats into bogeyman figures. This is a ridiculous attitude to take. These are our neighbours who have organised a club that we voted in favour of joining. We should have spent the last 42 years helping them, putting our energies into a better EU for all members rather than some form of super membership for the UK. Increased democracy within the EU would strengthen members’ economies by homogenizing trade rules for all.

The notion that the UK can easily replace EU trade partners with members of the Commonwealth is fanciful. That Britain’s international trade has increased in recent years is good news. Britain should therefore, as a member of the EU, push to lower the EU’s trade barriers with the rest of the world. Free trade across the globe is the bedrock of economic prosperity, not free trade for the (British) Commonwealth (Empire). I thought that lesson had been learnt many years ago.

The alternative of negotiating a Swiss type deal with the EU, thereby keeping the vast majority of British EU trade, simply doesn’t ring true with me. I doubt if we take our ball home that former partners would feel goodwill towards us and agree a treaty that is principally for the UK’s benefit. One must also consider that “Brexit” would be a costly, drawn out affair full of legal quagmire and political gridlock. Indeed we can be certain there would be no rush from the EU side, after 42 years of wasting time as a disingenuous member of their club.

The UK is not the only state within the EU that has tried to use the system for its own benefit, to the detriment of others. The two largest economies within the Eurozone are also guilty of this. Germany has imposed on Greece a bailout that is punitive, unworkable and against the diplomatic bonhomie that was intended from its inception, whilst its manufacturers continue to ram under-priced goods down the throats of poorer EU members. France, meanwhile, has always pandered to its farmers and supported the unworkable and unaffordable Common Agricultural Policy.

Yet the opportunity to make the EU more democratic, dramatically lower the hidden trade barriers and form a global hub of economic prosperity still exists. Unfortunately I am not sure that the political will remains. And Britain has wasted its political capital for the last 42 years. However, I would argue that there is still time and that the potential benefits far outweigh the risks.

 

Grexit or Gerxit?

Author
Angus Dent
Date

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Greece is saddled with debts on a scale that, when compared with its GDP, no nation has ever repaid. There seem to be only two possible outcomes: default and become the new Albania (a country locked in isolation and spiralling into decline for the next 50+ years) or devalue.

 

When the Euro Zone was formed, the economies of the joining countries should have fitted within certain economic parameters; the failure to enforce stringent “convergence criteria” has come to haunt the Euro area, worsened by the economic calamities of 2007 / 08. Today, while the Greek economy is a basket case, it is perhaps most closely aligned with the economies of Italy, Spain, Portugal the Balkan members of the EU and maybe even France. The countries that are most clearly out of step with the economies of Greece and its neighbours are those of Germany, Holland, the smaller countries such as Luxembourg. Germany has been able to use the Euro’s weakness to export goods to the weaker European nations at cheap prices, but without much foresight into how they would recover the IOUs.

 

The European Coal and Steel Community agreement of 1952 is the cornerstone of the EU and the Euro Zone. It was ostensibly an agreement to prevent any further wars between France and West Germany. It achieved its primary objective, but it was far from flawless. The community had little effect economically; coal and steel production was influenced more by global trends. The crisis in Greece may yet prove that the European Union is inherently flawed from an economic standpoint; it remains to be seen whether its political advantages can help rescue the Euro Zone or prove so strong that it wrecks the whole European Project. Could the radical option of a German exit from the EU be the most sensible alternative solution? The theory is certainly not as stupid as the inevitable copy-cat portmanteau.

 

Grexit gerxit

 

“Gerxit” might not only address Greece’s problems but also help many other countries begin to address their trade imbalances. As a soaring Deutsche Mark would make imports from Germany more expensive, other countries would be able to export at competitive prices. The cheap currency would make importing goods from the PIIGS (Portugal, Italy, Ireland, Greece, Spain) an attractive proposition, and prevent the need to cut high labour costs by reducing the minimum wage – particularly an issue in Italy. The PIIGS would grow at the same pace until it would be economically viable for Germany to re-join a balanced single currency. Germany, in the interim, would benefit from a strong and stable economy.

 

If Gerxit is the answer, it would require a huge expenditure of political will and a readiness, on the part of the Germans, to take the pain of a contracting economy. Merkel is not going to give up on the Eurozone just yet. And, aside from the political stumbling blocks, Gerxit has its fair share of economic barriers as well. In 2012 a Bertelsmann Foundation study found that leaving the European Union would cost Germany around 0.5 basis points of GDP percentage growth over a period of 13 years, or €1.2 trillion. An estimated 200,000 people would have to be made redundant. There would be trade slowdown as a result of currency conversion and exchange rate fluctuations.

 

But pondering the effects of Gerxit remains an academic exercise. For following considerable and far from unanimous debate, the Bundestag have decided to allow negotiations on a €86 billion Greek bailout deal, kicking the can down the road and probably the wrong road at that. At best, Judgement Day has been adjourned; Europe’s political and economic future again hangs in the balance and the UK remains disengaged. Even though the UK is outside the Eurozone, complete disengagement from next door’s crisis seems incredibly foolish. As the UK has little exposure to Greece it would be in a good position to broker a deal to resolve the crisis. Leadership, rather than intimidation and self-serving diplomacy, is called for.

 

I was recently reminded of a joke that alludes to the Germans’ handling of Greece’s fate as similar to the doctor who gave a patient six months to live. When the patient failed to pay up the doctor gave him six more months. Merkel has recognised that “death”, in this case, is the “chaos” of Grexit, a move that has next to no winners and millions of losers. Perhaps a more relevant cry would be “Physician heal thy self”.

How will a “no” vote by Greece affect UK business?

Author
Angus Dent
Date

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The Greek debt crisis that has been troubling Europe since 2010 will come to a head this Sunday when the country holds a referendum on whether to accept the bailout conditions put forward by the so-called troika of lenders – The European Commission, The European Central Bank, and the IMF. The rather wordy question that will be put to the Greek people will require a ‘yes’ to accept the troika’s proposals and a ‘no’ to reject them. And whilst the ruling Syriza party has taken pains to stress that a ‘no’ vote will not necessarily precipitate a Greek exit – or ‘Grexit’ – from the single currency, this is indeed the outcome that many commentators believe would result.

Polls released today show the dual campaigns to be neck-and-neck in terms of support. But increasingly eminent figures, including Nobel Prize winners Paul Krugman and Joseph Stiglitz, have lent their clout to the ‘no’ vote. Both make similar arguments about the failure of the current package, which has led to a 25% decline in GDP, and the inability of the Greeks to devalue their currency to restore competitiveness as reasons to vote ‘no.’ More, they fear that adhering to the demands of the Greeks’ creditors will deepen the nation’s recession under an ever-increasing debt burden.

Grexit photo

 

So a rejection of the creditors’ demands is a distinct possibility. And if these leading economists are to be believed, a return to the drachma may even be a desirable outcome if this occurs. Directly this would have a rather limited impact on UK businesses, as the Greek market represents just 0.55% of the UK’s global exports. But the repercussions of Grexit would be felt acutely by Britain’s biggest trading partner, the EU, and this would create problems. The fallout would clearly create fear and uncertainty in the currency markets which would erode the value of the Euro, making it more expensive for European businesses to import goods from the UK, whilst credit conditions would also likely worsen. The combined effect of these two events would be a fall in demand for British goods from the Eurozone. As John Longworth, Director General of the BCC, has put it “many UK businesses may be hit by the resulting market upheaval, changes in trade flows, and payment issues.”

The looming referendum presents a dilemma then. Whilst a ‘no’ vote appears the only long-term solution to Greek financial woes, the nation’s likely subsequent exit from the single currency would have a deeply negative effect on the Eurozone and its trading partners. UK exporters would be forced to find new markets for many of their goods which, in the current global economic climate, may not be a simple task. A tense weekend lies ahead.