Would a crash out No Deal precipitate a Lehman moment, like the crash of the big international trading bank that plunged much of the world into the financial crisis and near catastrophe in 2008? Here are two measured predictions from the financial experts of the (pro-Brexit) Daily Telegraph.The Bank of England and the Treasury can facilitate lending to France to fight deflation much more readily than the constrained ECB, The DT’s other message is that if by refusing to grant a longer extension of Art 50, contagion from the UK’s resulting plight would amount to European self harm. Macron should be careful of what he wishes for and Merkel must ride to the rescue and support an A5O extension. But if No Deal happens, exports to the EU are only 13% GDP and we can weather the storm – but storm it will be. .
The Brexit crisis is peaking at a bad time for European heavy industry says Ambrose Evans – Pritchard
The European Central Bank can – presumably – handle the immediate shock of a financial and trade rupture by relaunching bond purchases and compressing Italian yields. What the ECB cannot handle is a third economic recession in a decade. This will lead to a credit crunch and play havoc with Club Med debt dynamics.
Let us call it creeping Lehmanisation – until the dam breaks and risk spreads go non-linear
Airbus has already stated that a full breakdown in cross-channel trade would lead to losses of €1bn a week. The supply chain would “fall apart”. Some 4,000 UK firms supply more than 10,0000 aircraft parts. These include Rolls-Royce engines. The biggest industrial venture in Europe with 108,000 employees would be hobbled for as long as Brussels stuck to its hard-line policy.
Right now the eurozone is in deepening industrial recession. IHS Markit’s manufacturing PMI fell to a six-year low in March. Germany has seen the worst industrial deterioration since the eurozone banking crisis in July 2012. What happens if the EU impose customs clearance costs on Mercedes parts from suppliers in Coventry-Birmingham in these circumstances?
Academic trade models suggest that Germany can weather the trade shock of 10pc tariffs on 750,000 German cars sold each year to Britain. The models imply that the loss or disruption of €380bn of EU exports to the UK each year is manageable.
What these models do not capture are financial feedback loops that can amplify shocks. If your banking system is broken, this is exactly what you will get
The problem for Emmanuel Macron as he fans the flames of a no-deal Brexit is that his banks own a large chunk of Italy’s debt through subsidiaries. Total French exposure is 12 times French GDP, six times its exposure to Greece in 2010. Mr Macron’s other problem is that France has shot up the debt league. Combined public, household, and corporate debt has jumped by 67 percentage points of GDP since 2007.
he EU’s Stability Pact blocks fiscal stimulus a l’outrance. The ECB cannot legally or politically resort to “helicopter money” to fight deflation. The Bank of England and the Treasury operating together can do whatever they want.
Let us presume that the EU’s no-deal talk is just bluster, and that Chancellor Merkel will impose common sense. The most likely outcome is that the EU will grant a further Brexit extension without extreme conditions whatever happens in Parliament this week.
The forecasts have been over egged and may not be so destructive says Jeremy Warner.
Given the general lack of preparedness, the short-term effects are likely to be bloody… The Bank of England’s worst case scenario, which actually envisages a deeper slump than that associated with the financial crisis, with an ongoing, permanent impairment to output, is framed around these immediate, disruptive impacts.
But the Bank also makes some quite extreme assumptions – basically that everything that could possibly go wrong does – and is therefore something we don’t have to worry about too much.
his is not a good time for disruption of this sort. Unlike the financial crisis, or the slightly later eurozone debt crisis, central banks have little in the way of ammunition to fight a sustained downturn. The ECB already has a negative interest rate.
Turning to the longer term consequences, these too may have become somewhat over-egged. Some forecasts are little more than scaremongering. Others suffer from the opposite problem
Mervyn King, former Governor of the Bank of England, has gone out on a limb to say there will be virtually no long term impact. Few in mainstream economics agree. Leaving Europe’s customs union would impose extra costs on roughly half of Britain’s exports, and would also affect quite a bit of the rest.
Besides losing zero tariffs on exports to the EU, Britain would also surrender the benefits of almost all the EU’s existing trade agreements, covering 82 countries
International trade is not everything; exports to the EU are a relatively minor component of GDP – only 13pc. The fact is that you don’t need to be in a customs union to trade intensely with your next door neighbour.
Former BBC journalist and manager in Belfast, Manchester and London, Editor Spolight; Political Editor BBC NI; Current Affairs Commissioning editor BBC Radio 4; Editor Political and Parliamentary Programmes, BBC Westminster; former London Editor Belfast Telegraph. Hon Senior Research Fellow, The Constitution Unit, Univ Coll. London
Discover more from Slugger O'Toole
Subscribe to get the latest posts sent to your email.
