Europe’s unseen risk
If we reject Barnier’s Brexit plan, we could destroy the euro
The revolutionary nihilist answer to the EU’s Brexit ultimatum is surely to bring the European temple crashing down on everybody’s heads, by means of a no-deal economic shock. would be one way out of the constitutional impasse.
Some sovereignty Brexiteers might calculate that mutually assured depression would expose the hubris of Europe’s leaders and precipitate an internal political bloodbath in a string of countries, allowing for a different kind of settlement once the dust settles. Labour MPs who vote with Jacobite ultras on the delicious pretence that they can negotiate better terms than Theresa May – or aiming to bring down the Government – might instead cause the no-deal outcome they decry most.
From what we know, the Barnier plan is self-evidently at odds with democratic self-government. No nation would normally accept such terms unless small, bankrupt, or first defeated in war.
Brussels retains a de facto veto over whether Britain can ever leave the customs union, and therefore whether it can ever leave the EU’s legal orbit and pass its own laws. “They must align their rules but the EU will retain all the controls,” says the leaked note of EU negotiator Sabine Weyand.
It binds us to existing and future EU law on state aid and competition. “Non-regression” clauses commit us to the EU acquis on labour policy, taxation and the environment.
The withdrawal deal does not settle anything. We will still be arguing about the future trade accord years hence, but with less leverage and after paying £40bn for our own infeudation. How anybody thinks this could be a “steady state” equilibrium is beyond me. The flashpoints would be even more combustible.
So what would happen if the
country – by some patriotic spasm – said it could not accept this? Pereat mundus.
Bruno Le Maire, France’s finance minister, says the euro is dangerously vulnerable to the next global downturn without the apparatus of an EU treasury. Monetary union lacks pan-EMU bank deposit insurance, joint bond issuance and debts, or a shared social security system. The European Central Bank still cannot act as a real lender of last resort.
Germany did just enough to prevent the euro blowing up in 2012 but never addressed the underlying pathologies, chiefly the German current account surplus, illegal under EU treaty law but never punished. Instead it imposed internal devaluations and a fiscal surveillance regime for the South.
A clutch of Nobel economists has warned that the eurozone cannot survive another global recession as currently designed. Public debt ratios are much closer to the danger line than in 2007 – up from 36pc to 98pc of GDP in Spain, from 68pc to 125pc in Portugal, from 65pc to 99pc in France, and from 103pc to 133pc in Italy.
Austerity fatigue in the South is palpable. As the Lega-Five Star insurgency in Rome makes clear, a repeat of the 2011 to 2014 fiscal waterboarding is out of the question. The Stability Pact and the Fiscal Compact prohibit the sort of budget stimulus needed in the next crisis. Monetary policy cannot carry the burden a second time. The ECB has scant powder left to combat a serious shock. Interest rates are already minus 0.4pc. The bank’s balance sheet is 43pc of GDP after three years of quantitative easing. Diminishing returns have set in, and the political bar to more QE is high.
The eurozone would slide into a deflationary vortex – like Japan, without Japanese cohesion – and this would expose the unsustainable debt trajectories of EMU countries with high legacy debts. The chain of sovereign defaults would be unstoppable.
The eurozone economy is already close to stall speed as global borrowing costs ratchet higher. Monetary tightening by the US Federal Reserve is draining dollar liquidity, causing a credit crunch across emerging markets.
Italy’s growth fell to zero in the third quarter. Lorenzo Bini-Smaghi, an ex-ECB board member, says the economy is already in recession. “The crash is going to be violent,” he said. The Lega-Five Star coalition is digging in for a budget fight with Brussels. Risk spreads on 10-year Italian debt are back above 300 basis points, eroding the capital buffers of Italian banks. The eurozone’s “sovereign bank doom-loop” is alive and well.
The German economy contracted by 0.2pc last quarter. Brussels blames a “soft patch”, caused by temporary troubles in the car industry. Monetarists disagree. The broad M3 money figures threaten outright recession next year without a change in policy.
My view is that the financial shock of a no-deal Brexit would crystallise the risks and hurl the eurozone into an existential crisis. Academic trade models do not capture the multiple channels of contagion, obvious to any hedge fund.
Some 80pc of Europe’s capital markets are in London. Confidence would be shattered. The wealth effect of a stock market crash would cause eurozone consumption to buckle. Unless the EU backed off quickly, the supply chains of European multinationals would break down. Airbus might have to suspend its European operations. Germany’s 750,000 annual car sales in the UK would collapse.
Britons have been told for two years that a no-deal Brexit would bring the Four Horsemen of the Apocalypse – as it might – but the European public has not been alerted to the risks they face in any comparable way. The insouciance has been astonishing.
It is a fair bet that stunned electorates would turn on elites with condign fury. This is what the EU unwittingly risks by presenting Britain with what looks like the peacetime equivalent of Austria’s ultimatum to Serbia in July 1914.
Personally, I have reached no conclusion on the May plan. I will study the 500-page report and reflect for a week before deciding on the Hobson’s choice facing our nation: the evisceration of our democracy, or the ruin of our economy.
Sabine Weyand has certainly been effective in weaponising the Irish border and laying a legal-diplomatic trap with the December joint report. She has forced Britain to stay in the EU’s legal structure through the customs union. The EU’s £95bn trade surplus in goods with the UK is protected, without reciprocation on services. As the saying goes, Britain really is “out of Europe, but run by Europe”.
But sometimes in life you can be too clever by half.
‘Some 80pc of Europe’s capital markets are in London. Confidence would be shattered … a stock market crash would see eurozone consumption buckle’
Blurred vision? Michel Barnier, the EU’s chief negotiator, speaking on Brexit last night – but the European public has not been alerted to the huge risks they face if there is a no-deal catastrophe