Eu­rope’s un­seen risk

If we re­ject Barnier’s Brexit plan, we could de­stroy the euro

The Daily Telegraph - Business - - Front Page - Am­brose Evan­sPritchard

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

AM­BROSE EVAN­SPRITCHARD

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