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By Harris A. Samaras
The harsh economic reality of Brexit is that under any scenario, leaving the European Union will make Britain poorer than staying in, but in the event of a chaotic Brexit, would crashing out of the European Union sink the UK economy into recession and a full-blown crisis?
According to the Bank of England a disorderly Brexit would cause the UK economy to contract by 8% while the value of the pound would slump by as much as 25% and home prices could plummet 30% – an economic fallout worse than what Britain suffered in the recent global financial crisis.
No doubt, the uncertainty surrounding the outcome of the Brexit “madness” has deterred investment, and there would be transitional costs of shifting to a new regime for trade and investment which could result in financial instability that could have damaging macroeconomic effects because of the financial openness of the UK, at least in the short-term.
More than likely, in the long-term, the loss of GDP for the UK economy compared with the status quo projections of remaining fully in the EU and its single market, will have macroeconomic consequences.
But if the UK economy could contract by 8% as the Bank of England asserts (there are sound economic voices that forecast the contraction to be > 8%), it would also mean that the UK economy would be smaller indefinitely!
And loss of GDP, also means, in macroeconomic terms, a lower level of employment in the UK economy.
Yes, there are some import competing industries which can be expected to see job increases (if exit from the EU means that they become more competitive), either because a new trade regime raises the costs of imports or because they can then avoid regulations that impair their competitiveness but there are other sectors of activity in which job losses are more than likely – depending on what replaces the current arrangements – such are major exporters which would be forced to retrench if obstacles to exporting to the EU increase.
More than 170 business leaders, a week ago, together representing more than £100bn in annual contributions to the UK economy, have thrown their weight behind the campaign for a second referendum on Brexit.
The letter said: “The only viable way to do this is by asking the people whether they still want to leave the EU. With the clock now ticking rapidly before we are due to quit, politicians must not waste any more time on fantasies. We urge the leadership of both the main parties to support a people’s vote.”
Citigroup Inc’s CEO, Michael Corbat, warned, “assuming UK-based finance firms lose their passport to sell services into the EU, the bank will shift a large chunk of its non-UK European assets to the continent…”.
Similarly, Deutsche Bank, JP Morgan, Goldman Sachs and Morgan Stanley intend to move whole asset classes to Frankfurt, Paris, Dublin and Amsterdam, an estimated total of €750 billion.
Comparable voices and criticism against a no-deal Brexit (and Brexit altogether) have been repetitively exclaimed by Airbus UK, Siemens UK and Jaguar Land Rover companies which directly and indirectly affect more than 150,000 jobs.
According to RICS, the outlook for sales of the UK property market is the weakest in 20 years, with prices falling at the fastest rate in six years. Asking rents in major cities and London foremost hit an all-time high… Partly a reflection of a previously overheated market which has been exacerbated by the increasing political uncertainty caused by this madness.
A no-deal Brexit would more than likely also increase UK’s energy cost and prices, having a negative impact on both household and business finances. Right now, part of each British energy bill helps to invest in renewable energy sources and facilitates the research of energy improvements, to meet green energy and pollution targets that are set by the European Union.
Leaving the EU Emission Trading System, with no replacement for Euratom, the definite rising of transportation costs and the reduction of EU investment, means that shortage of supply and the risk of electricity prices would be a major concern that could very well equal to an energy crisis.
Note that, (a) all UK based energy operators will no longer be able to participate in the rules that enable physical interconnection of British energy markets, and (b) other than British Gas and SSE which are UK-owned, EDF is French, Scottish Power is owned by Spanish firm Iberdrola, and Npower and Eon are German.
Martial Law
In the meantime, the British Government is preparing for the option of having to impose martial law to quell civil disorder that might ensue under a no-deal Brexit… Madness! And if the Government will allow it to happen it will be nothing but an unprecedented act of negligence! And to my point of view, deliberate.
The fact remains that there are no comfortable options for the UK:
(a) It could revoke Article 50 – which would entail overturning a democratic vote;
(b) It could stage a second referendum – which would inflame divisions and further undermine parliamentary sovereignty;
(c) It could seek a Norway-style deal – which would render it a rule-taker, rather than a rule-maker, and keep free movement;
(d) It could leave with no deal – which is the maddest of all options; or
(e) It could accept Mrs. May’s voted down proposal by means of another parliamentary vote.
A no-deal Brexit would be economically disruptive not only for Britain but for many businesses in the European Union as the free flow of goods is tripped up by the re-imposition of regulations and borders.
The administrative and logistical challenges in trade would be significant and immediate. Worse probably of all, a no-deal Brexit would lead to deterioration in long term political relationships, which would make any new trade arrangement and other forms of economic cooperation in the future less likely.
Moreover, the Brexit process and what contributed to arrive to the referendum showcased the risks associated with economic and political fragmentation.
If, trade wars and less efficient economic interactions, increased taxation and more complicated cross-border financial flows thus less agility prevail, it will be much harder to maintain global norms and standards, let alone pursue international policy harmonization and coordination!
Economic policymaking is then bound to become the tool for addressing national security concerns whether these are real or imagined… an approach which would affect existing and future geopolitical and military arrangement and pacts.
By 29 March, the EU could extend Article 50 to give the UK more time to approve a deal or to plan a new referendum with Remain on the ballot paper, or even to hold a general election.
What is, however, more doubtful than ever, the EU would not extend Article 50 just to allow the UK to keep on debating for the sake of debating…
Right now, still, and while a no-deal seems unthinkable at a rational level, the least unlikely option is a deal of some kind… the clock is ticking… and Britain is more than likely in for a full-blown crisis…
The writer is an economist and Chairman & Group CEO of Pytheas, a global investment banking organization. Formerly with the Bank of America Group, Thomson Financial BankWatch and Moody’s Investors Service www.pytheas.net
