British procrastination – a postponement will not guarantee an agreement

Theresa May is in Berlin and Paris to request a new deadline. It’s a safe bet that she will get some time. The date discussed is December 31, 2019. It is a little less than what Donald Tusk was talking about, who was ready to go up to a year.

As no one knows the possible consequences of a lack of agreement, no leader will take the risk of being the one who could trigger the possible apocalypse.

Business leaders are making arrangements to manage the possibility of a Brexit but none wants a disruption that would have a negative impact on their business.

This procrastination has a cost. This is true for the English who, if they had not stored heavily, would have been in a recession for the last two quarters. This is the case of the European Union too. Any meeting with employees, clients, bankers or industrialists gives pride of place to the concerns about Brexit. Let’s not doubt that this uncertainty affects behavior and also penalizes the growth of the EU. We are thus in a war of attrition, looking for who will exit first. This may be the worst solution because costs will accumulate on both sides of the Channel.

Because, let us be clear, an additional period does not mean an agreement on the British side on the scheduled date. British are in the EU for an extended period.

Euro area growth projections downgraded, and policy mix still restrictive – My weekly column

The OECD and the ECB have downgraded their 2019 growth projections for the euro area in quick succession, with the OECD now expecting 1% for the year ahead vs. 1.8% previously, and the European Central Bank projecting 1.1% vs. 1.7% in December, putting euro area growth below its potential pace.
The main reason for this rapid slowdown of the activity lies in the rapid deceleration of world trade, particularly in its Asian component. The White House policy is a key explanation of this trend change. This external shock profoundly modifies the equilibrium of the euro zone economy.

The OECD believes that the economy in the bloc has now become a source of concern for the world economy as a whole. Beyond the euro area’s actual situation, a slowdown in the zone along with a sharp and swift downgrade to growth projections for 2019 also make for a shock on world growth. The area is a major contributor to world trade momentum, so a drastic slowdown is an additional source of concern for the world economy.
It is worrying that the euro area is so large, but yet it is still at the mercy of international events with little capacity to react to them clearly. It was buoyed by strengthening trade in 2017 but was dented by the recent negative shock, and its inability to absorb these tremors is alarming for the world as a whole and not just the European economy.

This situation reflects the fact that the area has become more and more open to outside influences, while for example the United States’ exposure to trade with the rest of the world has remained steady over time. Germany plays a major role in this trend, as shown by the chart, while Italy and France are similar in terms of how open their economies are to trade with outside countries

The most surprising aspect during the current downgrades to growth projections is that this swift drop reflects the dearth of economic policy to cushion the shock.

The policy mix – i.e. the way fiscal policy and monetary policy work together – is restrictive. Financial conditions are admittedly encouraging as a result of the ECB’s accommodation, but fiscal policy has been restrictive for too long and is not propping up economic activity, meaning that the shock from the world economy is in no way cushioned by euro area economic policy.

The chart shows the primary budget balance (excluding interest payments) adjusted for the economic cycle and expressed as a % of potential GDP. This figure is an indication of how restrictive fiscal policy is, and in the euro area the balance is positive, pointing to restrictive policy.

For the British, the hardest starts.

The main consequence of Tuesday’s British parliamentary vote is that Theresa May is now out of the game. The power is now in parliament and the European Commission.

The vote tonight (Wednesday) is about whether or not to choose a no deal. If the no deal is chosen by the parliamentarians then the British will leave without EU agreement on March 29th.

If the no deal is not voted, a third vote will be held Thursday on the possibility of a postponement of the exit date. But if May discusses this point with the European Commission it is this one that will accept or not this postponement. As suggested by the spokesperson of the commission, such a extension will only make sense if it allows a progress and a change of perspective.

A 3 months postponement, a delay often mentioned, is probably useless. Theresa May will remain prime minister but she has already exhausted all her resources.

The no deal is gaining ground every day.

The worst for the British would be a resignation from May and the call for general elections. The risk would be an institutional mayhem since a majority would be difficult to find and a prime minister too. A second referendum may take place only at this stage. It will take a long time and may add a supplementary mayhem.

For the British, the hardest starts.

Brexit – The cumulative cost since the referendum is high

Since the referendum on Brexit in June 2016, the dynamics of the British economy have been shrinking. Evidenced by the slowdown in growth in 2018 to 1.4%, the slowest pace since 2012 and a pace, as in 2017, slower than the Euro zone and France.

To fully appreciate the divergence between the United Kingdom on the one hand and France and the euro zone on the other, I calculated a trend starting in 2013 (beginning of the recovery everywhere) and ending in the second quarter of 2016 at the moment of the referendum.

The trend of each country is then extended while retaining the initial parameters. I then calculate the deviation (in%) of GDP to this trend. These are the three curves on the graph.

The UK curve is 2.5% below its pre-referendum trend. The cumulative difference since the choice of the British reflects the cost associated with it even before the Brexit is formally established (March 29, 2019 theoretically).

At the same time, the acceleration of growth in the eurozone and in France throughout 2017 marks these two countries, above their trend. France is 1.7% above the trend and the euro zone 0.8%.

Despite being the UK’s largest trading partner, European expansion has not benefited the UK. This is a very disturbing element.

Nevertheless, the expected slowdown in eurozone growth, beyond the effects of Brexit, should weigh on the economic situation across the Channel and increase, ex post, the cost of the referendum.

Brexit A new step

After the vote of the Parliament, there is a majority for a deal. But Theresa May will have to renegotiate de Irish backstop.

The EU now has to agree to reopen the negotiations. For that, Theresa May will have to offer interesting things that are not only to the advantage of the United Kingdom. It’s going to be complex for Theresa May but also for the EU which will have to remain united. The UK government should not end up dividing Europeans. It was their mode of negotiation at the beginning. Since everyone is now afraid with a no deal there may be a risk for this strategy to succeed. The EU spokesman accept to postpone the deadline but does not want to renegotiate. The game will be interesting in the coming days.

Brexit – an unknown territory now

Theresa May’s defeat in the British Parliament is historic with a gap of 230 votes (432 votes against 202 against).

The text that was validated in November by the British government and the European Commission will not be the canvas of the new European architecture.

What can happen? We all have in mind a scheme with all the alternatives.

Beyond Plan B that Theresa May must present in three days and that she obviously does not have, the United Kingdom will enter the land unknown because there is no trivial solution.

The question is who will carry the British government because the general idea is that Theresa May has to leave. Indeed, can Theresa May still be credible after her terrible defeat? Will she have the will to stay as Prime Minister? What can she bring now when she has put all her strength into the battle?

We can imagine general elections but who will take the 10 Downing Street? Theresa May? A brexiter? Or Jeremy Corbyn? The first has a problem of credibility, while no brexiter wants power as long as the issue of Brexit is not settled and the British left does not wish Corbyn for this job because he is too extreme and probably too volatile. This raises the question of who could take responsibility for a second referendum.

One can imagine an extension of Article 50 but why? The EU will not move, and rightly so, and the British have already tried to negotiate the best deal for them. The only reason that pushes in this direction is the idea that in fine reason will prevail and that the British will renounce Brexit.

There remains the unilateral renunciation of the procedure which would be carried by Parliament or a Brexit without agreement.

The uncertainty remains and will not be resolved for long as Theresa May will probably cling to her position when she no longer has the hand