Popular Economics Weekly
We know why the UK voted to exit the EU—UK working class anger at not gaining many of the benefits from joining the EU, while experiencing its downside with the influx of eastern EU citizens that displaced domestic workers. But leaving the EU without a negotiated treaty will make it even worse for all Brits, rich and poor. It could spell another recession like the Great Recession, or even worse.
Both the Great Depression and Great Recession were caused by excessive speculation in the financial markets that created massive asset bubbles—whether in overpriced stock values or housing—which then burst. And middle and lower income- earners suffered the most.
But there was another reason. Record income inequality underlay both Great Downturns when these earners continued to borrow beyond their means to spend.
There are no asset bubbles at present, but a high level of debt exists because of the various QE programs that kept interest rates low to enable consumers to keep borrowing. So European and U.S. stock markets aren’t anywhere near Great Depression or Great Recession P/E ratio levels. And there’s no housing bubble caused by excessive overbuilding (Too few dwellings being built—so much so that California’s new governor, for instance, has pledged to add 3.5 million residences to California’s housing stock during his term).
However, the EU’s Great Recession was made worse by misplaced austerity policies that cut welfare spending and taxes when it should have increased public subsides as Ben Bernanke’s Federal Reserve did in 2009 that mitigated some of its effects, and enabled a quicker U.S. recovery.
Can you imagine what could happen if the UK doesn’t beat an orderly retreat from the EU? The UK chancellor, Philip Hammond, has warned of a “bad-tempered scenario” in which neither side acts in their own best economic interests, said the Guardian recently:
“Many Europeans regard the dispute over money not as an early round of bargaining but as a matter of good faith. If the Brits cannot be trusted to settle their past promises, why bother striking future deals? Walking out could therefore be treated as a legal default, with litigation in the international courts and even asset confiscation. Never mind free trade talks, such an atmosphere could make it impossible to agree a replacement for all manner of existing arrangements governing travel, immigration and customs.”
This is while the UK and EU economies are already slowing, and President Trump’s looming trade wars with allies and enemies alike will cut back growth even further.
So it’s vital that the UK and EU find an amicable divorce. What would that look like? The Guardian reports that Brexiters believe the UK can use WTO rules to trade perfectly successfully with Europe, as does Britain when trading with non-EU members. Though WTO tariffs are high for food and cars, most manufactured goods would see little change in export duties. “Over time, the hope is that Britain could return to the negotiating table to agree on rules that would facilitate EU trade in services and find other ways to compensate for lost agricultural markets by looking to faster-growing markets abroad,” says the Guardian
But there is so much more to cross-border agreements, such as custom unions, citizenship barriers, and the like. The real lesson is that U.S. and European economies are too fragile to allow anything but an amicable Brexit divorce; or better yet, no divorce at all.
How do we judge the fragility of any economy? By its underlying growth factors. The EU and UK are both suffering serious slowdowns, with just 0.2 percent GDP growth rates in the latest quarters. The Euro area’s overall unemployment rate has declined to just 8 percent since the end of the Great Recession, with Italy’s unemployment stuck at 10 percent and Spain’s at 14 percent.
The question then is how much support would the US give to the UK, if the UK economy collapses, and the EU is unable or unwilling to come to their aid?
Harlan Green © 2019
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen