Monday, March 21, 2016

Brexit: surviving the car-crash

I'm reading Mervyn King's excellent "The End of Alchemy: Money, Banking and the Future of the Global Economy".

Newspaper reviews have been mixed: some commentators clearly wanted the inside story of the crash of 2008. Instead, the former governor of the Bank of England has provided a thoughtful critique of contemporary macroeconomic thinking, both Keynesian and neoclassical.

He gives short shrift to behavioural economics, choosing instead to focus on what he calls radical uncertainty, the unknown unknowns which regularly jeopardise the assumptions built into macroeconomic models. And subvert the policies of politicians.

Here is what he has to say about the prospects for the Euro, the Eurozone and the EU as a whole at the end of chapter 6.
"But in the euro area the fight for survival has become a battle between politicians and arithmetic. Although the future outcome is unknowable, history is on the side of arithmetic. The tragedy of monetary union in Europe is not that it might collapse but that, given the degree of political commitment among the leaders of Europe, it might continue, bringing economic stagnation to the largest currency bloc in the world and holding back recovery of the wider world economy.

"It is at the heart of the disequilibrium in the world today. The French ambition to curtail the economic power of Germany, and especially its central bank the Bundesbank, by drawing it into a monetary union that would be controlled by French civil servants has failed. The French economy is weaker than that of Germany, and monetary union has increased, not reduced, Germany's political dominance.

"Responsibility for the economic conditions in other member states will be laid at the door of Germany. The idea of a federal union was intended to represent the birth of a new Europe, born out of the common experience of defeat and occupation during the Second World War among all the original members of the European Economic Community.

"Attempts to recreate the Holy Roman Empire have often appealed to a European elite, but have foundered on the resistance of its peoples."
In the previous Brexit post I highlighted suggestions that if the European Union survives in any sense it will be led - dominated - by Germany. All other member states, by definition, will then be subordinate. Any path leading to a stable political pecking order in a future EU will be long and complex, and measured in decades, but that's the destination. If it exists at all.

But it seems unlikely that the EU in anything like its current geometry can survive over a period measured in decades. As Mervyn King points out in other chapters of his book, the Greek debt crisis has not gone away and the inevitable Greek default will be hugely unpopular in Germany. And Germany has lent massively to the rest of 'Club Med' in what might be considered belated war reparations.

Historical institutions tend to last longer than anyone thinks possible, and then to collapse faster.

There is a conceivable strategy for the UK in being close to the Northern European axis in the EU, and facilitating the transition to something more sustainable after the EU car crash. But that would demand a political culture in the UK which is communautaire. Such a culture does not exist. The British transactional paradigm for dealing with its EU partners will be worse than useless as the car crash unfolds.

The coming referendum is not the only occasion when the UK's existential relationship with the EU will be confronted - how could a foundational EU crisis not pose it again? - but proponents for staying in should be indicating what tactical advantages the UK gains given the extraordinarily dire outlook in the longer term.

If the UK (England?) decides to abandon ship, or is ejected at some point by a form of constructive dismissal, then it will operate as I imagine Japan will end up in a couple of decades, navigating between powers (the German-dominated EU, America, China) which are so much more powerful than itself.

One of the dilemmas facing even the most well-informed voter in the forthcoming referendum is that even when the issue is framed in this way, it's by no means obvious what the optimal answer is. We also have to consider that different sectional groups in the UK (employees of financial institutions and multinationals, the self-employed, trades unionists, blue-collar workers, welfare recipients, the Scots) will have variant interests perhaps best served by voting in different ways.

According to the oddschecker website today, the probability of a 'stay' vote is 69% and of a 'leave' vote is 31%.

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