What if Brexit is too successful?

Brexit is embarrassingly successful so far. Since the vote, Britain’s stockmarkets have surged. Its politics is unifying for the coming election, according to polls. And now new figures are in on the all-important foreign direct investment (FDI).

FDI measures real physical investments made by foreign companies into Britain. Not just the financial side. It means jobs, productivity growth and often trade for British people. So what did the numbers tell us?

British FDI surged in 2016 according to the OECD. We haven’t hit the heights seen before the financial crisis of 2008, but those were the days of the bubble. These days we’re leaving the EU, which is supposed to be a disaster. But the UK accounted for the bulk of the FDI increase for the EU and we’re second only to the US.

A few major deals represented much of the increase, but even without them we did well. AB InBev bought SABMiller, Shell bought BG Group, and Softbank bought ARM Holdings. The deals went ahead despite Brexit. And the big deals are set to continue with Google and Amazon expanding here.

This is an enormous vote of confidence in Britain from people willing to put their money where their mouth is. Our economic future is boosted.

The political implications of these results are more difficult to figure out. It’s hard to untangle whether the bumper FDI means Brexit is a good move, or whether companies just don’t care about it. But either way, it shows another prediction of Brexit doom is evaporating.

This begs the question, what if Brexit is too successful?

What’s the EU without the UK?

The EU is struggling with a long list of problems. It’s dramatically weaker without the UK. If Brexit unshackles Britain and we make decent policy with decent results, the future of Europe is something you should worry about.

Europeans face a stark choice between dismantling much of the EU dream and becoming more like the UK, or it could face a series of exits from other EU members.

The EU failing might seem like a vindication of Brexit. But the typical continental political leader who would lead that charge is no Daniel Hannan, Boris Johnson, Theresa May or Nigel Farage. The EU would devolve into a nationalism that is protectionist and dangerous to economic and political stability. Including ours.

Britain might seek to be pro-trade upon leaving the EU. But there’s no guarantee that the EU and its member states will respond in kind. They certainly haven’t so far. Angela Merkel’s recent speech to the EU is cause for concern. But she has her own issues to be concerned about now the UK is leaving. Will the EU cope?

Britain could be better off outside the EU. But how will the EU fare without Britain, and how will this affect us?

Without our influence, the EU would have looked very different. As a 2013 research paper put it, “On the one hand, a withdrawal could tip the EU towards protectionism, exacerbate existing division, or unleash centrifugal forces leading to the EU’s unravelling. Alternatively, the EU could free itself of its most awkward member, making the EU easier to lead and more effective.”

Last year, in the wake of Brexit, Carnegie Europe asked a series of experts how the EU would look without Britain. They all said the EU would continue. But it has lost a key influence on matters of diplomacy, security and trade.

Many EU nations hid behind the British veto on proposed policies in the past, argued Fraser Cameron from the EU-Russia Centre. They will have to come forward now and voice their anti-EU views, or be swept up in the creeping federalism. The UK is no longer holding back the tide. John Peet from The Economist explained how the EU has lost its most pro-trade member. Remember, the EU is a protectionist bloc to begin with. Losing the UK’s pro-trade influence on policy doesn’t bode well for future trade.

If the EU sets a course for expansion when its members are leaving and considering leaving, it looks delusional. Hopefully it will see Brexit as a wake-up call to reform.

Draghi puts the wrong emphahsis on the wrong sylahble

The man tasked with keeping Europe on track with copious amounts of money and debt is Mario Draghi, president of the European Central Bank (ECB). His press conference yesterday seemed like a non-event.

The ECB will continue its quantitative easing until December. And Draghi reaffirmed his “do whatever it takes” pledge with another assurance that the programme could be increased if need be. The euro was modestly surprised and dipped as he uttered this. Traders were expecting a mere “we won’t tighten prematurely”, which is a fundamentally different indication in the nuanced world of central bankers.

Central bankers must be very stout people. Not many of us could pump trillions of dollars into financial markets and remain calm. Or force interest rates to zero and remain dignified. But central bankers seem a unique combination of academic and warlord. The world is theoretical enough to be surreal and no action is beneath them to gain victory. Interest rates are their go-to weapon.

The debt conceit

We got rid of price controls on rents, coal and power long ago. Of all the price controls to remain, interest rates are particularly insidious. Debt, once a useful part of economic life, is now a tool of control for the government to control your behaviour.

Think for a moment about just how conceited this is. Controlling interest rates presumes economists know what should happen, that they are able to make it happen and that they can do a better job than people making decisions for themselves. All of these are wrong. But policymakers like to look busy.

Speaking of conceited, using debt to control the economy also means that economists are willing to sacrifice the future for today. Debt is future consumption moved forward in time. Manipulating interest rates to get people to borrow, tricks them into sacrificing the future for today. This is perfectly acceptable according to the economist John Maynard Keynes.

“In the long run, we are all dead,” Keynes told his detractors. Supposedly he meant that the long run was not as important as the short run. But today we’re going to interpret things differently.

If we follow the policies pursued in his namesake, then “in the long run, we are all dead” thanks to all the instability they create. Or as MN Gordon from acting-man.com put it, “J.M. Keynes is certainly dead, but we are still alive and can rightly be referred to as his victims.” We’re stuck in his long run.

We’re not dead yet, despite a heart attack in 2008. But the pain is very real. The Telegraph reported that “In 2006, a quarter of new mortgages went on beyond the age of 65. Today the figure is almost 40pc.” People are remortgaging their property to pay for their cost of living and avoid inheritance tax.

As the economist Friedrich Hayek explained, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

Unfortunately for us, economists have given governments the confidence to design the economy to their image. And they’ve chosen interest rates as their lever of control.

But all this begs the question, what if rates go up?

Until next time,

Nick Hubble
Capital & Conflict

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