The Brexit maths is simple

Nick Hubble

With her local policies causing nothing but problems for Prime Minister Theresa May, she’s turned attention back to Brexit to bolster support.

But now her opposition has sanctioned Brexit too. Jeremy Corbyn promises to get a deal with the EU. May still says no deal is better than a bad deal.

The confusing aspect of all this is that the maths is very simple. Assuming we take the Brexit route, there are two options. A Brexit with and without a deal.

We know what a Brexit without a deal looks like. Britain reverts to World Trade Organisation (WTO) rules. The EU, under WTO rules, is a nasty place to export to. It has high tariffs and restrictive rules.

But much of the rest of the world is not as anti-trade under WTO rules. And with free trade agreements, huge gains for trade could be made which EU membership was hindering. Trade in the rest of the world is growing fast. The point is that the outcome of a Brexit without a deal is fairly predictable, at least in terms of the frameworks we face for trade.

The simple maths, then, is that the EU must offer us a better deal than the one we’d get with it under WTO rules. Anything else is a waste of time.

Ginormous divorce bills are certainly not compliant with WTO rules, for a start. Threatening the UK with them reduces the probability of a deal, but has no other effect. It doesn’t harm Britain unless we agree to pay. Inside the WTO framework, Britain is protected from the EU’s vindictiveness because the protectionist bloc cannot treat us differently from other nations.

The obvious course of action is to have as many free trade deals as possible ready to go once we leave the EU. Then sit and wait for the EU to make the case for why its proposed Brexit deal is better than WTO rules between us. It has to make that case. It’s not really a negotiation. We are leaving. It must make us an offer.

And remember, the longer we wait, the weaker the EU’s position. The EU’s struggling states are illustrating just why at the moment…

Europe’s latest turmoil

The German newspaper Bild is reporting that the Greek government has rejected the latest bailout deal. Unless it comes with debt forgiveness, it’s not interested in receiving the next €7 billion package.

The Greek finance minister has put his money where his mouth is… by not paying bills. If you think about it, he’s threatening default to counter the threat of default. It’s a publicity stunt to pressure the bailouts. “The bills aren’t the problem,” the minister said. It’s the overall level of indebtedness.

The last bailout deal was rejected by the German finance minister. Wolfgang Schaeuble wants to see the Greeks actually implement policy before he is willing to forgive debts, rather than just accept the Greeks’ commitment to implement the policies. The International Monetary Fund agrees. Between the two, they have enough sway to prevent the deal.

The two sides are squaring off based on different understandings of the world. To the Greeks, debt sustainability is based on whether you can borrow. To the German way of thinking, it’s about the balance between spending and borrowing.

Strangely enough, the Greek finance minister seems to think that an agreement for debt relief only needs agreement from his own side: “The (creditors) differ on what is necessary. Why should that be a problem for the Greek side? We’ve done our side.” You’d think keeping your debt forgivers happy is a priority.

The euro took a hit on the Greek news from Bild. And because European Central Bank president Mario Draghi told the EU parliament he wants to continue quantitative easing in the face of inflation. An inflation estimate for May is due out tomorrow.

Over in Italy there was some surprise tumult too

The former prime minister Matteo Renzi told a weekend newspaper that he thought Italian elections should happen in September alongside Germany’s. Presumably to ensure some sort of unity inside the EU going forward. Especially in the face of Brexit negotiations. The elections weren’t due till 2018, so it’s a big change.

Unfortunately, the Italian stockmarket didn’t like the idea of early elections, and fell 2% on the comments. That’s because Italy is surprisingly eurosceptic. The major opposition parties are all anti-euro. Unlike in Germany, there are real risks in the Italian election.

Italian banks’ bad debts are just one of the potential triggers for the next EU crisis. Banks could be in trouble there soon given the extraordinarily high rate of bad loans.

Italy’s banking system seems to be an odd place for another reason. Researchers recently wrote a paper about bank robberies in Italy, which are rather interesting. The country has more bank robberies than the rest of Europe combined, at an average loot of €8,700 per robber. Believe it or not, only 40% of them bother with a disguise. So it’s not just borrowers who are getting their hands on money easily.

One of the few impressive industries of the Mediterranean nations is in trouble too. The olive oil industry is facing a drought. The Financial Times summarises the situation:

“Italy is terrible, Greece is terrible, and Tunisia is terrible. Can you imagine if Spain had also been down sharply?” said Panayotis Karantonis, director of the Athens-based Greek Association of Olive Oil Processors and Packers.

World production is forecast to fall 14 per cent, with Italian output expected to almost halve in the 12 months to September, according to the International Olive Council. Greece is likely to see a 20 per cent fall, Tunisia by 17 per cent, while production in Spain, known in the industry as the Saudi Arabia of olive oil because of the size of its output, predicted to decline 7 per cent.

But it’s not all bad news in Europe

The good news is that house prices right across Europe are rising for the first time. The last laggards Italy and Cyprus joined the rest of the EU with 0.1% price increases.

This is a surprise given Italy’s latest property gimmick. The country is letting people take up rent-free residence in some of its castles under the condition that the occupant does some renovation work. It’s a typically Italian deal. Invest your time and money and then leave when your lease is up.

Over in Cyprus, talks between the Turkish side and the Greek side have been abandoned once more. Cyprus illustrates nicely the strength of the EU to resolve local issues. I almost missed a flight thanks to the stupid border crossings on the island.

Turkey’s stockmarket is facing its own issues. It had to ban short selling after the index’s star performer was subjected to an investigation for fraud.

Back to good news. The Spanish economy is growing at 3% and its unemployment rate continues to fall. So everything is just fine in Europe…

How long will good news last in Britain?

Accounting and consulting firm Ernst & Young examined Britain’s foreign direct investment (FDI) figures and surveyed international investors to see what it could learn about our prospects.

Britain continues to dominate as a destination for FDI compared to other nations in Europe. The largest amount of money, number of projects and jobs from foreign investors were all created in Britain, closely followed by Germany.

Companies making and considering further investments want a trade deal with the EU and other nations, as well as infrastructure spending. No surprises there.

It’s not all good news in Britain though. Our economy is over-reliant on consumption. Only the US has a higher proportion of consumption as a per cent of GDP among developed economies.

Whether the two are related is hard to tell – does Britain underinvest because foreigners invest so much?

Either way, the economy slowed to just 0.2% growth for the first quarter of 2017. The fall in the pound is reducing all that consumption our GDP relies on.

Apart from having avoided a Brexit collapse, there’s little to be learned from the British economy for now.

Our investment markets are different. Will our property market join Europe’s upturn? There’s one extraordinary analysis which has a definitive answer.

Until next time,

Nick Hubble
Editor, Capital & Conflict

Category: Brexit

From time to time we may tell you about regulated products issued by Southbank Investment Research Limited. With these products your capital is at risk. You can lose some or all of your investment, so never risk more than you can afford to lose. Seek independent advice if you are unsure of the suitability of any investment. Southbank Investment Research Limited is authorised and regulated by the Financial Conduct Authority. FCA No 706697.

© 2019 Southbank Investment Research Ltd. Registered in England and Wales No 9539630. VAT No GB629 7287 94.
Registered Office: 2nd Floor, Crowne House, 56-58 Southwark Street, London, SE1 1UN.

Terms and conditions | Privacy Policy | Cookie Policy | FAQ | Contact Us | Top ↑