Eurozone at greater risk post-Brexit than the UK

There is no word for the current state of affairs other than chaos.

Published: 28th June 2016 09:37 AM  |   Last Updated: 28th June 2016 09:37 AM   |  A+A-

LONDON: 'The economy is about as strong as it could be to confront the challenges it faces". So said George Osborne, the Chancellor (for now) in his first public statement since Britain's momentous vote to leave the European Union.

Would that it were true. In the litany of whoppers told by both sides in this dismal and demeaning process, Mr Osborne's latest claim may not count as anywhere near the worst. Yet the reality is that the UK economy is nowhere near as strong as he pretends.

Nearly eight years after the start of the financial crisis, the Government is still borrowing at the rate of pounds 55.5bn a year, piling up the national debt. Worse the current account deficit stood at an unprecedented 7pc of GDP at the last count, higher than any other OECD country.

Regrettably Britain is in no state to withstand another serious buffeting. If it was, we wouldn't be having this crisis. Both the Chancellor and the country would be riding high, and there would have been no need for the referendum.

There is no word for our current state of affairs other than chaos - constitutional chaos, chaos in the Tory Party, chaos in the Labour Party, chaos in Europe and, though we have certainly seen worse, something close to chaos in financial markets.

Whether it will turn into economic chaos as well is at this stage anyone's guess, but the signs from the stock market don't look good.

The epicentre of the sell-off is in banking shares, with property and airlines in hot pursuit. This is a clear sign that markets are beginning to factor in a recession, albeit at this stage a quite mild one. In any downturn, banks are bound to suffer disproportionately as bad debts climb. Property shares are being hit by fears of a slowdown in the housing market, and airlines by prospects of a sharp fall-off in consumer confidence.

Much worse is happening on the Continent, where the Brexit vote seems to be reigniting some aspects of the Eurozone debt crisis. Up to a point, the UK stock market is insulated by the shock absorber of a falling currency.

No such protection is afforded Eurozone stock markets. Some of these have sold off far more seriously than the UK. In Italy, the government is considering a further euros 40bn (pounds 33.4bn) cash injection into the struggling banking system, in possible contravention of EU rules which stipulate that shareholders, bondholders and uninsured depositors must take a haircut first before any use of public funds. Any repeat of what happened in Cyprus, where savers were forced to take losses, would be a political disaster for the Renzi Government.

Ironically, Brexit may end up causing more financial, economic and political damage in the Eurozone than it does in Britain.

The vote has dealt a body blow to investor confidence across the Continent as a whole, hitting at the heart of a still deeply unstable European economy.

Back home, lack of clarity over precisely what form Brexit might take, the future of the Government, and indeed the future of Britain's own united kingdom, is causing the mood to darken across the nation's boardrooms.

The appointment of Oliver Letwin to head a committee that will establish the basis for any renegotiation is an improvement of sorts, even if Mr Letwin is an underwhelming choice who fails to inspire much confidence. But it is very hard to see what he might come up with that might calm the waters.

Boris Johnson has vowed to keep Britain in the single market, as indeed he must given the economic damage that leaving would do.

But has Britain really gone through this traumatic process just to swap EU membership for the European Economic Area?

This answer would amount to a huge let-down for many voters and Leave campaigners, as it would mean accepting most of the EU's laws, including free movement of labour, but with no say in their construction. Many would see it as a completely pointless victory.

In any case, the so-called Visegrad Four - Poland, the Czech Republic, Hungary and Slovakia - have already said they will veto any deal that infringes the free movement principle, making access to the single market in combination with restrictions on immigration a non-starter.

Things are fast sliding out of control. In resigning as the British-nominated European Commissioner for financial services, Lord Hill has marked the start of complete disengagement from Europe before Article 50 has even been triggered, and has shamefully left the City unprotected from the threat a Franco-German land grab.

Small wonder that bank shares sold off most strongly yesterday, for banking has the most to lose from loss of the single market.

If passporting and clearing rights are rescinded, then big chunks of finance are likely to move out of Britain at vast cost to the economy and to Government tax revenues. That would ultimately leave everyone else bearing a greater proportion of the overall tax burden.

As for the UK economy being in great shape to weather the storm, about the only sense in which this is true is in regard to jobs, with the economy at close to full employment.

In most other respects, however, the country is even deeper in the mire than it was going into the financial crisis, with a still disturbingly unbalanced economy, much higher public debts, and an even wider current account deficit.

So, no, Chancellor, we are not in the least bit prepared for the challenges that confront us.

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