But we also know that there are dynamic gains from having a guaranteed long term EU market - it encourages domestic investment, it attracts Foreign Direct Investment into the partner countries from third countries wanting to jump the common external tariff wall. It enables companies to exploit economies of scale and also encourages competition by undermining the pricing power of domestic monopolies and oligopolies as well as forcing them to become more efficient to compete with EU wide competitors. These "dynamic gains" are often thought to be more important than net static gains/losses. Now today we have a report LINK1 from the IFO and Berelsmann-Stifung institute both based in Germany that confirms how costly a Brexit might be for the UK and also for the EU countries. It is hard to know the precise impact because we don't know what kind of trade deal Britain might be able to negotiate if we left the EU. As the figures below show, the dynamic losses vastly outweigh the static losses and in a worst case scenario (UK isolation) GDP in the UK could fall nearly 17% and the best case scenario (soft exit i.e. good trade deal) the losses could still total 2.63% of GDP. I know people worry about out net contributions to the EU budget and there are endless discussions about the impact of EU migration but these pale into consideration when looking at these potential costs of a Brexit. The impact on unemployment would in my view be quite devastating as well, lower incomes translate into less jobs. Still the German study at least gives some idea of the dangers of a Brexit...I just hope the message becomes more widespread.
I have always been a very keen supporter of British membership of the European Union, I would even support the British to adopt the Euro its not such a bad currency ! I recognize that there are pros and cons to EU membership but for me its not just about economics its also about the politics and the continued process of globalization. There are things in the EU that I don't like in particular the Common Agricultural Policy is great for farmers but a bad deal for Europe's 340 million consumers. One thing that I would dread is Brexit whereby Britain leaves the EU. There are "trade creation gains" when you join the EU due to the fact that you get rid of your tariffs against your EU trading partners and they get rid of their tariffs against you. However, there are also "trade diversion losses" due to the fact that higher cost EU partners might artificially export to you rather than cheaper cost third countries such as the United States, Japan, China or India who face a common external tariff on their exports. In theory trade creation gains may be bigger or smaller than trade diversion losses, these are the so called static gains and losses.
But we also know that there are dynamic gains from having a guaranteed long term EU market - it encourages domestic investment, it attracts Foreign Direct Investment into the partner countries from third countries wanting to jump the common external tariff wall. It enables companies to exploit economies of scale and also encourages competition by undermining the pricing power of domestic monopolies and oligopolies as well as forcing them to become more efficient to compete with EU wide competitors. These "dynamic gains" are often thought to be more important than net static gains/losses. Now today we have a report LINK1 from the IFO and Berelsmann-Stifung institute both based in Germany that confirms how costly a Brexit might be for the UK and also for the EU countries. It is hard to know the precise impact because we don't know what kind of trade deal Britain might be able to negotiate if we left the EU. As the figures below show, the dynamic losses vastly outweigh the static losses and in a worst case scenario (UK isolation) GDP in the UK could fall nearly 17% and the best case scenario (soft exit i.e. good trade deal) the losses could still total 2.63% of GDP. I know people worry about out net contributions to the EU budget and there are endless discussions about the impact of EU migration but these pale into consideration when looking at these potential costs of a Brexit. The impact on unemployment would in my view be quite devastating as well, lower incomes translate into less jobs. Still the German study at least gives some idea of the dangers of a Brexit...I just hope the message becomes more widespread.
0 Comments
The LIBOR rigging scandal was one of the worst banking scandals I can recall. Now Deutsche Bank has to cough up $2.5 billion in fines - £227 million to the Financial Conduct Authority, $775 million to the US Department of Justice, $800 million to the Commodities Futures Trading commission and $600 million to the New York Department of Financial Services LINK1. Of course, it is the same old story in that shareholders end up paying the bill. In fact, it should come directly out of the bonus pool and no bonuses should be paid for next three years minimum. So far fines for the LIBOR scandal now total $9 billion across the banking sector as a whole. Further fines will have to be paid in relation to the investigations into the foreign exchange rigging scandal. The Department for Financial Services also requires Deutsche Bank to sack 7 of its staff that were involved in the scandal as part of the deal. Some of these "riggers" need to spend a bit of time in jail not just be sacked.
Well the big story of the day is how one trader Navinder Singh Sarao may have been the prime cause of the infamous Flash Crash on May 6th 2010. It seems he was placing various spoof sell orders at various lower levels of the S&P 500 e-mini futures contracts causing market participants to panic sell as the market approached these levels. I don't think this was a riskless strategy as there are just so many market participants including ETFs, hedge funds and more monitoring this market so intently. So the idea that a single trader could have caused the crash does not wash with me. Admittedly he is only accused of contributing to the crash and he may have engaged in something illegal but to me there were some very wierd things going on that day. The Greeks protests against austerity were being broadcast at the time and many market participants were very nervous. Let's also remember that many share prices went beserk that day and many trades had to be cancelled. So yes something did go on in the futures market to cause the crash but blaming one trader does not wash with me.
I have for some time predicted big problems in China resulting from its over investment in property and over investment in general LINK1. A lot of properties have been built and while prices went up no one seemed to care. But now prices are falling and in many cases building is stopping or slowing dramatically. There is now a severe surplus of housing and prices remain too high particularly in the major cities. Now we are beginning to see some of the loans turn sour. The property bubble has been financed by Chinese banks and also by foreign banks and by bond sales sometimes in foreign currency denominated debt. Now Kaiser Group Holdings has become the first property developer to default on its US dollar denominated debt LINK2, its $800 billion of debt is trading at just 55 cents on the dollar today. This is just the beginning of what I expect to become a major issue over the next year or two. Property booms eventually become property busts - expect a lot more pain for those with Chinese property exposure !
Well yesterday marked a historic day in the Global bond market as the Swiss 10 year note gave you a negative -0.05% bond yield. This is the first time in history that a Sovereign can borrow for 10 years at a negative return. It is just one more sign that the bond market bubble is continuing to grow. At some time there will be panic in the global bond markets but it seems we still have a little bit more time to go ! What is behind the non sensical negative yield? Masssive expansion of Swiss liquidity due to foreign exchange intervention by the SNB prior to the January 2015 ending of the 1.20/CHF/€1 peg, deflation fears, a feeling that something nasty will happens to asset prices such as stocks and bonds, QE by the ECB....or more likely myopia and stupidity by players in the market.
|
AuthorThe author of this blog is Keith Pilbeam who is currently Professor of International Economics and Finance at City, University of London. Archives
February 2021
Categories |