Which Way Is Up? How Much Schmexit After The Brexit

Well, all those experts forecasting general global economic collapse after a Brexit vote look kind of silly.  Ha ha ha!  So stocks around the world crashed hard the days right after the vote (Italy's market down more than 15% on the day after), but this past week they have pretty much gone up everywhere quite vigorously, in many countries now higher than before the vote.  Even in Britain, the most closely watched index, the FTSE-100, has seen its largest five day rise since 2011 and is now more than 3% higher than it was the day before the vote.  Yeah, the pound has gone back down to around $1.32 from $1,50 on the day of the vote, after bouncing back up to nearly $1.40 from an initial low after the vote of $1.31.  But, hey, that lower pound should help prevent recession by expanding exports and keeping out imports. And with Mark Carney, the Bank of England governor, promising looser monetary policy on Thursday, and Chancellor of the Exchequer, George Osborne, abandoning his heightened austerity to  stave off deficts, we can expect more stimulus from a still lower pound, not to mention no fiscal austerity.  Why things are just peachy keen!  Brexit-Schmexit it is!

Ah, but then we have things going every which way to the point that it is hard to see which way is up. The positives seem to be driven by the negatives.  So, the British pound falls in anticipation of a decline in exports in the future to the EU, with this supposedly leading also to a decline in foreign direct investment by companies wanting access to those EU markets. But then this decline looks to increase exports and maybe even foreign direct investment to take advantage of this export-led growth.  Which is it or will be?  Indeed, the picture is pretty muddied.  While the FTSE-100 has increased, it is noted that it consists mostly of large firms involved in exporting.  In contrast, according to the Financial Times Weekend, the much less watched FTSE-250, with more firms focused on the domestic market, while rising in recent days from a low around 15,000 is only at about 16,000 compared with about 17,400 on the day of the Brexit vote. Furthermore, the FTSE bank stock index is going nowhere around 350 after rising from a low of 340, compared with about 420 on the day of the vote.  But, hey, the more it looks like the British economy is going down, the more it looks like it is going up!

More of this confusion is the optimism arising from Carney's negative assessment on Thursday as well as Osborne's fiscal policy cave on Friday.  Wow! There will be monetary stimulus and an even lower  pound!  But in fact Carney is forecasting if not outright recession then much slower growth, with some of that already happening.  So, according again to the FT Weekend, Carney cites among items declining right now to be auto sales, property deals, and business investment.  Hmm. And all the FT commentators are calling for UK not to start the actual exit process by holding off invoking Article 50 of the Lisbon Treaty, even as all their European counterparts are requesting that they get on with it to reduce general uncertainty.  But this view in UK involves those who think the Brexit should be completely undone by a new  referendum, such as Gideon Rachman, those who think that probably won't happen but wish it would and are fearful of all the negative consequences they see, such as Martin Wolf, and even those who support the Brexit, such as Chris Grayling, who is all keen on "the City" getting out from EU regulations, but thinks that "the divorce" must be approached "calmly and methodically," presumably with lots of preliminary negotiations prior to any invocation of Article 50, again with all these commentators simply choosing to ignore  that the other EU nations are not at all in a mood for this shilly-shallying.

Then we have the problem that in fact that nobody in the pro-Leave group has put forward any sort of plan, much less one that other EU nations would agree with.  With David Cameron resigning and his successor yet to be selected (although that will probably happen soon), and Labour Party leader, Jeremy Corbyn facing strong demands that he resign, one FT writer  notes that Britain "has no Plan, no Leader, and no Opposition," a fine howdy-doo indeed.  Which way is up is even less clear.

Let me finally note that almost nobody in Britain is talking about the coming loss of EU regional  development aid to Britain.  While Britain almost assuredly pays more to the EU than the EU pays back (the amounts involved a matter of debate, although it is clear that the net difference claimed by the pro-Brexit group has been much exaggerated), what Britain receives has been heavily directed at its poorer regions, with in some of them very little capital investment occurring that has not been supported in recent years by such aid.  It is hard to get exact numbers on this, although regional development aid has been about a third of the EU budget, about the same as its support for CAP. However, for Wales alone, an area that voted for Brexit with 52%, it is slated to receive about 1.5 billion pounds in aid from the EU during 2016.  What is striking to me is how little this fact has been publicized.  I think that those in these poorer areas of the UK who have voted for Brexit have no idea what they are about to lose.  But,hey, Brexit-Schmexit!  What goes down must go up!

Barkley Rosser