Author: Steven P. Lee, Co-Founder, finRenaissance
George Osborne, Chancellor of the Exchequer said at a news conference earlier today, that “it will not be plain sailing in the days ahead. But let me be clear, you should not underestimate our resolve, and we are equipped for whatever happens.” The British pound has just suffered another day of whipping, falling by yet another 2 percent against the US dollar, driven largely by fears of the unknown, especially consequences of the BREXIT LEAVE vote.
The big ratings agencies just threw the sink and everything they had at the BREXIT’ers; downgrading the UK by up to two notches and warning (or is that rather a promise?) of even further downgrades. And that almost by fiat, guided largely by a thumb-in-the-air read of the growing cynicism of BREXIT ever surviving the breakup.
Even Greenspan has joined the camp of naysayers, throwing ever more fuel at the fire, as if to make doubly sure Brexiters will regret their decision. One can but view such comments by a once respected public figure to be highly irregular, especially in stirring up Scotland and N. Ireland to leave the UK, and preaching almost only EU positives.
Such negative spikes have no place in an environment that is already unnerved by known as well as irrational and unknown fears. Much of the fear is probably also around how the EU, world leaders as well as large and powerful global / regional institutions would react, whether and how many of these might choose to exact punitive actions to warn other potential EXIT’ers from following the lead of these BREXIT’ers.
But is there a place for such overt negativity? Isn’t this a time for a more measured and mature response? This is badly needed especially to calm unnerving investors and global fears, as demonstrated in the last two trading days of pure onslaught of speculative bets.
What is the market really saying? How much of these market moves is just pure speculation and position play by traders and punters hoping to exact quick profits from obvious fears?
Many EU leaders, especially those of the founding nations clearly have much to worry about. What they have conceived and created seems to be unraveling. Many more might just choose to follow the UK lead in leaving the EU. Beyond just rational concerns, there is also a case of much lost pride; pride that has been severely bruised. Many will be looking to repair their bruised egos, and of course much of any follow-up actions will come under the guise of taking steps to hold the EU together and prevent further EXITs.
Regardless, the UK will have to brace for and likely have to bear the brunt of the anger of the STAY camps, from the likes of the EU leaders, large and powerful institutions, including the big credit ratings agencies, who have already shown their teeth. This will include potentially vengeful, vindictive as well as other differently disguised actions, to send a bold message across the bow, in case anyone else might be tempted to try a similar stunt.
A number of world leaders as well as many large and powerful institutions have repeatedly coaxed and insisted that LEAVE is never an option to consider. How would they now make sure that what they have preached so hard and for so long would not fall on deaf ears? They must need to take action, and if necessary to make an example of BREXIT’ers. Many will not be ready to eat the humble pie; and will not be ready to respond with a true positive attitude to make things work in the best way possible for the UK, the EU and the rest of the world.
Yet among these, and I am hopeful, that some will possibly hit the reset button and consider ways to work with the UK to make their BREXIT effort less painful.
Will common sense prevail? Is there not a true case for BREXIT?
If we consider the idea and concept behind the EU, and its current implementation, we can see that the EU was never meant to be a platform for equals. The very design itself is skewed towards benefiting some, and to some extend at the expense of the others, at least if one takes a long term view.
EU was from the very conception an idea that encourages overconsumption by many member countries..(think Greece), and favored greatly the manufacturing and exporting powerhouse like Germany.
On the latter, especially the Eurozone has been most detrimental to some while benefitting significantly strong exporting nations like Germany. Let’s take the case of Germany for our consideration here.
Germany under the EU, and with the euro, was and is able to sell its products without the natural exchange rate mechanism that would otherwise drive up the value of its local currency (remember the DM?). This natural exchange rate / trade balance mechanism would have (in the absence of the euro) the effect of triggering a stronger DM, which would have otherwise slowed down German exports. However, with the shield of the euro, German products continue to enjoy competitive Euro pricing against what would have been an otherwise strengthening DM that could quickly strangle German exports. Talking about exchange rate manipulation; this is one place to look.
Many EU nations ended up net importers of German products, and again with the euro shield, this comes without the effects of an otherwise quickly weakening local currency (e.g. think Greece Drachma) slowing down unfettered imports. The combined effects have led many EU nations like Greece, Spain, etc. to continue to build up huge trade deficit and increasing debt to fund such purchases.
Of course this is a simplistic view as there are also other issues at play here. But you get my point. This illusion of being able to continue purchasing cheaper imports is supported by the continued strength of the euro (against what would have been otherwise a much weakened local currency, making such imports expensive, slowing unfettered demand for imports). This has allowed the situation in many places to spiral beyond control. Net exporters like Germany continue to enjoy the privilege of pricing its exports cheaper and selling well into these deteriorating and failing markets.
In short, the EU and along with the introduction of the euro to replace local currencies for some, has unusually benefitted some while creating a death spiral for others. For sure, the UK never did adopt the euro. But the euro would nonetheless allowed net exporters like Germany to still price its goods much lower than if it had to use its own local currency, the DM.
Given this framework and the way the EU is implemented, member countries who are better exporters stand to gain the most, especially selling into the common EU market. Yet this advantage will not be long lasting. Over the longer period, the easy access to the EU market will certainly blunt the competitive capabilities of EU member countries, especially those which are thoroughly dependent on the EU as the marketplace for their products and services.
This slow process of decay can and will persist, with member countries being largely collaborators and most only interested in selling and buying from within the EU market. The overall competitive edge of member EU countries on the global stage has been and will continue to be blunted by the strong addiction of reliance on the EU markets, instead of opening up to a much larger world market. The U.K. and a number of other member EU countries are in this predicament.
For sure, the U.K. exit from the EU, will in the short term be a painful one. Even just on the challenges of re-establishing itself as an independent member on the global stage. The transition is certainly not un-doable, as the UK today still has, and will continue to retain many of its competitive edge that will have much value globally beyond the EU. However, there will be a much needed dusting-off and re-sharpening of the tools and traits that made the UK such a great contributor to world markets in the past…and it still has many of that edge.
The Singapore Precedence?
The transition does have many uncertainties, and the move has created much fear and possibly also likely repercussions from vindictive and vengeful actions by those who detest such a move. However, it will force the UK to think and engage globally, leveraging its strengths. This situation is not that dissimilar to the Singapore situation when it was forced out of the Malaysian Federation in the 1960’s.
Back then, there were many who were extremely negative about the prospects for Singapore and its very survival, after it was forced out of the Malaysian Federation, including many of Singapore’s own leaders.
But once the bridge is burned, Singapore had no choice but to work outside its comfort zone. Leaving the comfort zone and the addiction of a “guaranteed” marketplace, Singapore was able to focus on doing business beyond the Malaysian Federation. And it has done well to secure business in the broader Asia region as well as globally, and we see the results in Singapore today.
Singapore has certainly succeeded in navigating the difficult transition, against what many naysayers had described as an impossibility. But the resolve of the Singapore leaders and the people, and the help of a few friendly nations made the difference. Where Singapore stand today is a reminder that there is much that can be gained by engaging more globally – think globally, and act globally.
The U.K. is in many respects a much bigger Singapore, having many similarities. The BREXIT transition will not be easy, especially with the background noise of Scotland and N Ireland seeking to leave the U.K. to allow them to rejoin the EU. However, it is my belief that U.K. can pursue a similar course as Singapore did several decades back.
The U.K. can once again make itself globally attractive to businesses, and countries, create a free and open trading market and serve global rather than just European needs. This is in fact not an unfamiliar territory for the U.K. at all. And for all we know, in several years, the EU and its member countries might start to envy a resurgent U.K. powerhouse, much like how the Malaysian Federation wished it knew how to leverage Singapore’s strengths for global engagement.
The U.K. has many similar strengths and perhaps far more persuasive strengths than what Singapore had back in the 1960’s. Such strengths will be hard to discover while hiding under the seemingly attractive and familiar comfort zone of the EU marketplace. The deep roots that the U.K. has in the emerging powerhouse of Asia, the Middle East and the African continent can propel and trigger a new revisiting of the broader global markets accessible to the U.K.. Already South Korea has extended a willing hand to work with the U.K. post BREXIT. And many more, including China, ASEAN, Russia will very likely follow suit.
No doubt the new relationships with leaders in these emerging powerhouse nations will be on a different footing than before, but the ties are still strong and can be rebuilt. And many of these would be willing to come on board, and support building closer trading and other ties. There is much more than I can articulate here, and indeed these and many other strengths can and should be unleashed.
One of the key weaknesses of the EU common market concept is that many EU members are too focused and reliant on growing internally within the region. Their competitive edge for a much larger global economy is no longer as sharp as before the union, and often create ever more reliance on the EU market to offset inability to compete effectively in the global market.
In my humble opinion, the U.K. exit is not only a good decision but a right one from many angles. But the UK can do with getting a break from the naysayers. Many are just plainly not supportive of their LEAVE initiative. A number will likely go to great lengths to make the BREXIT’ers pay. Such vengeful actions would certainly hurt the UK but will not do any good either for those who inflict such harms.
We can just hope that such negativity be changed, and the U.K. take courage in navigating its paths ahead. The world can view BREXIT as a TRUE POSITIVE. Much of the current market reactions are speculative in nature, and arise from fears of how things could unravel. YET, there can be a much more positive outlook that few are willing to see today. And I urge everyone globally to put on a different set of lenses to view this BREXIT decision….it can be a real POSITIVE for everyone; especially the U.K.
– do also read Dr Michael Ivanovich’s CNBC write-up on “Nevermind the Brexit, UK will emerge with a good trade deal”