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Saturday, 3 September 2016
Brexit 'shock' threatens to do far more damage to the European economy than to Britain
h to be a fly on the wall as the Office for Budget Responsibility (OBR) gets to work on its economic and fiscal forecasts for Philip Hammond’s first Autumn Statement later this year ... JEREMY WARNER
3 September 2016 7:09PM
Despite Brexit, Britain may outgrow the eurozone in the third quarter
As is now abundantly clear, the immediate post referendum shock to the economy wasn’t nearly as bad as many forecasters, including the Treasury, the Bank of England and the great bulk of City economists, feared it might be.
Thanks in part to a sharp devaluation in the pound, even the manufacturing sector seems to have weathered the storm in much better shape than generally anticipated. The litmus test will be this week’s Markit/CIPS Purchasing Managers’ Index (PMI) for the much bigger services sector, but anecdotal evidence already suggests that this too will look reasonably encouraging. Only in construction can we be sure of a bad set of numbers.
The upshot is that despite the turmoil of the last several months, it is now eminently possible that Britain will show a higher rate of growth in the post-Brexit third quarter than the Eurozone. Few if any would have predicted such an outcome.
The British economy sails on as if nothing has happened, but the European one continues to stagnate. It is as if the Brexit shock has been more powerfully felt in Europe than in Britain. Both France and Italy showed no growth at all in the second quarter, and now even the data from Germany is starting to look poor.
That the Eurozone economy is still struggling after everything that has been thrown at it almost beggars belief. In terms of stimulus, it is hard to know how much more of a following wind the euro area could have had. It’s been positively gale force. Austerity has been effectively ended, interest rates have been cut below zero, the economy has been flooded with newly printed money, the euro was devalued and to cap it all, there has been the monumental boost to disposable incomes provided by the low oil price.
Yet still the European economy is struggling to raise itself from its sick bed. The danger is that the depression gripping large parts of Europe has gone on for so long now that they have lost the capacity to mend, a phenomenon known as hysteresis.
All this suggests that the problem with the European economy is not so much the European Union as such as its experiment in monetary union. Europe is stuck in an economic funk of its own making, where politically it can neither move forward with the sort of institutions and policies that might in the long run make the single currency work, nor backwards to the restoration of flexible exchange rates and sovereign monetary policy. The resilience of the UK economy has fuelled demands among some Leave campaigners for an immediate “hard” exit.
No-one can say how the Eurozone crisis might eventually resolve itself. Political will has kept the single currency alive for far longer than conventional economic analysis suggests should have been the case. What’s clear is that we are fast approaching some kind of tipping point which Brexit is very much a part of; the legitimacy of the entire European project is being questioned as never before, with every possibility that the EU will have changed fundamentally by the time the Article 50 negotiations on Britain’s exit conclude.
But a word of warning. The resilience of the UK economy has fuelled demands among some Leave campaigners for an immediate “hard” exit. This would be a hubristic mistake. Today’s relative calm owes little to any already emerging Brexit dividend, but rather is a mix of three related phenomena – that it will be some while before we actually leave and the meantime things won’t change much, that a strong centre right government rapidly emerged from the political rubble of the vote, and that the Bank of England took immediate stabilising actions.
Business will take a long time to adjust to whatever the reality of life outside the EU turns out to be. This points to the need for a prolonged period of transition after the terms of departure have been agreed. In the meantime, the OBR’s Robert Chote has quite a challenge ahead of him concocting anything remotely close to a credible forecast for the next several years. I wish him luck, but perhaps best not to be guided by whatever the Treasury had to say in the cut and thrust of the campaign. Apple, pots and kettles
I’m almost entirely on Apple’s side in its tax dispute with the European Commission. If it’s managed to send even the ultra pro-European Micheal O’Leary of Ryanair fame into a blind fury at the heavy handedness of the Brussels machine, then right must be on Apple’s side.
But one thing about it that really gets my goat is the constant carping by corporate and political America over how disgracefully US business, and particularly its tech giants, get treated when operating in Europe.
This is not to argue that spite doesn’t play a part in the European approach, even if it is hard to think of any other major economic region outside the US as open to these digital goliaths as Europe. Yet the American complaint is also a classic case of the pot calling the kettle black.
This week the EU said Apple should pay £11bn to the Irish government
In fact, European companies get a far rawer deal in the US than US companies get in the EU. BP was hung out to dry in the wake of the Gulf of Mexico oil spill, with record and totally disproportionate fines and compensation. US companies involved in the same incident got off virtually scot free. At the same time President Obama ramped up the anti-British rhetoric in a manner more reminiscent of the populist Donald Trump than the liberal, free trade progressive be pretends to be.
European companies get a far rawer deal in the US than US companies get in the EU.
The same is true of European banks, where fines and damages out of all proportion to the “crime” committed are routinely levied, rather in the manner of an arbitrary tax on foreigners. Those that kick up a fuss are threatened with removal of their dollar clearing licence. That tends to concentrate minds wonderfully. There is no right of reply.
No European bank would dare call those nice US law enforcers “crap”, the language used by Apple’s chief executive Tim Cox about Brussels. When it comes to exercising extra-territorial reach, the Commission is only doing the same thing as the US. Irish government to challenge Apple tax ruling
Besides, the nub of the problem with Apple is not so much Ireland’s use of tax policy to attract business investment – now ridiculously declared by Brussels to be a form of illegal state aid – as the unduly onerous nature of the US tax system, which both applies very high rates of corporation tax and has an extremely aggressive approach to taxing overseas profits. This encourages US companies to earn and keep their profits offshore, resulting in the cloud cuckoo land inhabited by Apple whereby the company borrows heavily in America to finance dividends, buybacks and investment despite a $215bn cash mountain that earns virtually nothing sitting there in London and elsewhere.
Not until America addresses the failings in its own back yard will these issues begin to resolve themselves.
