French investment bank Natixis sides with rebellious islanders.
The UK will hold a referendum by the end of 2017 on whether or not to stay in the EU. No country has ever left the EU. The fact that the now second largest economy in the EU is threatening to do so because its people may want out has set off a bout of hot-and-heavy scaremongering.
Visions of doom and gloom are used to beat the rebellious islanders into voting the right way and submitting without further demur to the yoke of Brussels. Even the US has jumped on the scaremongering bandwagon. Everything must be done to hold the EU together, and some rebellious islanders aren’t going to muck it up. That’s the theme.
But wait a minute, said Natixis, the investment bank of France’s second largest megabank, Groupe BPCE, in a new report: a “Brexit,” it said, would be “a non-event.”
It then poured cold water over all the scaremongering.
The economic policies of the UK are already independent from those of the Eurozone, it said. “The situation would be very different” if a Eurozone country, like Greece, wanted to get out of the EU and “take advantage of the exit to devalue its exchange rate….”
But the UK already has its own monetary and exchange rate policies. It runs whatever budget deficits it wants to, unconstrained by EU rules, which limit deficits to 3% of GDP. The EU imposes draconian punishments on violators, such as gnashing its teeth in public, as it did when Germany was among the first to violate that rule.
The UK doesn’t worry about that circus. Its fiscal deficit exceeded 10% of GDP in 2010, and even now, it sits on a deficit of 4%. While Greece was going through the bailout extortion racket after the Financial Crisis, the UK was happily printing money and monetizing its deficit. Everyone’s doing it, even the ECB – though Eurozone countries that need it the most, like Greece, can’t benefit from it, while others like Germany and now Spain are awash in this money, and negative interest rates see to it that their governments get paid to borrow.
Britons see this absurdity and are scratching their heads.
There are other differences, according to Natixis: In the UK, the tax burden, at 34% of nominal GDP, is lower than in the Eurozone, at 40%, with some countries lower than the UK, and others higher, such as Denmark, France, and Belgium at just under 50%.
Welfare benefits as percent of nominal GDP in the UK are lower than in the Eurozone. But both have increased over the years, with the UK’s rising from 12.4% in 2002 to 13.8% now, and the Eurozone’s rising from 16.2% in 2002 to 17.2% now. Corporate income tax rates are low in the UK: its 20% rate compares to Germany’s 30.2%, France’s 34.4%, Spain 28%, and Italy’s 27.5%.
But these differences, however important they might be, Natixis says, “would be neither greater nor smaller after a UK exit from the EU.” So in these respects, a Brexit won’t change anything for the UK.
What about the threat that a Brexit would crush the UK’s exports of goods and services to the EU? Um, well – a Brexit would only have “muted impact.”
In terms of trade, if the UK leaves the EU, it has two options:
First option: it can join the European Free Trade Association (EFTA) and its four Member States: Iceland, Liechtenstein, Norway, and Switzerland. In that case, a Brexit might have no “significant” impact on trade. But the UK would have to subject itself to very EU regulations it’s trying to get out from under. So if the UK wants this, Natixis says, “it is difficult to see any reason to leave the EU” in the first place.
Second option: it does not join the EFTA. In that case, customs tariffs may be introduced between the UK and the EU. But they won’t have much impact either.
Turns out the UK has only a “small-scale industry.” Exports of goods from the UK to the EU have been declining, now at 6.5% of GDP. And the price elasticity is low: “For a customs tariff of 10% in both directions, the shortfall in exports would lead to a loss of 0.25 percentage point of GDP” in the UK, “which is very small.”
But the UK has “large-scale exports of services,” which has risen to 12% of GDP now. They’re centered on financial services, a sector that employs 3.5% of all workers. However, these services are highly specialized and would probably only be “very slightly affected.”
For the City of London, one of the most opaque financial centers of the world and a key to the UK economy, a Brexit may be a mixed bag of minor proportions.
Some financial services, such as investment banks or asset managers, might relocate some of their services to the EU. But others, such as hedge funds, would be attracted to the UK, as “one of the objectives of a ‘Brexit’ for the United Kingdom is to have less restrictive financial regulations than those applied in the Eurozone….”
A Brexit would only have “limited impacts” on the UK economy, Natixis concludes. “But there would obviously be a negative impact on the European Union’s economic and diplomatic weight.”
So all the scaremongering may be about the EU and not the UK. It isn’t about the economy, which would be fine on either side of the Channel, but about political power, about the EU’s “economic and diplomatic weight” in the world, and about the size and power of the bureaucracy in Brussels.
Those rebellious islanders in the UK who are threatening to muck up the dream of the Eurocrats are under intense pressure. And the name of the game is fear. Read… US Threatens UK over Brexit Vote
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.