According to economist Roger Bootle, the EU has grown unsustainable and due to various factors, is about to burst. (AP/Francisco Seco)
LONDON– The recent triggering of Article 50 of the European Union’s Lisbon Treaty by the United Kingdom has formally set into motion the process of Britain’s departure from the EU, an action that is in line with the result of last June’s referendum, where 52 percent of British voters chose to leave the union.
Europe is now faced with the prospect of a turbulent period ahead, with the upcoming French presidential elections and the possibility of a victory for populist candidate Marine Le Pen, as well as snap parliamentary elections declared in the UK, German elections in September, a rising tide of Euroscepticism across the continent and the process of Brexit now formally put into motion.
Economist Roger Bootle, chairman of Capital Economics in London and specialist adviser to the British House of Commons Treasury Committee, is the lead author of the report “Leaving the euro: a practical guide,” which was awarded the prestigious Wolfson Prize in Economics in 2012. The report presents a comprehensive proposal for how any eurozone member could depart the zone in an orderly fashion. Bootle discussed his findings extensively in a March 2015 interview with Dialogos Radio.
MintPress News recently had the opportunity to speak with Bootle, in an interview that also aired on Dialogos Radio, about the prospects of the British economy following Brexit and the future of the EU and eurozone following Britain’s upcoming departure.
MintPress News (MPN): The British government has recently gone ahead and invoked Article 50, formally triggering the process for Great Britain’s departure from the European Union. Many doom-and-gloom scenarios have been voiced, particularly by media pundits, regarding the adverse impacts of “Brexit” on Great Britain’s economy. In reality, how has the British economy performed since the referendum vote and, more recently, since Article 50 was invoked, and what are its prospects going forward?
Roger Bootle (RB): The British economy has done extremely well since the referendum. In fact, you can’t really see any adverse effects at all. It’s just bowled along much as before. In the immediate weeks and months after the referendum, there was some hesitation and some business sectors undoubtedly felt a bit of a slowdown, but that didn’t last long.
As things are at the moment, they’re looking really very strong. Surveys suggest that economic growth will continue roughly at the level we’ve seen recently. Of course, the pound has dropped quite considerably, and that’s helped British exports. They are looking very strong. Even if there’s a bit of a squeeze on consumers, which there may well be, I think all the signs are that the British economy is going to sail through this period.
MPN: From an economic point of view, what are the next steps in the Brexit process for Great Britain? For instance, do you believe that Great Britain will still maintain access to the European common market, and more so, do you believe that Great Britain should maintain access to the European common market?
RB: Now of course we are in a difficult phase, which could go on for up to two years because the Lisbon Treaty allows for a period of up to two years for negotiations for a country leaving. Of course, there’s been no country apart from Greenland, a long time before, that’s actually left the European Union, so we’re in uncharted territory really.
I think that what we’re going to see, what I hope we’re going to see, is some sort of free trade deal hammered out between Britain and the EU. Now if that doesn’t happen, it’s very important that this word “access” is nobbled, that Britain needs “access.” I think it really is very misleading, this word.
Every country in the world has got access to the single market – the United States, India, China, Japan, all these countries trade with the single market, they’ve got access to it, it’s just that not being part of the single market, not having a free trade deal with the European Union, they have to pay the European Union common external tariff, and of course they have to meet all the standards and certificates and so on that the EU demands.
Now, if Britain doesn’t reach some sort of free trade agreement with the EU during this two-year negotiating period, then we’re effectively going to be in the same sort of situation that the United States, China, Japan and India are all in. That doesn’t sound to me to be too bad.
MPN: There have been many rumors and many press reports regarding the pound of flesh, if you will, that the European Union will demand from Great Britain as an exit bill for leaving the EU. Do you view this as a distinct possibility, or does Great Britain have bargaining chips of its own to possibly avoid this as it navigates the exit process?
RB: Various figures have suggested bills as high as 60 billion euros that the UK will have to hand over to the EU. I think the chances of the EU being able to secure anything like that are vanishingly small, next to zero. There was a report by the British House of Lords recently which obtained expert legal opinion, and the result of that expert legal opinion was that Britain was obliged to pay nothing at all. That is to say, the common sense interpretation of this would apply, that once you leave the club you’re no longer asked to carry on paying your membership dues.
Now, I suspect that there might be reasons of political and economic self-interest such that Britain might end up paying rather more than zero, but 60 billion euros, well they’ll have to whistle for that. I think there’s plenty of room for some sort of reasonable deal.
MPN: Part of the exit process, from what I understand, would have to do with Great Britain’s share of the European Central Bank’s cash reserves, which amount to 16 percent of the ECB’s total cash reserves. Can these cash reserves be returned to Great Britain as part of the Brexit process?
RB: I don’t see that as being a factor to be taken on its own. As a shareholder in the ECB, we do have a claim on the ECB’s net assets. The ECB’s got liabilities as well, so it isn’t reasonable to just look at the cash the ECB holds, you have to look at the balance sheet as a whole, and then you’ve got to put that into the context of the whole position of the EU. I can’t see the UK walking away with 16 percent of the ECB’s cash holdings. I think there’s going to be some overall totting-up of assets and liabilities and whatever the EU thinks are the UK’s continuing obligations after it’s actually left the club, and that’s something that’s going to be a major argument. These ECB cash reserves will be just one factor among very many that will affect this question of how much the UK has to hand over.
MPN: What are the possibilities that Great Britain has on the table as it prepares to depart the European Union, in terms of new trade deals or other beneficial agreements outside of the European Union?
RB: We’ve heard President [Donald] Trump say that he’s keen on a prospective U.S.-UK trade deal, and he’s made it pretty clear that he thinks that can be accomplished very quickly. There’s a whole series of other countries that are interested, including former members of the British Empire that are now members of the British Commonwealth: Canada, Australia, New Zealand, India. Countries outside, such as Japan and China, I think will be able to secure some sort of agreement pretty soon.
I think it’s very important not to overplay the significance of trade deals. Britain trades all around the world with all sorts of countries with which it does not have a trade deal, the United States being one of them, Britain’s biggest single export market. The UK does not have a trade agreement with the United States, and the reason it doesn’t have one is because at the moment it can’t make its own trade policy! It’s the EU that has to do that, and the EU hasn’t been able to make a trade deal with the United States!
I think very much [that as] a result of “euro-brainwashing,” in the European Union most people seem to think that prosperity emerges at the end of the fountain pens of these wonderful official trade negotiators in Brussels and elsewhere, and that all our futures depend on these people. This is complete hogwash. It’s a fairy tale. Around the world, all sorts of countries do extremely well and trade with each other without having anything to do with these panjandrums in Brussels. Britain could be in exactly the same position.
MPN: How does the City of London and the business community in Great Britain view the prospects of the British economy following Brexit?
RB: In the run-up to the referendum, there was a majority of the leaders of big business in Britain, including in the City of London, the financial interests, in favor of Britain staying in. That hasn’t changed very much, and accordingly there’s a preponderance of voices, although it’s less strident than before, worried about exactly what sort of arrangement Britain is going to put in place.
But even before the referendum vote, this description of the state of business opinion was far from uniform. There were a lot of businesspeople who were in favor of Britain leaving. A lot of people in the City were in favor of Britain leaving. On the whole, it was the more entrepreneurial City firms that were in favor of Britain leaving, as opposed to the big established banks and brokerage houses and so forth, who on balance were in favor of Britain staying.
I think that now the debate has moved on a lot. It’s been helped by some of Mrs. [British Prime Minister Theresa] May’s speeches and by the triggering of Article 50. It’s now pretty clear that we are leaving; accordingly, business opinion has switched from trying to operate as some sort of rear-guard action to realizing that it’s going to happen. Obviously, there’s a difference of opinion.
There are still some business leaders, including some in the City, who are a bit concerned and they want to make sure that we get the softest of soft Brexits. But a lot of business leaders are more optimistic than that. I think the mood, though, has changed. It’s changed towards, as I thought it would and hoped it would, towards making the most of Brexit, getting on with it, getting on with the job, getting the job of leaving the EU done and then making sure that Britain is best placed in the world that follows.
MPN: A recent survey of reserve managers at 80 central banks around the world found that there is a recent tendency for central banks to cut their euro exposure, while viewing British currency as a safer prospect for their banks’ portfolios. Is this a trend that you have observed in the markets and is this likely to continue?
RB: I don’t find it surprising that central bank reserve managers should find the prospect of having substantial amounts of their reserves in euros alarming. I don’t find that surprising at all, because there is a mega-crisis in the European Union. For the last year or so, the media has been obsessing about the so-called “British crisis” triggered by the fact that we voted to leave the European Union.
But fundamentally, putting aside for a moment the possible question of a second Scottish referendum — that is a big worry for the UK — that aside, the UK is a pretty stable place, and I think all the signs are that although there might be a few wobbles over Brexit, it can continue to be both successful and stable in the years ahead. And of course, famously it’s got extremely liquid financial markets. So I can see why international money managers, including central bank reserve managers, would find the UK fairly attractive.
By contrast, you can paint a scenario that’s deeply alarming for the countries of the EU. It’s still, I think, more than possible that another country is going to leave the euro over the next few years. The Italians remain very weak, the Greek economy is in a very, very serious state. Either one or both of those countries can leave. You’ve got a political crisis in France, with the possibility of far-right leader Marine Le Pen becoming president.
Even if that doesn’t happen, there’s no doubt over what way France is going over the next couple of years. So there are really fundamental questions about the integrity of the EU as a political unit, and the euro currency alongside that. Why would you want to expose substantial amounts of your reserves to that?
From a British point of view, there is a danger, I think, in all of this. I happen to think that the lower pound brought on by Brexit is a great boon for the British economy. I wanted the pound to be weaker for a long time. I think we needed it, it’s improved our competitiveness, so the last thing I would want to see is international capital holders becoming really worried about the euro and the EU, moving money into the pound with the result of the pound rising a lot in the exchanges. I think that would be extremely unhelpful for Britain.
MPN: Even though Great Britain was not in the eurozone, many people forget that it had been a part of the European Exchange Rate Mechanism, the ERM, before departing in 1992. This departure had, like Brexit, been accompanied by doom-and-gloom scenarios for what the impact on the British economy would be. In reality, how did exiting the ERM impact the British economy at the time?
RB: It’s very funny, this, because I remember extremely well that before Britain left — ”left” is too dignified a word, it sort of fell out of the ERM. What happened in September 1992, the UK Treasury was telling anyone who wanted to listen, and quite a few who didn’t, that we absolutely had to stay in the ERM, because otherwise inflation would soar, interest rates would soar and the economy would go down the tubes.
Various economists, myself included, said this was rubbish and that the opposite would happen, and dare I say it, after Sept. 16, 1992, the Treasury was proven wrong. That’s to say, the currency fell a long way, and exactly as a few of us had said, interest rates would not have to go up. Indeed they fell, inflation carried on falling too, and the economy recovered. After that, there were five years of very strong growth under the Conservatives before Labour won the election in 1997. So that was an earlier occasion where the Treasury forecasts of doom and gloom were proved comprehensively wrong.
MPN: Looking at economic and political developments in Europe, with an emphasis on the upcoming presidential elections in France and the candidacy of Marine Le Pen, who has delivered her own strong Eurosceptic message to French voters, do you believe we are seeing the beginning process of the breakup of the eurozone or the European Union, and how can Brexit serve as a catalyst for this process?
RB: I think we are seeing probably the beginnings of the breakup of the EU. The beginnings of the breakup of the euro were seen some time ago. Of course it hasn’t happened, but the signs are, I think, pretty clear, of the strains, very clear of course in Greece, but also I think more significantly in Italy. Less dramatic, of course, in Italy, but Italy is a much bigger economy, and I think this is more significant for the EU because Italy, of course, was a founding member of the EU. Greece didn’t join until much later.
If Greece ends up leaving the euro, then that is a hammerblow not just to the euro but, I think, to the institutions of the EU itself. Now, it may well be that one of these events, a country leaving the euro or the election of Marine Le Pen, could happen fairly soon, and that would still be early on in the Brexit process, because it will be almost two years until Britain leaves the EU.
But if Italy doesn’t leave the euro, and/or we don’t get Marine Le Pen as president of France, and both the euro and the EU hold together, then I think Brexit is going to play a major role, because then all eyes are going to be on seeing how the UK does outside the EU. Now of course, it’s going to take quite some time for this to be testable. We’ve got the up to two years of negotiations, and I suspect there will be some wobbles and difficulties and short-term problems associated with the business of exit, so it might be a year or two after exit before we can see how the UK is doing.
But if the UK is doing really pretty well after that period, we’re going to see a lot of pressure within the EU for other countries to leave, because then the UK will have gotten out of the free movement of labor, gotten out of the jurisdiction of the European courts without having to pay Brussels these huge annual subventions, and I think a lot of countries will look at this deal and think “oh gosh, I think I rather like that setup.”
MPN: A few years back, you were awarded the Wolfson Prize in Economics for your analysis that showed that any eurozone member state could safely depart the eurozone in an orderly fashion. Could you recap some of the highlights of this proposal for our listeners, and has anything changed in your analysis since then?
RB: I don’t think the essence of the situation or indeed my recommendations for what a country should do have changed at all, but there is a particular relevance to the French situation. What we said was, first of all, don’t be afraid of the fact that the exchange rate for the new currency falls, that the currency is weak immediately after the exit. That is part of the solution, not the problem. You shouldn’t try to stop it, indeed you should encourage it. It’s how you get the combination of reduced burden of debt and increased competitiveness.
We recommended that preparations for this exit should be conducted in secret. If this is not possible, then you have to impose capital controls. You might have to close the banks, which would be a serious worry. You don’t need to be able to issue new currency in order to leave. It takes quite some time for notes to be printed. You can do it without doing that in these days of electronic money. You could do without notes for a while, and indeed you could carry on using euros in the interim before your new notes are available.
You probably will need, in some sense, to default on some of your debt. The aim should be redenominate your national debt into the new currency, the one that’s depreciated, and depending on whether you can do that, it’s going to depend on the precise legal position of the debt. But insofar as you can, that’s what you should do, and the aim should be, through a combination of a reduced debt burden as a share of GDP, and the increased competitiveness, to get a period of economic growth, and from that of course, all sorts of good things will follow.
The connection with the French election is that Marine Le Pen has talked about having a referendum on ditching the euro and bringing back the franc, which is completely different from what we suggested in our Wolfson Prize-winning study. The significance of this is that Marine Le Pen’s proposal is going to cause an awful lot of financial instability. The financial markets aren’t going to wait for the result of the vote, they’re going to act with their feet straight away!
If Marine Le Pen wins, I think you’re going to see substantial capital flight from France even before she announces the referendum, and a lot of money leaving France. I could see a real banking crisis following from that, as people try to get their money out and to put it in, as it were, safer members of the eurozone, principally Germany. There might have to be some sort of capital controls imposed to stop that capital flight and to stop the French banking system from collapsing.
MPN: Looking at economic conditions in Europe today, and specifically in countries such as Greece that continue to enforce a regime of strict economic austerity as prescribed by its lenders, do you believe that exiting the eurozone is still an option for these countries?
RB: I don’t see how Greece can escape from its current situation without a much-devalued exchange rate. Spain is a country that is now recovering, and I think would probably be able to stay in the euro system, although not if Italy leaves and devalues. Italy, especially, and Greece, I don’t see any chance of emerging from their current economic torpor that doesn’t involve leaving the euro.
MPN: In Greece, there are various arguments that are heard against Grexit, ranging from claims that it’s too late and that it is something Greece should have done seven or eight years ago at the onset of the crisis, to arguments that a catastrophic devaluation of the new currency would follow, or that hyperinflation would result, or that Greece would be unable to import vital necessities. How do you respond to these arguments?
RB: There’s no doubt that it would be possible to do Grexit badly, and in the same vein, it’s possible to do Brexit badly. You could make a complete mess of it. There’s no doubt that’s possible. It’s very important, I think, not to let the perfect be the enemy of the good. Yes, there will be difficulties as a result of Grexit, but the most important thing is, it gives hope.
You have to ask yourself what you’re comparing your option with. A country that’s lost something like 25 percent of its GDP, that has a huge proportion of its workforce unemployed, there doesn’t seem to be much hope under the current situation. So I think it’s a bit extreme to say “oh gosh, if Greece left the euro, there would be hyperinflation.” Well, there wouldn’t be hyperinflation at all. If it’s managed properly, there wouldn’t be an uptick in inflation, and that wouldn’t necessarily be all bad, because it would help to devalue the real value of some of the debt.
You’d have to, though, keep this under control. It would have to be well-managed. You would need the effective management of the Bank of Greece and the Greek government to make sure that this was a fairly benign process. That doesn’t mean to say that you can avoid pain. You can’t avoid pain! You’ve had pain for the last how many years in Greece, and this is a country that’s lost 25 percent of its GDP!
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