Picking Through Brexit Rubble, Leaders Try to Plot Futureby
Merkel kicks off crisis talks with European leaders in Berlin
Central bankers meet in Portugal and may resume firefighting
The stakeholders of the global economy are struggling to plot a course through the aftershocks of Brexit.
From what’s legal to what’s possible to what’s desirable, little has been clarified in the four days since U.K. voters took the unprecedented step of choosing to take their country out of the European Union. Making matters even more complicated are the meltdown in Britain’s two main political parties and the enduring legacy of the 2008 financial crisis.
“Uncertainty is bad,” said Kit Juckes, global strategist at Societe Generale SA. “That wouldn’t matter if the global economy were ticking along nicely, but it isn’t.”
German Chancellor Angela Merkel and fellow European leaders kick off crisis talks on Monday. Central bankers meet in Portugal as they consider whether ever more extraordinary measures are needed to shore up growth. The task for all the policy makers is to devise a strategy before traders force their hand -- as they did after the collapse of Lehman Brothers Holdings Inc. and Greece’s debacle.
Leaders in Asia on Monday tried to mitigate the Brexit’s short-term impact. Chinese Premier Li Keqiang said the vote has increased uncertainties for the global economy; South Korean President Park Geun Hye called for all necessary steps to stabilize markets; and Japanese Prime Minister Shinzo Abe ordered his central bank to provide funds to support the financial system.
Investors are already bracing for further declines in the pound after sterling plummeted to a three-decade low against the dollar; weaker equities worldwide and gains in bonds and havens like gold are in the cards.
“The political situation right now is more confusing than ever,” said Nicola Marinelli, a portfolio manager at Pentalpha Capital in London, which oversees about 160 million euros. “For the investment community it’s a big mess.”
In the U.K. alone, the fight within the Conservative Party to replace Prime Minister David Cameron is under way with some members of parliament moving to block pro-Brexit lawmaker Boris Johnson from the top job. Labour Party leader Jeremy Corbyn is also facing a revolt, while Scottish First Minister Nicola Sturgeon is readying another run for independence and threatening a veto over last week’s referendum result.
That’s all coming before the government even begins thinking about negotiations over the terms of its new relationship with the EU. Cameron will address the U.K. Parliament on Monday and Chancellor of the Exchequer George Osborne is also due to make a statement on the economy.
The overriding question for international policy makers is how big is the blast zone? A sign of the concern: U.S. Secretary of State John Kerry, whose boss Barack Obama urged the U.K. to stay in the EU, will jet into Brussels and London today.
Aiming to chart the way forward, Merkel is hosting French President Francois Hollande and Italian Prime Minister Matteo Renzi in Berlin. The heads of what will be the EU’s three biggest economies once the U.K. departs are seeking to forge a response before meeting the 24 other members of the bloc on Tuesday in Brussels. Cameron will appear for part of the meeting before being asked to leave for the rest.
Item one is how far to push Britain? While Cameron wants to delay triggering the mechanism that will begin divorce talks with a limit of two years, timing has become the first -- and certainly not the last -- stumbling block to a resolution.
EU Parliament President Martin Schulz, a German Social Democrat, told Bild am Sonntag newspaper that the U.K. should start the exit process this week, to avoid the uncertainty that would endanger investment and jobs. He was slapped down by Peter Altmaier, Merkel’s chief of staff, who told German radio that U.K. politicians should be given time “to reflect again on the consequences of an exit.”
The calendar isn’t the issue for Erik Nielsen, chief economist at UniCredit Bank AG. He says those that remain in the EU will want to make the U.K. an example, to deter potential followers. Protest movements are gaining ground in France, Italy and the Netherlands, though results from an election in Spain on Sunday suggested voters had balked at insurgent political forces in favor of the incumbent.
“You want to be sure that there is no illusion that you can leave and be treated quite well,” said Nielsen. “You’ve got to play by the rules.”
Nielsen predicts the Brexit result will force the EU leaders to make some effort to curb immigration and perhaps also consider easier fiscal policy to reinforce the glue that binds them. The central bankers who have been on the front lines of crisis-fighting for almost a decade will probably have to step in again.
Coincidentally, many are meeting today in Sintra, Portugal. Originally planned as an academic debate, it’s now anything but. European Central Bank President Mario Draghi is the host and Federal Reserve Chair Janet Yellen is on the guest list. Bank of England Governor Mark Carney withdrew.
Having already committed to ensure ample liquidity in world markets, investors will now seek clues of what more they’re willing to do.
The Bank of England may have to cut interest rates and even buy more bonds after warning Brexit could prompt recession. For the Fed, it’s a question of whether to wait before raising interest rates again, while the ECB and Bank of Japan may need to consider more stimulus. Japan may also intervene to weaken the yen.
“It’s important that central banks use the dovish tone they’ve done in the past to suppress any financial market volatility,” said Kallum Pickering, an economist at Berenberg Bank in London. “It’s the volatility from the Brexit uncertainty which will harm the real economies in other parts of the world, not the break from the EU itself.”
The worry is that yet again policy makers fall short almost a decade since they had to react to the demise of Lehman Brothers and then address subsequent turmoil in Greece and emerging markets. The legacy of that period lives on in the form of the weak economic growth and the topsy-turvy world of negative interest rates.
“The Brexit ‘crisis’ is a continuation of a series of watershed events over the past decade,” said Martin Malone, global macro policy strategist at Mint Partners in London. “The crisis -- triggered by electorate activism, caused by political failure to action pro-growth reforms -- delivers an watershed opportunity for action.”