The Brexit Elephant Encounters Repentance Prayers at ECB’s Forum

  • Economists grapple with the various impacts of Brexit
  • Charles Goodhart considers regulators’ sins of omission

On the second day, the elephant in the room was acknowledged.

The U.K.’s decision to leave the European Union took center stage on Wednesday at the European Central Bank’s annual forum in Sintra, Portugal, after policy makers and economics scholars largely skirted the issue during the first day of the meeting. Here are the main takeaways from the day’s debates:

1. Brexit hasn’t been so bad so far, at least for the markets outside of the U.K., but its message must be heeded. ECB Vice President Vitor Constancio downplayed the impact of Brexit in the forum’s final panel -- a hastily-put together event after ECB President Mario Draghi, Federal Reserve Chair Janet Yellen and Bank of England Governor Mark Carney pulled out -- adding that the ECB has the tools to respond to any volatility if necessary. Former BOE policy maker Charlie Bean went as far as to say the split from the E.U. won’t necessarily happen, even if it should. But what was most striking was the new attention professors and officials vowed to give to the impact of immigration and unemployment on Europe’s disgruntled voters: in past years economists mostly focused on the positive effects of the arrival of new labor in the aging continent; now they have pledged to pay more attention to disruption wreaked by rapid societal change.

2. An item to add to your reading list: Guy Standing’s 2011 book "The Precariat." Beatrice Weder di Mauro, a former economic adviser to the German government, cited the book and a copy she brought with her was passed around and curiously skimmed by several of the economists at Sintra. The book examines how globalization leads to job and identity insecurity, and predicted the rise of political extremism that would soon sweep Europe.

3. There was a very clear warning to Italy. As the government ponders ways to shore up its stricken lenders, hoping to get around strict European rules governing bail-outs, ECB Executive Board member Benoit Coeure warned that direct aid by the government without respecting bail-in rules may lead to an “extremely intrusive” banking supervision. It would be the final nail in the coffin for the project to unify Europe’s capital markets. “That’s your choice,” he said.

4. And anyway, shifting funding of the economy from being mostly bank-led, as is the case now in most of Europe, to the markets as is the case with the U.S., may not be such an advantage after all. Stijn Claessens, an adviser to the U.S. Federal Reserve Board of Governors, argued in a study presented at the forum that the benefits of complementing bank- with market-financing aren’t always obvious; most importantly, such diversification may increase volatility and make economies more susceptible to the impact of economic downturns.

5. Is it time to praise the Lord or to repent for what’s been done on financial regulation since the financial crisis? Former BOE policy maker Charles Goodhart turned to religion to atone for the errors committed in shoring up the financial system: “Let me start by leading you in prayer. Lord forgive us because we have done those things we ought not to have done, and we have not done those things we ought to have done.” Ex-FSA chief Adair Turner wasn’t so ready for the sackcloth and ashes though, arguing that while more could have been done, the actions that have been taken were generally right.

Before it's here, it's on the Bloomberg Terminal.