Drop the U.K. Panic Talk and Protect Global Markets
The doomsday narrative of British Prime Minister David Cameron, the Bank of England and their official friends around the world is setting a course for a self-fulfilling financial panic. They insist that the British economy will be permanently poorer and global markets will be roiled if the British public votes to leave the European Union in a referendum on Thursday.
These claims are based on fuzzy analysis. More seriously, they are deeply irresponsible. Make no mistake, if markets do panic it will be because of the hysteria that the officials have built up. To redeem themselves, policymakers around the world must set up visible signposts now to dampen financial turbulence.
Upon leaving the European Union, Britain would trade less with Europe and more with other nations. It's possible that overall trade may fall somewhat during the transition. But all economists agree that the costs of such a decline would be small and short-lived. A just-released study from the International Monetary Fund shows that the share of British goods exported to the European Union fell stunningly to 45 percent in 2014 from 60 percent in 2000. This shift away from slower-growing Europe to the rest of the world is set to continue irrespective of Brexit.
For this reason, the entire official campaign against a British exit, or "Brexit,” is based on the further claim that British productivity would fall precipitously. There is no evidence for this assertion. A possible small, transitional, decline in trade cannot cause such a large fall in productivity. It's true that more trade has sometimes been associated with higher productivity, but only when countries emerged from economic isolation.
For advanced economies, the evidence favors the opposite possibility. The most productive firms are the most active exporters, and when it becomes harder to export, they redouble their efforts to improve productivity. For decades, as the deutsche mark appreciated, German producers held back an increase in their export prices by raising their efficiency.
At the very least, the long-term economic consequences of Britain leaving the EU are neutral within a small margin that no economist can parse, as many -- including former Bank of England Governor, Mervyn King -- are beginning to acknowledge. And when there is no looming fundamental economic loss, all predictions of financial panic become judgments based on anecdotes.
The Bank of England, for example, claims that Brexit fears have contributed to the fall in the value of the British pound since late 2015. This conclusion does not pass the simplest smell test. Much of the decline in sterling’s value took place earlier this year, when the polls -- and especially the betting markets -- showed a clear lead for the “Remain” campaign, and hence a low probability of exit. Sterling, in fact, stabilized as the “Leave” campaign gained ground earlier this month.
But such is the power of narrative that every analyst sees the ghost of Brexit in every market movement. European bank stocks are down, the claim is, because of Brexit. It takes a moment to recognize that European bank stocks have been falling behind for years as their leveraged bets are being unwound. Italian banks are walking on the edge of a precipice.
Similarly, there's no basis to the Bank of England’s claim that economic growth has already slowed in anticipation of Britain's departure from the EU. The British economy has moved predictably with the degree of fiscal austerity: gratuitous austerity delayed recovery from the financial crisis, a brief reprieve in 2014 drove a fleeting rebound, and more anticipated austerity is causing a slowdown. No forecaster can -- or should -- try to discern a Brexit effect amidst these much larger movements.
The world economy is in a fragile state. World trade, the best single barometer of global economic health, has been crawling. Indeed, the latest numbers suggest that world trade may not be growing at all. We know the reasons why. The Chinese economy has been grinding down, which has put a lid on Japanese and Asian growth. Though the euro zone is out of crisis mode for now, it is, at best, muddling ahead. And the United States has ceased acting as a global engine of growth.
Now the collective voices of officialdom have primed financial markets to fear Brexit. The big rebound in sterling and world stock markets after this weekend’s modest shift back to “Remain” suggest that the association of Brexit with financial mayhem may have sunk in.
There are enough fault lines in the global economy to worry about already. Adding this specter of a Brexit-induced financial collapse is misguided and self-indulgent.
Evidently, individual central banks are taking precautions. U.S. Federal Reserve Chair Janet Yellen has noted that Brexit is on her radar screen. And the Bank of England has added liquidity lines.
It is time now to step back from this dangerous course. Central banks should make a joint statement reassuring markets that they stand by with credible tools to protect global financial systems.
If Britain decides to exit from the European Union, a chapter in post-War European and global history will come to a close. How the event is remembered will depend on the wisdom of the present stewards of the global economic and financial systems.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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