Peter Tasker - Why Asia Should Care about Brexit?

posted by Robert Madsen on June 21, 2016 - 12:59pm

Here is my comment on Peter Tasker's commentary on Why Should Asia Care about Brexit?

Peter Tasker’s article is a very good summary of what Brexit would mean for the world.  If he makes any errors they are in underestimating the probability that the demise of the Eurozone could be “managed” at least in the short term.  It is possible, for instance, that Britain’s departure would galvanize Germany and the other major powers to enact rapid financial and economic reforms that prevent additional defections.  The ECB could intervene again to stabilize the continent’s financial markets during the interim.  The combination of monetary mollification and structural reform might then enable the Eurozone to survive the shock waves emanating from the UK for months or years. 

The more intriguing possibility is that the EU and the ECB might quietly recognize that the problems motivating Britain to leave are systemic and ultimately insurmountable and hence that they want the weaker economies to leave in order to promote longer-term stability in the sustainable Eurozone core.  That would require an immediate easing of monetary policy—guaranteeing deposits and liquidity in the countries most immediately threatened by Britain’s departure—and probably emergency fiscal assistance as well.  Once the Brexit crisis has passed, however, the EU could begin ratcheting up the pressure for Greece, perhaps Spain or Italy, and some of the Central and Eastern European economics to confront reality and leave.  This need not cause a continental or global crisis since those countries’ financial systems are more insulated from the big European banks than they were a few years ago and trouble can accordingly be localized more easily.  Using that advantage to protect be core economies while encouraging the departure of some of the deadweight countries could eventuate in a smaller and more economically viable currency union.  

The key question is of course France, a country that shares many characteristics of the weaker peripheral economies and yet is crucial to the European project.  An optimist might venture that the process of negotiating and managing new fiscal and monetary mechanisms would bring Paris to the fore, bestowing on France more international prestige and garnering more public support.  Along with greater transfers or other assistance, this could form the basis for sustained membership in the Eurozone, essentially binding France more closely to the Germano-centric economies.  The eurozone would thus contract in size but grow stronger.

As Tasker rightly notes, the question is in the final analysis political.  The EU and the ECB have the resources to hold a post-Brexit Eurozone together if the national governments allow that to happen.  Given the extremely high stakes, it is likely that the authorities have a plan in mind and are already trying to marshall governmental opinion behind it.  Whether they manage to do so will not be clear for days or weeks after the British vote next week. It is also worth noting that the Eurozone may decide that it should shrink even if British voters opt to stay in the currency union.  The political, economic and financial problems that led to the secessionist movement, after all, remain unresolved both in the United Kingdom and more generally.  Over the longer term today’s Eurozone is almost certainly too unwieldy to survive.