quarta-feira, 15 de junho de 2016

Economists’ rare unity highlights peril of Brexit

Britain is a week away from its historic economic decision on EU membership. Economists have never been more united in supporting a vote to remain, yet the profession increasingly appears incapable of persuading the public of Britain’s national interest.

Economic history is clear. The UK’s growth of national income per head has been the fastest in the G7 since joining in 1973, having been the slowest between 1950 and 1973. EU membership has served Britain well and has not prevented domestic economic renewal.

A battery of evidence shows the EU creates trade rather than diverts it. All other relationships with the EU and others throw up greater tariff or non-tariff barriers. Trade enhances competition and productivity growth, the elixir of prosperity. Britain is not burdened by EU red tape; its most damaging regulations are home grown. Although EU immigration is unlikely to make the British-born much better off, there is no evidence migrants take jobs and precious little that they harm wages or public services.

The economic assessment is rounded off by the concern that the uncertainty associated with Brexit is highly likely to depress economic activity in the short term, ensuring a much greater hit to the public finances than any possible savings in membership fee sent to Brussels.

Though they do not come to precisely the same assessment of harm, the consensus is striking. While George Osborne’s warning of an immediate tax-raising Budget might be jumping the gun, economists agree higher taxes or lower spending would be necessary. Although economists stand to gain from Brexit — economics does well in a crisis — their lives will not be sweet after a Leave vote for three reasons.

First, good economists know the difference between big and small; they know what is true and fair, and they can put economic claims in the correct context. Such knowledge should be celebrated, but Michael Gove, the leading Brexiter, scorns serious economic research because “people in this country have had enough of experts”.

The Leave campaign has delighted in being the enemy of good economics and shows every sign of continuing after a victory, when it will surely get its fingers on the levers of power. Instead of addressing the arguments, the Leave campaign invariably plays the man not the ball, accuses independent research bodies of being hired hands of European funders, and incorrectly states that authors of many reports were in favour of the UK’s euro membership. A particular low was the insinuation by Steve Baker MP that Mark Carney, the Bank of England governor, was still acting as the mouthpiece of his former employer Goldman Sachs.

Second, some economic officials have been granted constrained powers to take decisions for the public good. The BoE controls interest rates. The Office for Budget Responsibility produces the official forecast that underpins tax and spending decisions. Competition authorities help arrange the playing field on which companies compete. Parliament’s ultimate sovereignty comes in the ability to remove these powers. But that is not enough for many Leave campaigners such as Jacob Rees-Mogg MP, who sought to bully the BoE into silence and called for Mr Carney’s head. Such threats will impede vital economic truth-telling after the referendum.

Third, economics itself is on the line. If leaving the EU turns out to be beneficial, the profession will enter a crisis that will dwarf its inability to see the global financial crisis coming. More likely, if economists are right but had insufficient influence, few will find satisfaction in saying, “we told you so”.

This is a pivotal moment for Britain. It is also a crucial time for economics. For once Britain’s economists have spoken with one voice. Britain should not leave the EU, they say. You have been warned.

Chris Giles

Fonte: FT

Brexit imperils the confidence of strangers

Suppose that the Leave campaign, which one might call Project Lie, wins the referendum next week. How bad might the economic consequences over the next few years be? Alas, they might be very bad indeed.
Mark Carney, governor of the Bank of England, noted when launching the May Inflation Report: “The [Monetary Policy Committee] judges that the most significant risks to its forecast concern the referendum.” Moreover, he added, “a vote to leave the EU could have material economic effects — on the exchange rate, on demand and on the economy’s supply potential — that could affect the appropriate setting of monetary policy”. The latest Inflation Report adds that the campaign has already partly caused sterling’s depreciation.
The UK Treasury has provided a thorough analysis of short-term risks. This is, inevitably, controversial. But it is important to remember that the Treasury is notoriously sceptical about the EU. Its main scenario is that gross domestic product would be 3.6 per cent lower after two years than if the UK voted to stay, unemployment 520,000 higher and the pound 12 per cent lower. Under a worse scenario, GDP would be 6 per cent lower, unemployment 820,000 higher and sterling 15 per cent lower. The Institute for Fiscal Studies has added that — instead of an improvement of £8bn a year in the fiscal position if the net contribution to the EU fell — the budget deficit might be between £20bn and £40bn higher in 2019-20 than otherwise.
Far more important than such inevitably uncertain forecasts is the analysis of the three channels through which Brexit would work in the short term. These are the “transition effect”, which would come from the perception that the UK had become permanently poorer; the “uncertainty effect”, which would come from unavoidable ignorance about the post-Brexit policy regime; and, finally, the “financial conditions effect”, which would work via the perception that the UK was a less appealing and riskier place in which to invest money.
An important question is whether modelled possibilities capture all the tail risks. The answer is that they do not.
The Treasury argues that the economy might reach a “tipping point” after which worse outcomes would occur — thus “a shock to sterling might cause a sudden contraction in foreign currency lending to UK banks”. Since about half of banks’ short-term wholesale funding is in foreign currencies, reduced access to such funding could then cause further significant financial instability.
Martin Wolf chart 1
An obvious source of fragility is the huge current account deficit. This reached 7 per cent of GDP in the last quarter of 2015. Mr Carney has stated that the UK is dependent on “the kindness of strangers” for sustaining its current standard of living. More precisely, it depends on their confidence. The current account deficit brings risks even in normal times. But the uncertainty caused by Brexit might cause a sharp turnround in capital flows. Net inward foreign direct investment might collapse, for example. The results could include a sharp decline in sterling, a fall in the prices of sterling-denominated bonds and a jump in the inflation rate.
If this were merely caused by a negative shock to demand, the MPC could respond with expansionary policy. Even so, it would be forced into unconventional policies, possibly including negative rates, given how low interest rates are. But, if Brexit were also viewed as a negative shock to supply (as it would almost certainly be), the case for monetary offsets would be weaker. The higher prices would then be a way to deliver the needed suppression of real demand. (See charts.)
Martin Wolf chart 2
A crucial source of fragility, on which the Treasury naturally says nothing, is political. After the referendum, the UK would cease to have a government in any meaningful sense. The Conservative party, with a tiny majority, would be deeply divided between its pro and anti-European wings. The opposition Labour party is already deeply divided on this and many other issues.
Out of this morass would have to come a competent government with a view of what it wants to achieve in complex negotiations with the rest of the EU and the world. It would then have to undertake these negotiations with partners that have many other concerns and would regard the UK with a poisonous blend of hostility and contempt. It would have to decide whether to keep or modify the laws created by more than four decades of EU membership and, if the latter, how to do so. It would have to manage the impact of Brexit on the coherence of the UK and its relations with Ireland. While doing all this, it would have to manage the economy, the fiscal position and the minutiae of political life. Anybody who believes the leaders of the Brexit campaign could manage all this is surely taking illegal drugs.
Martin Wolf chart 3
Moreover, the consequences of Brexit are unlikely to be limited to the UK. The direct impact of British economic instability on the world might not be large, though the eurozone is not in a good position to cope with negative shocks. But the indirect effects might be sizeable. Outsiders might view the UK’s departure as a sign that the EU is a sinking ship. Inside the EU, nationalists and xenophobes would take heart. Brexit might, in such ways, prove an important blow to the EU. At the least, it would force a huge diversion of attention and effort. Yet perhaps the most important consequence might be as a signal of the sheer power of populist forces. If the UK can choose Brexit, maybe Donald Trump will become president of the US.
Brexit, in sum, might be a big economic shock and not just for the UK. This is largely because of the fragility that precedes it and the many uncertainties that would follow it. The referendum is itself irresponsible. The outcome might well prove devastating.

Martin Wolf

Fonte: FT

segunda-feira, 6 de junho de 2016

Here is one export Germany should not be making

When, in April, Wolfgang Schäuble, Germany’s finance minister, sharply criticised the policies of the European Central Bank, he was expressing a distinctive macroeconomic approach which shapes the views of German economists and policymakers alike. It is based on the strong conviction that problems of aggregate demand are of secondary importance as long as prices are sufficiently flexible. This explains the German insistence on structural reform as the solution to almost all economic problems and the quasi-religious fixation on the “black zero”, the balanced fiscal budget with no red ink.

On the face of it, this German exception in macroeconomics is difficult to explain. Students in Germany read the same textbooks as their counterparts in other countries, and in advanced studies the same economic models are used. But behind the textbooks and models lies an economic philosophy called “Ordnungspolitik” which is not found outside Germany. Its guiding spirit is Walter Eucken, who taught at Freiburg university until his death in 1950. In a recent speech marking what would have been Eucken’s 125th birthday, Angela Merkel, the chancellor, insisted that the principles of the “Freiburg school” remained relevant.

There were two aspects to Eucken’s economic philosophy, one positive, the other negative. On the positive side was a commitment to freedom of contract, open markets, private property and robust antitrust policy. On the negative side was a rejection of Keynesianism.

From the experience of the Great Depression, John Maynard Keynes drew the conclusion that active demand management is necessary. Eucken, by contrast, believed that “full employment” policy of the sort advocated by Keynes would lead to a centrally planned economy. And while Keynes saw the Great Depression as the result of the inherent instability of the market economy, Eucken attributed it to an insufficient flexibility of wages and an inadequate monetary order. In his view, flexible prices and wages and an adequate monetary order were a reliable antidote to market instability.

In his aversion to the pursuit of full employment through fiscal policy, Mr Schäuble is an obvious heir to Eucken. This is also true of prominent German economists who, during the eurozone crisis, have ignored the effects of austerity on demand, out of a deep-seated belief that structural reforms can solve all problems.

How has such a narrow economic paradigm survived for so long in Germany? The answer is simple: German economic policy using this approach has been quite successful. But this is only because Germany’s economy, despite its size, is extremely open. The ratio of exports to gross domestic product is 46 per cent. In Japan, the figure is 18 per cent and 13 per cent in the US.

This openness allows Germany to pursue a passive macroeconomic policy at home and benefit from active demand-side policies pursued in other countries. About 60 per cent of the German current account surplus is with the US, the UK, France and Italy, which all have relatively high fiscal deficits. In short, Germany’s economy is supported by the demand management policies of countries that are heavily criticised by German academics and policymakers.

From a global perspective, this freeriding on the demand policies of other countries is questionable enough. But the German approach becomes positively dangerous when politicians try to apply policies which can work in isolation in a very open economy to a large and not very open currency area like the eurozone. In the present situation of chronic demand deficiency, insisting on the “black zero” for large currency areas, or even at the global level, would create a black hole in the world economy.

Peter Bofinger is professor of economics at Würzburg university and a member of the German council of economic experts

Fonte: FT