TWN Info Service on Finance and Development (Jul16/01)
5 July 2016
Third World Network

Brexit overshadows BIS outlook, world central bankers meet
Published in SUNS #8271 dated 28 June 2016

Geneva, 27 Jun (Chakravarthi Raghavan*) -- The Bank for International Settlements (BIS), the so-called central bank for the central banks of the world, at its annual meeting on Sunday 26 June, and perhaps more important, the side meetings and confabulations of leading central bankers of the world, found itself totally overshadowed by the Brexit referendum outcome in the UK, and the political and market reactions.

The BIS, in remarks that no doubt were inserted at the last moment in the speech to the annual meeting of its General Manager, Jaime Caruana, tried to give some reassuring words and the hope that with international cooperation (a commodity plenty in lack across all areas for some years now), the problems arising from the Brexit vote outcome, and the future economic, trade and other relationships of the UK and the rest of Europe, and City of London as an important centre of capital markets and financial services, would be sorted out.

Caruana said: "The outcome of the EU referendum in the United Kingdom has resulted in high volatility in financial markets. Extensive contingency plans by the private sector and central banks have been put in place to limit disturbances in financial markets. Stronger capital and liquidity buffers in the private sector have also made financial systems more resilient to such market disturbances. Central banks have already communicated that they are closely monitoring the situation and stand ready to take the necessary actions to ensure orderly market functioning. Central banks have acted swiftly in the past, they stand ready to act again, and they have the tools. There is likely to be a period of uncertainty and adjustment. The United Kingdom is closely integrated in the global economy, and it hosts one of the world's most important financial centres. With good cooperation at the global level, I am confident that uncertainty can be contained and that adjustments will proceed as smooth ly as possible."

In a similar vein, the IMF chief, Mme Christine Lagarde, called upon the UK and the EU to quell uncertainty over the implications of Britain's vote to leave the 28-member bloc by acting quickly and cohesively, following three days of confusion.

The Fund, she said, "will continue to encourage the parties involved to actually proceed with this transition in the most efficient, predictable way in order to reduce the level of uncertainty, which will itself determine the level of risk we are facing".

However, though it is first and foremost a political issue to be sorted by political leaders on either side (in the UK and in the EU), it would be foolish to ignore some time-spans and limits, and numerous forces that will come into play.

A report of the UK House of Lords has set out in some detail the procedures and legal issues: (, and it was published in May, and includes some weighty legal opinion, and options, that everyone should read and would benefit from, including WTO and FT writers, one of whom had cited in a report on 24-25 June on the consequences of the Brexit outcome, from remarks in London on 7 June of the WTO's Director-General Roberto Azevedo. (More on that below.)

Firstly, in terms of the EU treaty, and the rights and obligations of its members, only Britain can act to set in motion the "divorce" proceedings, by invoking Article 50 of the treaty. Once it is invoked it involves intricate talks involving technicians and politicians in the UK on one side and the EU on the other.

With the British Prime Minister David Cameron announcing last week, after the results of the referendum were out, that he was resigning, but will function as caretaker until a new conservative leader is chosen (in a complicated process that is expected by October), it will be for the new PM to set in motion the process of "divorce" from the EU.

And the would-be candidates for PM (leaders of the leave campaign, like Boris Johnson), even have said there is no hurry.

However, other EU members are already applying pressure that the UK must set in motion now Art. 50. While legally, they have to wait on the UK to do so, they can apply other pressures. Any event, in the interregnum, the UK will be frozen out of the decision making by the other EU members. And until it is legally separate, all EU laws and regulations issued till separation, will prevail, even within the UK, until separation, and then action by the UK legislature to change the laws (with the legislatures of Scotland and Northern Ireland with devolved powers, whose agreement is needed for change, and having a veto).

And as the just resigned UK Commissioner in charge of Finance Portfolio on the EU's executive commission, Lord Hill, has pointed out, even financial regulations that will impact on the City of London and the capital markets and financial businesses of firms based there.

On the EU side, will be several actors - the EU Council of Ministers (minus the UK), and the terms of negotiations and instruments it fashions for the intricate negotiations with the UK, the EU Commission as the practical executing arm, and the EU Parliament that will have a Yes or No say on the final accord, and has already demanded a place at the table of negotiations from the outset.

And when the agreements are settled, each of the EU member states have to ratify, as also the UK. If there is no accord when the two-year span runs out, it can be extended by both; otherwise the separation will be automatic, without any arrangement in place.

In the time span, several issues have to be also agreed: future of UK-EU trade relationships, future of the millions of each other's citizens working, living in and having achieved some settlers' rights have to be agreed upon, as also a number of other such issues.

Even God, according to the Bible, took six days to create the world and populate it, and had to take rest on the seventh; what he thinks of it all now, only he (or she) knows for sure.

In the FT, in various comments and scenarios after Brexit (, in an article by Gemma Tetlow, on 25 June titled, "Brexiters' very different visions of post-EU Britain," has two paras on suggestion by some Leavers, for Britain to unilaterally reduce its external tariffs to zero.

It says, among others: the second paragraph citing WTO Director-General Roberto Azevedo (that I have highlighted below in CAPS):

"Mr (Boris) Johnson's position contrasts with the suggestion from some Leave supporters, such as Lord Lawson, the former chancellor, and Patrick Minford, the economist, that all tariffs should be removed unilaterally, even if the EU and other countries do not reciprocate.

"A unilateral approach poses two difficulties. By removing all tariffs without requiring similar concessions from other countries, the UK would reduce its bargaining power in future negotiations. Even if politicians are happy to give this up, "NO [World Trade Organisation] MEMBER CAN UNILATERALLY DECIDE WHAT ITS RIGHTS AND OBLIGATIONS ARE", it cited Azevedo as commenting.

In other words, Tetlow went on, unilaterally falling back on WTO rules is not as quick and simple as some have suggested and would still require agreement from the other 161 member countries.

The WTO media office confirmed to SUNS today, the Azevedo remarks, noting it was delivered by him in London at a 7 June conference.

In the remarks (on the trade implications of Brexit), Azevedo said: "I would like simply to clarify some of the facts and practical implications as they relate to trade and the WTO.

"The UK currently has preferential trade relationships with the EU, and with the 58 countries with which the EU currently has free trade agreements. In the event of a British exit, all of these relationships would need to be re-established to maintain the same preferential access the UK currently enjoys via the EU.

"This would probably entail negotiations.

"In the meantime, while trade would continue, it could be on worse terms. Most likely, it would cost more for the UK to trade with the same markets - therefore damaging the competitiveness of UK companies. Here we're talking about preferences on 60% of the country's goods trade (that divides as around 47% with the EU itself, and around 13% with the EU's preferential trade partners). The implication is that UK exporters would risk having to pay up to 5.6 billion pounds each year in duty on their exports. And there could be an impact on services trade as well.

"In addition," Azevedo added, "the UK would also need to re-establish its terms of trade within the WTO. The UK, as an individual country, would of course remain a WTO member, but it would not have defined terms in the WTO for its trade in goods and services. It only has these commitments as an EU member. Key aspects of the EU's terms of trade could not simply be cut and pasted for the UK. Therefore important elements would need to be negotiated.

"There is no precedent for this - even the process for conducting these negotiations is unclear at this stage. I can say that negotiations merely to adjust members' existing terms have often taken several years to complete - in certain cases up to 10 years, or more. However, as far as the UK's case is concerned, it is impossible to tell how long it may take.

"Upon leaving the EU, rights that the EU secured for its members would arguably no longer automatically apply to the UK. This includes the right to restrict certain aspects of the free movement of people and to protect public utilities from competition. The UK might need to negotiate with other WTO members to maintain these rights.

"No WTO member can unilaterally decide what its rights and obligations are."

(Text of speech at:

The EU-negotiated accords on preferential access or under FTAs with other countries stand on a different footing though from rights and obligations of the UK at WTO.

As Mr. B. K. Zutshi, who negotiated and signed for India the Marrakesh Agreement for WTO, notes, at that time in 1994, and until then in the old GATT 1947, the UK was a original member of the GATT 1947, and as such it also became an original member of the WTO and its agreements. As a member of the European Economic Community (until it became the EU later on), the EC Commission negotiated on behalf of the EEC members, but the accords were signed by the EEC members.

Even after WTO, while the EU and its constituent states are recognised as members, each member state is a member with voting rights, and paying its budget shares according to assessed contributions.

On any matter of voting, while the EU casts the votes collectively on behalf of all its members, the total votes are only those of members (and not EU separately).

As a original member, the UK has all the rights (and obligations) flowing therefrom, including any tariff or goods accords subsequently. In terms of its rights, after separation, the external MFN tariffs of the EU, at the time of separation, will automatically be the MFN tariffs of the UK, with all WTO members (including the EU).

Any WTO member, can without any negotiations, reduce its own external tariffs, to zero as some Leavers have said, and apply those tariffs unilaterally, or bind them at zero unilaterally.

The UK would need to negotiate with others, only in respect of any reduction of obligations it seeks, or in relation to the rights and obligations of the EU's Free Trade Accords.

This is very different from the UK trying to stop or reduce migration.

Notwithstanding the remarks (of Caruana or others at the BIS meet or elsewhere), while, before the vote, plenty of global leaders, financial and economic multilateral institutions, and economists, and governments and political leaders of other countries had been warning the British public of the dire consequences, to themselves, and the global economy, few anticipated the outcome, even if some had some contingency plans.

May be in a week or ten days, cooler heads may prevail, mutual recriminations may be put aside, but the intricacies of "separation" are such that it will be time-consuming, subject to hard bargaining, and an issue of political dynamics, with leaders of most countries and sectors, out of touch with their populace and, more importantly, the people do not have any confidence in their judgements or of their functioning keeping with people's welfare and in public interest.

In its annual report released on Sunday, and in related media briefings, and various remarks, the BIS and its economists attempted to mount a case against the continued over-reliance of politicians and governments everywhere on monetary policy, but press for fiscal policies and hard "structural reforms and changes".

The report and its chief economists argued that there is so much mis-guided focus on "inflation", or on purported "demand" deficiencies and monetary policies (that have become counter-productive) to stimulate demand, and hence need for fiscal policies that by their nature cannot have a "one-size-fit-all" approach or formula.

Judged by standard benchmarks, the global economy is not doing as badly as the rhetoric sometimes suggests, the BIS report suggested in its overview.

Global growth continues to disappoint expectations, but is in line with pre-crisis historical averages, and unemployment continues to decline.

Less comforting is the longer-term context - a "risky trinity" of conditions: productivity growth that is unusually low, global debt levels that are historically high, and room for policy manoeuvre that is remarkably narrow, the BIS said, adding, a "key sign of these discomforting conditions is the persistence of exceptionally low interest rates, which have actually fallen further since last year."

The report has dealt at some detail on the damage being caused to various parts of financial sector and institutions - banks, non-banking financial institutions, insurance companies, pension funds, and ordinary "savers" - and the dilemmas facing central banks in grasping the nettle and nudge interest rates into positive territory.

The year under review, the BIS said, saw the beginnings of a realignment in the forces driving global developments: partly in response to US monetary policy prospects, global liquidity conditions began to tighten and the US dollar appreciated; financial booms matured or even began to turn in some emerging market economies (EMEs); and commodity prices, especially the oil price, dropped further.

However, global prices and capital flows partly reversed in the first half of this year even as underlying vulnerabilities remained.

There is an urgent need to rebalance policy in order to shift to a more robust and sustainable expansion.

A key factor in the current predicament has been the inability to get to grips with hugely damaging financial booms and busts and the debt-fuelled growth model that this has spawned.

It is essential to relieve monetary policy, which has been overburdened for far too long. This means completing financial reforms, judiciously using the available fiscal space while ensuring long-term sustainability; and, above all, this means stepping up structural reforms.

The BIS said in the Report, "These steps should be embedded in longer-term efforts to put in place an effective macro-financial stability framework better able to address the financial cycle. A firm long-term focus is essential. We badly need policies that we will not once again regret when the future becomes today."

(* Chakravarthi Raghavan is the Editor-Emeritus of the SUNS. A more detailed analysis and review of the report will be in future issues of SUNS). +