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: (http://www.publications.parliament.uk/pa/ld201516/ldselect/ldeucom/138/138.pdf),
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
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
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 (http://www.ft.com/cms/s/2/c4ae013a-370f-11e6-a780-b48ed7b6126f.html#axzz4CiCFdQGs),
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
(Text of speech at: https://www.wto.org/english/news_e/spra_e/spra126_e.htm)
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
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). +