Bulgaria should ignore the vote and gird its loins for the next phase of Eurozone problems.
After a fierce campaign which has witnessed members of the ruling Conservative party turn upon each other with such unprecedented vitriol that it seems difficult to believe they could ever work together afterwards, the likely outcome is that Britain will vote to Remain in the EU. This position has changed markedly in the last 5 days. For the four prior weeks the Leave campaign crept up steadily in the polls, moving from a seemingly hopeless position until last week the polls were neck and neck.
The Prime Minister and his advisers badly misread the British public. The more he pressurized an array of international statesmen and women to portend economic doom for Britain should it Leave, the less Remainers were trusted by the public. The economy was the central focus of Remain. Immigration and sovereignty were the focus of Leave. In recent weeks the Government’s economic arguments spectacularly backfired. Specifically, two reports by the Treasury department purported to paint a bleak economic future in a Brexit scenario, going so far as meticulously to calculate the cost of Brexit at £4,300 per household (just over Euros 5,000).
But these reports seem so obviously manufactured to deliver the Government’s preferred outcome that a slew of respected commentators attacked them.
To quote Professor Kevin Dowd:
“The Brexit reports should not be dismissed as just another couple of badly written Treasury reports. We have seen plenty of those over years, but these are on all altogether different level. These reports are an object lesson in the economists’ black art of how to deceive with models and they should be required-reading for all trainee economists – not, one hopes, as a how-to manual, but as an exercise in how not to carry out economic modelling. As Joan Robinson once observed, the purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists. These reports are a disgrace to the economics profession and I can well understand why their authors would prefer not to put their names to them.”
So why do I believe Remain will prevail? The shocking murder of a 41 year old mother, and Member of the British Parliament Parliament, Jo Cox seems to have had a significant influence. She was killed by a man who seems psychiatrically disturbed, but who nonetheless had links to an extreme but very small British political outfit called “Britain First”. He screamed the name as he was shooting and stabbing her. The event has shaken the British mood and, I believe, subliminally revived memories of extreme totalitarian governments in Europe in the 20th century. Jo Cox was a committed “Remain” campaigner, and by all accounts a selfless, incorruptible warm and bipartisan politician. Maybe the polls have swung out of sympathy for her, maybe it has made wavering voters more worried about the ‘nasty shocks’ that the Prime Minister have warned lie in wait of a Brexit.
The importance of this background is that in the UK there is a sense that Pandora’s Box has now been opened. Even if the vote is to Remain, issues have been aired which go to the root of struggling Europe.
My view as regards Bulgaria is that if Britain were to vote for Brexit, there is a chance that the financial crisis would come to a head slightly sooner, but I think the timing difference is marginal. Europe’s banking system is broken, its monetary policy a mess and its currency unstable. The term “Terminal Debt” has been coined. Extend and pretend can only last so long. At some point there will be an acknowledgement that the situation is terminal.
This matters for Bulgaria because it has relatively low levels of national debt and stands to lose heavily if there is disruption to the euro. Hard though this may be to accept, a currency crisis is always associated with rampant price inflation. Although presently mired in deflation, the euro could sink into an inflationary crisis quite easily.
Greece is clearly bankrupt, the troika have abandoned any hope of Greece being able to service its debt at all. They merely take as much money as they argue Greece can afford each year and construct an interest rate and repayment grace terms around this number.
Spain cannot stabilize its debt. Portugal’s debt is greater than Japan’s – above 400% of GDP. Ireland is little better off.
This has led to mass unemployment across much of Europe, and this depression has no end in sight.
But this situation will not go on for ever. Something will snap. I suspect that one major country will break away. Germany’s Der Spiegel pleaded on Sunday for Britain to remain on the ground that, if it leaves, Germany will be unable to prevent Europe’s political culture shifting into belief in full scale state power over economies and redistribution. In other words, Germany believes the indebted countries seek to crank up their borrowings.
Germany has consistently been unhappy with loose ECB monetary policies which it sees as discouraging reforms in the above and other countries. Germany is unlikely to agree to a common fund to insure the deposits of customers of banks across Europe. Banking Union is therefore dead and fiscal integration unlikely to happen. This alone neuters the pro European federalists, and we have not even yet mentioned migration.
And yet the Remain campaign in the UK sees Europe as key to Britain’s future economic growth? Why has the media not responded to such claims with derision?
My view is that the sovereign debt and banking crisis are poorly understood by the media and completely beyond the comprehension most non-banking specialists. Accounting rule making has moved so far away from the traditional “true and fair” view of a bank’s profitability and solvency that no serious person claims to be able to assess a bank’s health from its accounts.
Germany puts up with this mess because of the politics of Europe and presumably also because it cannot see an alternative to its continued participation in the euro without itself suffering massive internal disruption, and sustaining huge losses given its 27% ownership of the ECB, which not only holds €3 trillion of paper debts much of which would default in these circumstances, but also owes Germany some €700 billion through the less obvious settlement system it operates on behalf of the eurosystem of national central banks.
As a fairly frequent visitor to Bulgaria and SE Europe I despair at the bland acceptance with which Bulgaria in particular responds to each phase of monetary loosening. Bulgaria should skilfully and diplomatically increase its borrowing and fund much needed improvements in infrastructure. Yes of course there are EU rules limiting borrowing. But one thing the crisis has shown us is that the financing techniques exist to circumvent almost any rule.
By Gordon Kerr