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| Pavel Constantin, Romania, June 22, 2016 Caglecartoons.com, |
UK's vote to become the first country to leave the EU, has the potential to start
a motion that could unravel the post-war global financial structure and with it a
deep plunging of the global growth. To be clear, the Brexit itself is not the culprit
as we have argued before the global financial system has been in an extremely perilous
situation over the past decade.
It is unfortunate that Brexit has happened in such uncertain times when the US political situation is in such a precarious state with the two highly divisive presidential candidates; of whom one is so
out of touch with the global economic fundamentals that he constantly adds to the prevailing
uncertainty by his uniformed and misguided policy statements and the other’s “extremely
careless” use of a private email address and server has been mischievously
exploited to render her as a completely ineffective leader, should she win the
election. Meanwhile, the US economy is slowing down and a significantly higher
dollar, partially reflecting the increased global risk, is exacerbating the global
economic disorder.
In Asia, both China and Japan's economic and political
situations leave a lot to be desired. A tepid global demand is intensifying the
adverse impact of Brexit on Chinese exports at the time when the rise of dollar, vis-à-vis
Europe’s currencies, may force China to react yet again by allowing a more
rapid depreciation of its renminbi, which is scheduled to be included in the IMF’s basket
of currencies making up the Special Drawing Right (SDR) effective October 1,
2016. The country’s growth, after
averaging almost 10 percent between 2006 and 2014, slowed to 6.8 percent in
2015 and it may slow to about 5.8 percent this year. The promised economic restructuring and the consolidation
of inefficient state enterprises with chronic oversupply now appear of remote possibility, while
the probabilities of political and social unrest should not be underestimated.
Japan’s economic malaise is also worsening and Abenomics appears
dead after the Brexit. A frightening fiscal
debt level, a stagnant economy and an ineffective monetary policy with a damaging negative
interest rate must now deal with the consequences of an appreciating yen
against several currencies which will reduce its exports, weigh heavily
on its industrial sector’s earnings and undermine the country’s domestic
investment prospects.
Of course, the brunt of the Brexit mishap will be felt mainly
in Europe, and particularly in the UK where British pound has plunged to hit a record
low of $1.28 since June 1985. The pound also fell to a near three-year low
against the euro at €1.17. On the stock market, shares in domestic companies,
such as supermarkets, housebuilders and banks, took the biggest hit on July 6th
after the Bank of England unveiled a four-point plan to cope with the Brexit
crisis. With the economy dependent on his ability to act quickly, decisively and
with full access to information, governor Carney provided a timely reassurance that
“The bank can be expected to take whatever action is needed to promote monetary
and financial stability, and as a consequence, support the real economy.” This
was a reminiscent of the 2012 Mario Draghi’s pledge to do “whatever it takes”
to save the euro, which has only been successful as far as it has postponed the day of
reckoning for euro. The bank of England has eased special capital
requirements for banks, providing an estimated
extra £150bn for lending, which would not be nearly enough to prevent the risk
of a global contagion.
Of course, the answer to Brexit cannot be monetary policy. The limits of central banking in Japan, Eurozone,
and the US have already been observed. The answer to Brexit is not even in the
hands of Europeans ( the UK included). The world global financial disorder requires
an urgent restructuring to get rid of the global toxic debts, establishment of
a purchasing-power-parity-based exchange rate system, and a Marshall-type plan
to invest on global digital infrastructure, renewable energy, and eradication
of poverty and diseases. Unfortunately, the world is faced with lack of
credible and visionary leaders to push for such an agenda.
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