Tuesday, June 28, 2016

BREXIT and uncertainty - Could a EU policy of punishment toward the UK go too far?

Last thing I remember, I was
Running for the door
I had to find the passage back
To the place I was before
"Relax, " said the night man,
"We are programmed to receive.
You can check-out any time you like,
But you can never leave! "

The uncertainty surrounding BREXIT has not been resolved and will not be resolved for some time. In fact, as the full extent of this event starts to be realized, the financial impact may increase. 

Joining the EU was like going to the Eagle's Hotel California. You cannot leave, or at the least, a country that wants to leave will be severely punished. The reasoned strategy for the EU is to make the terms of a UK exit so high that others will think twice of voting for exit. Punishment seems to be the policy of the day in order to protect this more perfect union. It sends a clear signal to other EU members. I am not sure this was the intent of "one Europe" but this is the place where we are currently. 

I am thinking right now of the punishment of Germany after WWI with reparations and the thoughts of Keynes in The Economic Consequences of the Peace. Is it possible that asking for a quick but painful solution for trying to save the EU could lay the foundation for the next large recession? Could an attempt to reach a higher goal cause greater harm for the European community? While extracting punishment for leaving is rational, can it go too far? 

The Venn diagram below shows the different forms of connection across Europe. There is the EU custom unions and European Economic Area EEA that can both be used to find a middle ground for compromise. It is still early to tell whether these can be fit for the UK and the EU. 

Our job is to handicap markets not to provide solutions, but we have to think through the implications of policy actions and whether they may create more downside risks as well as upside potential. Our concern is still skewed to the downside. 

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