ECB Policy Blues At Brexit Turning Point

The gradual withdrawal of England from the European Union (Brexit) following a country vide referendum on 23 June 2016, is proving to be a greater unbundling of trouble for both England and the European Union than the opening of the mythical "pandora's box". This month when the European Central Bank (ECB) board sits to review its policy rates, it will have much more on its mind than just the liquidity position in the EU system. Brexit is the single largest challenge the European Union is facing since its inception in 1993.

The marriage of the EU and the United Kingdom was not an easy one. Ever since the days of "Treaty of Paris in 1951" the United Kingdom has been in a fix, whether to be a part of the European Union or not. When it tried to join it in 1963 and 1967, it was vetoed down both the times by "Charles De Gaulle" the then-president of France, terming it as American proxy to influence into the affairs of Europe. Then, when it did finally join in 1972, the labour party government of 1974 wanted to re-negotiate the terms of membership which it termed as unfavourable to the UK. Over the period of forty-two years since 1974 till 23 June 2016, there has been many a twist and turns on the way with referendums and resignations and elections being fought over the issue. Finally, it seems, all is settled, and England has made up its mind to leave the European Union for good. The tentative date for the withdrawal was set to be on 29 March 2019 but has since got extended to 31 October 2019.

The European Union as we know it today; the very idea to build an all serving united European economic bloc was first born in 1951 with the signing of the "Treaty of Paris in 1951" by Belgium, France, Italy, Luxembourg, Netherlands and West Germany better known at that time as the “inner six”. Later they were joined by another seven countries; Sweden, Switzerland, Austria, Denmark, Norway, Portugal, and the United Kingdom. This list kept on expanding to reach a total of 28 member countries today finally. However, the idea of a single integrated market where people moved freely between countries, companies did business across boundaries and a single currency regulated by a European central bank, came into existence on 1 November 1993 with the formal signing of a treaty among member states called the ‘Maastricht Treaty’ in the city of Maastricht in Switzerland. However, since then, this treaty has been tested on several occasions. First of all, member countries maintained their economic policies, their independent central banks and treated the advisory of European central bank merely as guidance. This arrangement reduced the ECB as a central bank with no real powers to regulate policies across the union. This problem came into the wide-open during the 2008-11 global financial crisis. Member countries like Portugal, Spain, Greece, Ireland and Cyprus were found to using undisciplined and not so transparent economic practices and failed to honour their sovereign debt obligations. The events of the 2008-11 crisis cast severe doubts on the stability of the European Union, it necessitated huge stimulus packages being doled out to these countries to tide over the crisis. The money, however, came from larger and more economically disciplined countries like France, Germany and the United Kingdom, who though obliged but reluctantly.

The mood among the masses of these countries became belligerent, who were unhappy that their hard-earned money is being used to help member countries whose policies only seemed to be to exploit larger countries. They conducted their affairs in a manner their resources couldn’t support, and their citizens often moved to these larger countries and stole their jobs. There was a renewed and more vociferous call now in these countries to exit EU following this development. Germany and France; two of the three most significant countries in the economic bloc however have been able to contain the unrest; realizing the broader benefits of staying in the European Union. On the other hand, despite several appeals by the ruling Conservative party in favour of staying in the EU, the British people voted against it overwhelmingly. The government of Theresa May formally initiated the departure on 29 March 2017 with a letter stating the same to EU president Donald Tusk. The divorce a long-drawn process, is to be accomplished over a two-year period with each free to follow their independent policies after the date.

The entire European Union was badly jittered following the 2008-11 economic crisis. Massive reforms at the European Central Bank were initiated to avoid a repeat of the crisis. More powers were given to the ECB to regulate monetary policy across the EU, and members agreed to greater compliance of regulations. A number of other measures were also taken up like setting up of European bank recovery and resolution authority, European fiscal union and issuance of euro bonds. On the political side, extreme austerity measures were initiated by most of the affected member countries. State heads like Nicolas Sarkozy of France and Silvio Berlusconi of Italy lost mandate and lost in subsequent elections.

Several American Investment banks and credit rating agencies were also in the dock and were blamed for the aiding the wrongdoers and not being able to see the impending downfall.

However British leaving the European Union is a different ball game altogether. If not appropriately implemented could send the entire Eurozone and the British economy with it into a long-term recessionary mode. The interlinked businesses and fund flow between banks and financial institutions and interconnected companies of money market exchanges would stop immediately. Bridges built over the years will come to disuse in no time with people withdrawing from their businesses anticipating massive disruptions.

Both the European Union and Great Britain are in battle mode to deal with this event of a mutual parting of ways. There is greater emphasis on measures to be taken to check business disruptions from happening at all. Despite getting two years preparation period to take all preventive measures, the exercise seems to have overwhelmed the foresight of both European Union and Great Britain. With the gradual clarity in the understanding of the magnitude of the problem, lawmakers on both sides are grappling for solutions. The idea being that there will be an agreement between the two blocks that in case of any eventuality, all issues are to be resolved as per a predetermined set of terms to be set under this agreement. However, negotiations between European Union and Great Britain are still going even as the final date of disengagement is coming near.

The bone of contention, however, are two main issues, the financial settlement between the EU and England and the rules of engagement regarding people movement between the EU and England post-Brexit.

On the financial settlement front, a member country leaving the union is expected to keep contributing towards it budget for some times, apart from that the departing member, must also satisfy all the financial obligations it owes to other member countries entered under the framework of the union or replace them with suitable bilateral agreements. However, till March 2019 there was no final agreement of the amount England owed to EU, the British government has put out a figure of £37.8 billion from its side based on agreed methodologies of valuations and adjustments, from EU side no definite figure has been made public.

Other than that, there is the issue of 3.2 million EU citizens working in the UK and 1.2 million UK citizens working in EU zone who entered each other's territory as per rules under erstwhile united EU arrangements. Disruptions in their jobs will cause a mass hue and cry and massive business disruptions.

In anticipation of the foreseen and unforeseen repercussions of the separation, there is a mood on both sides that can best be described as panic. Several of Lawmakers in the UK have come forward and have stated that a no-deal Brexit (an agreement between EU and UK to settle the above as per a predetermined framework) would be a foolhardiest gamble and prove to be disastrous for the UK and would cost the economy somewhere close to £30 billion. The Union countries, on the other hand, are also bracing up for the likely impact of the event, several of them have made arrangements like cutting rates and preliminary trade negotiation engagements with countries outside of EU. Despite the overwhelming understanding of the likely consequences, (in case of a no-deal), bitterness in the negotiations between both parties continues to fetter by the day. The new Prime Minister-elect, Boris Johnson has promised a “do or die” Brexit, that is a no-deal Brexit should a deal not materialize by the D-date, and deal with the consequences as they come. He claims that the much-hyped repercussions will not be as critical as is being anticipated and will receive a soft landing under the WTO arrangements where both European Union countries and Great Britain are signatories.

Preparations on ECB side are in full swing as well. ECB chairman Donald Tusk is to chair a meet of the EU member countries this week, where rate cuts and several policy measures, will be discussed to ensure the impact of Brexit is not hard felt.