Overblown rhetoric over UK withdrawal

Perspectives from central Europe

The rhetorical battle over the best way for Britain to leave the European Union in March 2019 has witnessed a ratcheting up of overblown invective from all sides of the debate. We have dire technocratic admonitions on the effects of a ‘no deal’ Brexit without a formal withdrawal agreement: health ravages, ruinous effects on air transport and mobile telephony, lorries piling up at the port of Dover, and emergency food stockpiling. And we see politicians warning of catastrophic splits in the Conservative party and Jeremy Corbyn, the radical Labour leader, inaugurating a far-left takeover of 10 Downing Street if a potential ousting of Prime Minister Theresa May precipitates an early election. Mark Carney, Bank of England governor, whose general forecasting record has not been brilliant, weighed in by telling May’s ministers that a ‘no deal’ departure would drive up mortgage rates, knock the pound and drive down house prices by 35%.

It can be safely presumed that none of these dire predictions will come to pass. The rationale behind such statements, most of them either deliberately or unwittingly exaggerated, is to ward off unpleasant outcomes. Britain will leave more or less on time on 29 March with an accord that will be not too different from the compromise deal May outlined at her country residence of Chequers two months ago. A good place to analyse the actual state of affairs in the EU is the Polish city of Kraków, once the fortified frontier of the Austro-Hungarian empire, on Friday the venue for an economic conference of the Polish and Hungarian central banks (co-organised by OMFIF).

Poland and Hungary, two non-mainstream EU members following relatively independent and nationalistic policies opposed by much of the core membership, are both broadly sympathetic to the UK political influences that led to the 2016 referendum withdrawal decision. Both are worried about the effect on general EU policies of the UK departure, which they see (rightly or wrongly) as strengthening an unwelcome Franco-German grip on the EU. Both have been recording economic growth rates of 4% and more, double the EU average – and label the central European region as a whole ‘the growth engine of Europe’.

Narodowy Bank Polski and Magyar Nemzeti Bank are happy – for both positive and negative reasons – about staying outside the euro area for the foreseeable future. The central banks also follow non-mainstream views on central bank independence. They believe central banks should be joined up with government policy in a manner that compromises purist Bundesbank-style separation from politics. ‘We talk to government. We are independent of money markets, of business and of the euro area’, as one authoritative figure puts it.

Both Poland and Hungary are anxious about exposure to adverse geopolitical forces (Russia, China, US President Donald Trump) but believe joining the euro area would be economically and politically destabilising. Their view about the dangers of European Central Bank monetary policies are shared by many in Germany. This was underlined earlier this month by Uwe Fröhlich, chief executive-designate of the giant German co-operative ‘central bank’, DZ BANK. He told a conference in Berlin that the ECB had ‘acted responsibly in the aftermath of the financial crisis’ and brought recovery. But he added: ‘Unwillingness to raise interest rates in a timely manner is effectively destabilising the European banking market day by day.’

Poland and Hungary, like Germany, wish to secure alliances in many fields with the UK after Brexit. One background reason why the chances of a constructive deal by November have risen significantly is intensely bound up with the ECB’s future. German Chancellor Angela Merkel has effectively decided that it’s more important to have a German helm the European Commission than the ECB. This has enabled Michel Barnier, the EU’s chief Brexit negotiator, who had previously harboured ambitions on the top Commission job, to concentrate on getting Brexit done rather than securing his political future. This new Barnier singe-mindedness, coupled with an improved UK negotiating performance and disarray among the ‘no deal’-favouring Conservative Brexiteers, should bring benefits for the UK and the rest of Europe.

David Marsh is Chairman of OMFIF.

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