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Commentary

Tue 11 Dec 2018 / Europe

Brexit tumult recalls Black Wednesday

The UK is in a fast-changing situation with much at stake. The degree of uncertainty over the future path of government policy on Brexit calls to mind the days running up to Black Wednesday in September 1992, when the UK attempted to raise base rates twice to defend the pound before crashing out of the European exchange rate mechanism. Prime Minister Theresa May has outlined three options for the UK as it looks to exit the European Union: her deal, no deal, or no Brexit at all. Though none seems probable, one of them must happen.

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Mon 10 Dec 2018 / Europe

AKK's rise: France, euro repercussions

Annegret Kramp-Karrenbauer, the new leader of Germany's principal governing party, faces a complex struggle to impose her will on her fractious Christian Democratic Union. She will pursue a more conservative path in key areas compared with still-Chancellor Angela Merkel. This has consequences for policies to stabilise the euro. 'AKK' is a long-time Merkel ally and, more recently, her designated successor. How well she masters her shorter-term tasks will have a crucial bearing on whether, when and how she takes over the chancellorship.

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Wed 5 Dec 2018 / Europe

Preserving Britain's place in the EEA

The UK intends to remain a member of the European Economic Area on the same grounds as Norway, Iceland and Liechtenstein. There will be a deep free trade agreement in place on 30 March 2019 and no need to take recourse to World Trade Organisation tariff schedules for intra-EEA trade. Continuing in the EEA on this basis could unite many different viewpoints in parliament because, first, the UK would maintain significant control, and second, this approach leaves longer-term trade policy issues to be settled later.

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Wed 28 Nov 2018 / Europe

May deal faces near-impossible hurdles

Prime Minister Theresa May would almost certainly try to counter a rejection of her Brexit deal in the UK parliament by returning with an amended version to avoid the more dramatic alternatives. To stand any chance of success, an amended deal must overcome two hurdles. First, May must keep her cabinet united – which seems unlikely to happen. Second, the EU must be forthcoming in offering something meaningful to appease the UK parliament and Leave MPs – again, what that could amount to is almost impossible to determine.

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Mon 19 Nov 2018 / Europe

Five options if UK rejects May deal

UK Prime Minister Theresa May has clinched her deal with the European Union and persuaded most of her cabinet to support it. But after EU leaders sign off the deal at a summit on 25 November, May has promised the House of Commons a 'meaningful vote'; it is hard to see how she can win it. However, even if May falls, the arrival of a new Conservative party leader would not change the parliamentary arithmetic behind the Brexit deal. If parliament votes against the deal, there are just five possible outcomes.

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Fri 9 Nov 2018 / North America

US midterms fulfil market expectations

The results of the 6 November US midterm elections illustrate how President Donald Trump remains bound to historical norms around US voter preferences for shared power. That is the central insight from this result: the loss of total Republican control of Congress should somewhat constrain Trump's potential for erratic behaviour. The initial market reaction has been positive, as the outcome fulfilled expectations. While the chance of gridlock in Congress is higher, the result also reduces the probability of negative policy surprises.

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Thu 8 Nov 2018 / Europe

Merkel can help Christian Democrats

German Chancellor Angela Merkel bequeaths a political legacy that leaves leadership of Europe's most powerful economy in less than wholly secure hands. The result of her manoeuvring is a country with seven major political parties competing in parliament. Those bidding for Merkel's job will need to keep an eye on a possible revival of the earlier-considered four-party coalition. If the Social Democrats leave (or are pushed out of) the 'grand coalition' next year, Merkel's successor will have another chance of forging a new constellation.

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Mon 5 Nov 2018 / North America

US faces twin deficit crisis

The US trade deficit has widened steadily over the past two years, reaching a record high of almost $1tn annually. As a result of Washington's expansive budget policy at this late stage in the economic cycle, analysts expect that over the next two years the US budget deficit will rise to a peace-time high of more than $1tn. This makes it probable that the US will face a twin deficit problem – an outsized budget deficit and an outsized trade deficit – last seen in the 1980s during Ronald Reagan's presidency.

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Thu 1 Nov 2018 / Europe

'Incertitudes allemandes' back again

German instability is back again. Angela Merkel, presiding over the ruling Christian Democratic Union as chairman since 2000 and as chancellor since 2005, will step down from the party leadership in December. She protests that she will stay the course. A fight is brewing among the (at least) four disparate candidates for the party chair. The odds are shortening on her departing from the chancellorship well before general elections scheduled for 2021. The next poll could indeed come a lot sooner.

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Fri 26 Oct 2018 / Europe

No-deal Brexit threat to rich EU nations

When examining the potential fallout from the two greatest risks facing European markets, a no-deal UK exit from the European Union and possible Italian contagion, the impact on EU supply chains and cross-border banking exposures is especially important to consider. The EU regions that would be most impacted by a no-deal Brexit are richer and have lower unemployment rates, including southern Germany and the Netherlands. Such regions stand in contrast to Italy and Spain, which are less exposed to the UK through supply chains.

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