Independent: ‘Financial Markets Aren’t Afraid Of Brexit — They Are Afraid Of Incompetent Global Leadership’

An article from the Independent explains “markets worry when European political leaders make dire warnings about Brexit, not because they believe these warnings, but because they feel this shows the leaders are frightened by change”:

Whatever happens in the Brexit vote next week, there has been a discomforting message from the financial markets. They have been more alarmed than reason says they should be. The particular red light that flashed most violently was the 10-year German bund yield dipping below zero. You pay money to lend to the German government for 10 years.

Yet Germany is the eurozone’s largest and most successful economy. It has even lower unemployment that the UK. The government is in fiscal surplus. And it has a huge current account surplus with the rest of the world. There must be better opportunities there for savings to earn some money. Germany may be a safe haven in a sea of troubles, but my word people must think those troubles are bad to lead to this.

The possibility of the UK leaving the European Union ought not to be a big enough issue to do real damage to the world economy. I know the Chancellor of the Exchequer and the Governor of the Bank of England have issued grave warnings, and of course those warning should be taken seriously. But the reality is that UK would continue to trade with Europe. There would be some new arrangement ensuring that. We are not in the eurozone so the euro should not be affected. We are not in Schengen so that is not affected either.

In any case, even on the worst assumptions, the loss to global GDP would be tiny. The UK is 3 per cent of global output. Let’s assume that we lose 5 per cent of GDP as a result of Brexit (an assumption that I think is far too high, given the continued decent growth notwithstanding Brexit fears). That is 0.15 per cent of the global total – barely worth thinking about.

So what is it?

The best explanation I can see is that people are frightened that there will be another global recession and that if it happens there will be nothing the authorities can do about it…

…Investors do not trust the policy-makers. They worry that if there are more signs of a slowdown they will do the wrong thing. They worry that the present ultra-loose monetary policy is perverse. They worry when European political leaders make dire warnings about Brexit, not because they believe these warnings, but because they feel this shows the leaders are frightened by change.

This fear that the grown-ups are not behaving like grown-ups is corrosive. Whatever happens in the vote next week they will have a chance to show they can respond in a measured and competent way. This isn’t just about Brexit. It is about competence of leadership on the one hand, and confidence in that leadership on the other.

Read more of Hamish McRae’s piece on Brexit here.