The Minor Issue of Brexit

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In November this year, I witnessed a lecture seeking to assess the impact of Brexit on the relative significance of financial centres like Amsterdam, Luxembourg, Paris, Frankfurt or London. 

I felt almost amused by the indignation most particpants expressed with regard to the UK's "treacherous" breakaway from Euroland. 

To the astonishment of a number of disscussionists, I would point out that the purported disadvantages of a Brexit to Europe and the UK, appeared to me almost negligible compared to the scale of problems that are constitutive of the Euro zone and which are likely to cause the whole Fehlkonstruktion (faulty design) that the EU is to crash, probably much sooner than any serious reverberations of the Brexit are going to show egregiously serious effects on the UK, if there are any such overwhelming drawbacks to be expected, to begin with.

Here is a transcript of Pettis' explanations:

The problem in the Euro zone is actually not that difficult to figure out. 

In 2003 or so, you had the labour reforms in Germany which had the effect of forcing up the German savings rate—not because Germans saved more, but, again, because the household share [in GDP] contracted, and their lower wages translated into much higher profits and higher savings on the part of businesses. 

Instead of increasing the investment [in Germany], investment actually declined, so this gowth in savings had to be exported; and it was exported to countries like Spain and Italy, where real interest rates were probably negative—because of the high inflation in those countries. 

So what ended up happening was that they had to absorb those high savings by low savings. And there are two ways you can reduce savings: one is with a burst of consumption, which is what happened in the lead up to the crisis, and the other is with an increase in unemployment, which is what happened afterwards.

So, I don't really see Europe getting out of this mess until you see significant reflation of demand in Germany, and that does not seem to be happening. So, that means Europeans have to choose between year after year after year of slow growth and high unemployment, or to break up the Euro.

So, I am not very optimistic that the Euro will be around ten years from now.

Brexit could be important because it could speed up the break-up process.

If England does well, that is going to give a lot of influence to those who want to break up the Euro, in countries like France, Spain, Italy, etc.