Posts tagged ‘ECB’
Central bank activity has been a linchpin feature of market activity in recent years. Rather than following rate trajectories and getting on with life, markets have been paying such attention to every last detail of bankers’ announcements and emergency programmes around the world that there have been some curious butterfly effects. In 2013 for instance the Fed announced that one day, quantitative easing would come to a halt. Now this programme had exhibited next to no economic effect on the US itself. But it weakened the currency of Brazil to such an extent that rates went up to defend against import price inflation, thereby contributing to that country’s recession and associated woes.
So what have central banks been up to lately, and what might come of it?
In the US the Fed has attracted criticism for its confusing guidance ever since it bottled tightening policy last autumn. The most recent statement from Chair Yellen said she was “cautiously optimistic” on prospects for the US economy, and she has said on several occasions that she would rather point people towards indicators which the Fed follows than give specific commitments to policy decisions in advance, which is understandable. But it has created uncertainty: some observers find signs in the data that the Fed is falling behind the curve, while others see no case for any more tightening at all this year. Markets are pricing in no move over the summer – which conflicts with Fed briefings as recent as 12 days ago – but expect the target rate to have risen to 0.75% by the end of 2016. Bloomberg summarized the situation well in a piece headlined: “Yellen Data Dependence Leaves Investors Dazed And Confused“.
For investors, this means continued uncertainty over the imminent path of US interest rates and that is not a comfortable situation for markets to find themselves in. Today’s sell off in equity on both sides of the Atlantic is, in part, a reflection of this. As to what will actually happen it is plainly anyone’s guess though if oil remains at the $50 level the deflationary contribution from energy will fade in August, core inflation remains above 2% and last week there was a positive data surprise in the form of a 4.7% unemployment rate (down from 5% and a new post-Great Recession low). Fundamentals aside, however, the Yellen era has been characterized thus far by uncertainty and that remains the key watch point from the Fed at present.
Over at the ECB talk on monetary measures has quietened down, though a noteworthy kilometrestone was reached this week when the bank began its latest phase of QE through buying corporate debt. Mr Draghi has instead been opining on supply side reform and keeping a studied silence on some issues which might possibly be of broader interest, such as the ability of Greece to finance itself next month.
That particular elephant in the room, and perhaps – who knows? – a Brexit vote here in a couple of weeks will give investors rather more to chew on than the ECB’s plans for monetary policy over the next few months. Having said that, eurozone unemployment has stayed stuck above 10% despite what passes there for a robust rate of growth. (Mr Draghi certainly does have a point about structural reform.) There is no realistic prospect of monetary tightening for a long time: markets suggest 2020. The ECB watch point for markets will be rhetoric and planning over emergency measures. However effective they may or may not be in practice their announcement always carries the power to disappoint and while a second-order issue relative to European politics at the moment this remains a source of risk.
Over at the Bank of Japan the story is similar. The yen has strengthened by 11% this year which is a disaster for Japan’s economy. Abenomics, too, have been faltering for some time. Deflation is back. The central bank is torn over the issue of negative interest rates adopted earlier this year and whose effects, if there are to be any, have yet to be felt. At a public meeting this week Deputy Governor Nakaso signalled the BoJ would do more if needed – but this was possibly nothing more than an effort to talk the currency down.
The BoJ’s next meeting is next week. It has not attracted half so much of the market’s attention as the Fed or the ECB but as in Europe the watch point is the reaction to policy announcements. If the BoJ adopts more emergency measures unexpectedly that could give Tokyo a nice boost, especially if it led to a weaker yen. The interest here though is more domestic than global for now.
Over at Threadneedle Street there has been a period of calm – at least on the monetary front. (Mr Carney’s regular warnings about the dire consequences of a Brexit have been a feature of life at the Bank of England since the early spring.) Rates wise expectations are as low as they were during the panic in February and the futures market is not pricing for an increase in the base rate until the second half of 2018.
In terms of things to watch the Old Lady is at the more interesting end of the spectrum. Carney has decried negative rates as ushering in a “zero sum game” via currency wars but that was before the hideous spectre of Brexit loomed. The possibility of negative rates has been mooted by one of his MPC confreres and if the Bank is serious about its rhetoric a Brexit vote could see a major surprise in that direction. That would potentially be great news for gilts but probably not much else.
On the other hand the May Inflation Report, as usual, forecast that under present conditions CPI would bosh back up to 2% in time to meet the Bank’s commitment to that target on a two year horizon. We know about the fading of energy-driven deflation. We know that the UK economy is at or close to full employment. The industrial production number for May was the strongest in nearly four years and core CPI inflation, which bottomed at 0.8% over a year ago, has yet to fall below 1.2% in 2016. So we could find ourselves with something of an earlier hike than is currently priced in, and that again might surprise markets depending on the circumstances.
Despite the dominance of politics there is thus much to follow from the central bankers, and most of it would seem to present more of a threat to risk markets than an opportunity.
This week saw headlines appear about the possibility of another debt crisis in Greece. A multi-billion loan repayment to the ECB is due this summer; the European Commission and the IMF – the other two members of the “troika” governing the bailout arrangement – are divided on the scale of deficit reduction required to allow funds to be released; and in the meantime the country has just gone out on a general strike today in protest at any further “austerity”.
It feels, rather sadly, just like old times.
Yet things have changed in Greece since the pandemonium over her original bailout and debt restructuring. The governing leftist coalition, Syriza, has learned through bitter experience that it really does have no option but to comply with its creditors’ requests. And while books will doubtless continue to be written on the fiscal consolidation undergone by western countries since the Great Recession it is undeniable that Greece has been getting on with the job: the budget deficit there, as a proportion of GDP, has been falling from its 2009 peak of -15.2% at almost twice the pace at which it had grown during the course of Greece’s eurozone membership up to that point. This has had the effect of containing the national debt to GDP ratio, which while eye-wateringly high (177% for 2015) has fallen since 2014 despite the suffering brought about as a result of the Greek government’s hubris a year ago. Indeed, take out the effect of the debt restructuring in 2012 and last year’s fall in this ratio was the first since 2007.
There were also tentative signs of recuperation on the broader economic front too. The European Commission’s spring economic forecast was published on Tuesday and the expected contraction in Greek GDP this year was revised down from -0.7% to -0.3%. (Growth of +2.7% is projected for 2017.) The slow turnaround in employment might have halted for now, stuck between 24%-25% over the nine months to January, but with growth beginning to return again this should continue to tick down – and remains below the peak of 28% reached three years ago.
In the meantime, bond markets in Greece and elsewhere on the eurozone periphery are not showing any sign of panic. Ten year Greek government paper is trading down towards its lows for the year to date (just over 8% at present), well short of the over 11% reached during February’s market-wide funk. Italian and Spanish bonds have been priced around the 1.5% mark in recent weeks, just like ten year gilts.
It is worth reflecting that five short years ago – when many respected commentators were confidently predicting the demise of the euro – this was unthinkable. Greece might have been in the headlines again but there is absolutely no contagion in evidence today. Today, markets are not even bothering to try taking on Mr Draghi and his “bazooka”.
It is also worth reflecting that economic growth in the eurozone as a whole is projected at +1.6% this year and +1.7% next – a breakneck pace compared to the average rate of +0.9% over the last 15 years. And talking of headlines, it drew some attention last week when data emerged to show that the zone’s GDP had finally surpassed its pre-Great Recession peak in real terms. Numbers out last month showed its deficit falling as a percentage of GDP for the sixth consecutive year in 2015 to -2.1%, and confirmed that total debt to GDP peaked a year earlier. The unemployment rate might already have dropped back below 10% this month for the first time since April 2011.
There are political risks ahead for Europe but to say that the eurozone as a whole has moved on from the debt crisis is beginning to look like an understatement. It is to be hoped that Greece manages to continue her recuperation. If she does so the “European debt crisis” will soon be history.
In these uncertain times, let us refresh ourselves by beginning with what was again proved this week to be an indisputable fact: Mario Draghi is the most significant and successful central banker in the world.
The announcement three years ago that the ECB was assuming the power to intervene in bond markets, when he was not even 12 months into the job, put the sovereign debt crisis to bed, restored market confidence across the world and helped turn the creaking hull of the eurozone supertanker away from recession. Two years later his €400bn bank liquidity programme and adoption of a negative policy rate had analysts calling him a rock star. Another €700bn splurge and surprise rate cut followed. And at the beginning of this year Mr Draghi announced a €1.1trn programme of quantitative easing.
So yesterday’s announcement that the ECB was ready to modify the “size, composition and duration” of its QE exercise was part of a pattern. Draghi and team are being seen to do whatever it takes to re-normalise the eurozone economy. Indeed, as he put it at a speech he gave in London on 26 July 2012:
The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.
Everybody believes you now, Mr Draghi.
Market reaction yesterday and overnight was, in a word, electric. The euro plunged by 1% against the dollar in the space of half an hour to close the day 2% weaker overall. (That is a more significant one day fall than the planned devaluation of the Chinese yuan that caused such consternation back in August.) The Euro Stoxx 50, which had been trading flat throughout the morning, rocketed up in the afternoon to post a +2.5% close. European bond yields hit new record lows: the 2-year bund was pricing at -0.35% in the opening hours of this morning while the 2-year Italian buono hit negative yield territory for the first time.
There is a good, detailed overview of the global impact of Mr Draghi’s latest star performance from Reuters here: Global Stocks Hit Two-Month High On Dovish Dragi Message. But it is the quotes from market observers which we will focus on before leaving this subject:
“Investors and traders are buying the idea of expected action out of the Bank of Japan and the ECB,” said Ben Le Brun, market analyst at trading platform provider optionsXpress.
The Chinese central bank’s injection of 105.5 billion yuan into 11 banks via its medium-term lending facility this week, combined with possible additional stimulus from the ECB, “may give the Fed more reason to raise rates by year end,” said Chris Brankin, chief executive officer of online trading platform TR Ameritrade Asia in Singapore.
“Draghi has come out and kitchen-sinked the whole thing, everything is now on the table,” said Gavin Friend, a strategist at National Australia Bank in London. “You combine what the ECB is now saying with (the fact) that the Fed is not going to be going aggressively and that the Bank of Japan is going to want to get involved, then you say ‘Blimey!'”
Mr Draghi has played his role exceptionally well, but the dominance of central bank rhetoric and activity over market behaviour is unhealthy. When the People’s Bank of China devalued over the summer for example it was treated as a disaster – a desperate act to prop up a seriously weak economy. The falling stock market in China had helped unsettle the world and the markets’ interpretation of events took place against a background of gloom. This week, however – thanks to the ECB – we inhabit an era of sunshine and optimism. So when the PBOC announced further monetary loosening today it was seen not as desperate but as a sign of “the government’s determination” which has now lit “a fire under global stocks” as “US equity futures jump”, to quote some of this afternoon’s commentary. Markets hated Chinese policy over the summer and loosening by the PBOC was taken badly; today it’s just what was needed to cement the rally in place.
If there is a cloud to go with this week’s silver lining, therefore, it is the now familiar truth that reliance on central banks has become a major source of volatility. “Money Markets Primed for Draghi as Bets Jump on Deposit-Rate Cut”, says Bloomberg’s headline today. And what if there is no cut on 3 December? Or if there is, but this is seen as bowing to market pressure – the kind of pressure which appears now to govern decision-making at the Fed? One day markets are given a boost by “Super Mario”, the next, they start looking for more – and pricing it in.
Volatility is the textbook definition of financial market risk. Mario Draghi is, to say the least, an impressive figure. He has given investors much to be very grateful for. But he and his confreres around the world, counter-intuitive though it might seem, have actually helped to make investing today a riskier proposition. To put it another way, we have become used to looking to central banks to underpin market stability; and by relying on them to the extent that we now do, ensured the exact opposite.
Market chat on the subject of the eurozone has tended to be rather downbeat over the last few years. Some observers have focused on its benighted wrangling over sovereign debt; others, more recently, on the supposed millstone of deflation. And there have of course been those who have questioned the zone’s very future. Narrative gloom set in well before the double dip recession’s second leg, persisted throughout it (Q4 2011 – Q1 2013) and has continued since. Today, however, the fundamentals are refusing to play ball even more stubbornly than they usually can, when the mood takes them.
Earlier this month we saw the ECB revise its growth forecast for 2015 up from 1.0% to 1.5%. Just this week, consumer confidence in the eurozone hit its highest level since the short-lived spike up into July 2007. And the composite output indicator showed the strongest level of growth since May 2011, before the market crash and pandemonium which dominated the second half of that year.
There are three major reasons for this.
- The euro has depreciated. It has fallen by over 20% against the dollar over the last nine months (from 1.365 to 1.088) and more modestly against sterling and the yen also (-8.7% and -6.5%).
- This real world monetary easing has been matched by the ECB’s first foray into quantitative easing. Dubious though the policy’s concept and effects may be, markets have tended to approve of this.
- The eurozone collectively is the world’s largest net importer of crude oil. Though the euro has got cheaper, oil has got cheaper still: the near Brent crude future is 36% lower in euro terms today than it was nine months ago.
Against this background the strong performance of European equity markets versus their developed-world peers is understandable. (The Stoxx 50 is up by 17% so far this year as against 11% for the Nikkei, 4% for the FTSE 100 and zero for the S&P.) The question is: can it last?
Disaster notwithstanding, the answer might just be “yes”.
The benign effects of cheap oil on the US as another significant net importer are offset by fears over monetary tightening in the face of a galloping labour market. These intensified last week when the word “patient” was removed from the formal description of the Fed’s present monetary stance. The Bank of England is similarly looking to tighten policy at some point as affirmed by Governor Carney only this morning. Before the oil price collapse began to be felt in earnest there were signs of price pressure in these economies and should the collapse unwind at all into the end of this year those signals will get stronger and stronger.
The unemployment rate in the eurozone, by contrast, fell by only 0.6% over the whole of last year to end it at 11.3%. This brings with it all sorts of other problems, of course, but from an inflationary perspective it leaves a lot of slack in the labour market. It looks likely to be some considerable time before investors need to worry about monetary tightening from the ECB.
On a similar note: with oil and other commodities having fallen or – at best – stabilized in price over the last few months, there is little danger of the weak euro having an inflationary effect. At the same time, the pitch of its descent means it has been winning that notorious game of “beggar my neighbour” for its exporters on the major currency markets. (This is not such great news for some far eastern countries, including China, whose exchange rates have strengthened impressively against the euro.)
There are always risks and Europe faces its own particular demons. But the speed of the turnaround there has been impressive: it was only back in November that the EU Commission last cut its forecast for 2015 growth. Like good news, quick turnarounds might well strike readers as a most un-European phenomenon. It has been most welcome to see the Continent delivering such pleasant surprises for a change.
Much like last year, 2015 has got off to an exciting start. This blog identified interest rates as an important market theme, and though the Fed (and to a lesser extent the Bank of England) have been positioning expectations for a tightening of policy at some point it has been the new emergency monetary measures in Europe which have dominated attention thus far. Mr Draghi can take much of the credit for turning around sentiment on the sovereign debt malady in 2012, attracted further limelight last year by introducing negative deposit rates among other things and yesterday, of course, officially announced the start of quantitative easing in the eurozone. As with his other announcements this one has been taken well: the Stoxx 50 has risen by more than 10% over the last couple of weeks, bonds in Greece and elsewhere in the eurozone periphery have found some support and he will not mind that the euro, which has fallen by 3% against the dollar in the last two days alone, now stands at levels last reached in the summer of 2003.
Fears over the prospects for Europe are nowhere near as powerful as they were in the days of the Bond Market Terror when Draghi took the helm in November 2011. Today the fear is that the Continent will follow the “deflationary spiral” which sucked the Japanese economy under the waves for so many years, as people defer spending decisions, companies delay production, activity thus contracts (exacerbating the price effect) and the bells of doom generally begin to toll.
Or so the story goes. The Japanese experience was / is not actually like that. After the collapse of the 1980s economic and investment boom the stock market crashed in 1990, growth began to slow, and the Bank of Japan cut rates accordingly. The yen, however, was allowed to appreciate by over 50% on a trade weighted basis at the same time, more than compensating for this effect and ensuring a recession which saw growth move sideways for two years. Annual inflation, on the other hand, didn’t turn negative until 1994 – and in 1995-6 the economy motored along just fine. The first bout of Japanese deflation was therefore a symptom of the malaise, not its cause.
Then came the 1997 collapse of the Asian tiger economies, the Japanese banking crisis and another unwelcome period of massive yen appreciation. It was at this point that the zero-interest rate policy, “ZIRP”, came along. Then of course there followed the collapse of the TMT boom. So the level of Japanese real GDP moved sideways for five years this time (1997-2002). Although deflation did not begin in earnest until the 2000s, its association with Japan’s “lost decade” had become intractable, and the idea of deflation as a cause of her problems, rather than a symptom of them, an established part of the market narrative.
Looking at this another way, Japan is not the only economy to have experienced deflation in the recent past. Did you know that Switzerland, for example, saw a pronounced deflationary period from 2011 to 2013? Or that Singapore officially entered deflation a month before the eurozone? Nor is it only countries beginning with “S”: Israel has been deflating quite cheerfully since the autumn, joined last month by neighbouring Lebanon. None of these places are forecast to suffer Armageddon as a result.
One could also mention that “core” inflation in Europe remains positive … but by this stage the point ought to be well made.
Of course, a lot of market narratives can become self-fulfilling. For this, if for no other reason, it should come as a relief to see the latest round of “open mouth operations” at the ECB enjoying a positive reception.
As a last word on this subject – for now! – it also salutary to observe what happened to Japanese asset pricing during the first decade of this century. Ten year bond yields did not tend to trade at 0.4%, for example, even with deflation all around, QE in train and the policy rate at or near zero. Nor did equities experience a terminal spiral of death, or the yen perpetually depreciate. But all of that is a much longer story.
Markets barely had enough time to recover from Mario Draghi’s last “rock star” performance at the ECB before he shocked them with yesterday’s encore. Back in June he left his fans with the rhetorical question: “Are we finished? The answer is no.” Yesterday he proved it, lifting the lid on a plan for purchasing about €700bn worth of asset-backed securities while slicing another 10bp off policy rates. Only six of the fifty-seven economists and investment banks surveyed by Bloomberg expected the rate move, and the ABS programme, though trailed at the June ECB press conference, has also come surprisingly quickly.
Three months ago it looked as though Mr Draghi was playing to the crowd as much as anything. Two questions now emerge:
- Has anything substantial happened in Europe since June which has increased the need for emergency monetary measures?
- If not, how necessary are the ECB’s announcements as “open mouth operations”?
Look at the growth numbers reported in August and it is tempting to answer question (1) with a “yes”. Across the eurozone as a whole, GDP for Q2 was flat, down from an already-muted 0.2% rise in Q1. Stagnation in France was no surprise but it was a mild shock to see Italy back in recession. At the same time, headline inflation has continued to fall back with the annual CPI increase to August down at 0.3%. There has also been heightened concern in recent weeks over events in eastern Ukraine, with some commentators attributing weakness in European business investment to fears over escalating sanctions against Russia.
At the same time, however, it’s not that simple. The PMI composite indicator of economic output for the eurozone remains well into positive territory, despite the usual variation between countries, and the economic sentiment indicator (of consumer and business confidence) remains well off its 2012 lows – and indeed well above the levels associated with the three quarters of positive growth witnessed from Q2 2013. The ECB along with the consensus expects GDP to grow again this quarter, albeit at the accustomed muted rate. Even on the inflationary front much of the decline is down to cheaper energy prices: the “core” CPI rate for August, which as it excludes volatile items such as food and energy is supposed to be a more accurate reflection of the economy’s underlying price dynamics, actually rose for the second time since May to 0.9%. On balance, then, it does not seem reasonable to believe that there has been a material deterioration in the fundamental prospects for the eurozone over the last three months.
This does nothing to detract from the importance of question (2). At yesterday’s press conference (the full text of which can be read here), Mr Draghi had the following important, and in this blog’s view unarguable statement to make in the tangential final section of his answer to a question about fiscal policy:
[I]n many parts of the euro area, there are several reasons why growth is not coming back, but one of them is actually that there is lack of confidence. There is lack of confidence in the future, lack of confidence in the prospects, in economic prospects, of these countries.
It is an indisputable fact that much of the world’s confidence in recent years has relied for better or for worse on the perceived actions of central banks. The ECB understands this. And the reaction to this week’s news, together with one key longer-term trend, seems to indicate that they are getting the confidence-building part of their operation right.
First the reaction yesterday: Stoxx 50 up by 1.8% on the day, credit spreads tighter, euro back under 1.30 for the first time in over a year – in its biggest daily percentage fall against the dollar since the height of the debt crisis in November 2011 – and as for the bond market, well, that brings us on to the longer-term trend side of things.
Talking of the height of the debt crisis, back in November ’11 it cost the Italian government 7.9% to raise three-year money. A few months later, after the ECB announced its potential use of an emergency long-dated bond-buying programme, Italy was borrowing for ten years at 5.8%. Finally, just on Thursday last week, Italy raised ten year money at 2.4% and five year at 1.1%, record lows in both cases. And it isn’t just Italy. At the time of writing, two year bond yields are actually negative now in Germany, Denmark, Finland, Belgium, the Netherlands, France, Austria, Slovakia and (wait for it …) Ireland. It puts even the two-year Japanese government bond to shame, and makes the yield on our own 4% 2016 gilt look positively generous at 0.8%. All this is just excellent news, of course, if you’re an indebted sovereign looking to refinance your borrowing at the cheapest rates available in the world.
It doesn’t do to be complacent about Europe, or indeed the world economy in general. But it is encouraging that the ECB has been rising to the market’s demands for action in its own managed, but clearly credible way. European confidence in particular does indeed need all the help it can get. Rock star: play on …
Europe has been much in the news again lately. David Cameron expressed a preference for the Presidency of the European Commission to go to an unknown arch-federalist other than the one seemingly favoured by his fellow leaders. This is exciting enough. But a wiretapping scandal in Poland, which initially passed unnoticed when as a purely local matter it threatened only to unseat the governor of the Polish central bank and plunge the ruling party there into crisis, is more exciting still. According a magazine report, foreign minister Radosław Sikorski – who to top things off was once a member of the Bullingdon Club – has, in the even-handed vocabulary of the BBC, “criticised UK Prime Minister David Cameron’s handling of EU affairs”:
He goes on to say, using expletive-laden terms, that Mr Cameron messed up the 2011 EU fiscal compact on budget discipline, which the UK tried to block. “Because he’s not interested, because he doesn’t get it, because he believes in this stupid propaganda, he stupidly tries to manipulate the system,” Mr Sikorski was quoted as saying.
Readers might well have forgotten that the fiscal compact of which Mr Sikorski speaks began life as a putative new EU treaty, which Britain vetoed in December 2011. It subsequently took off as a “compact” between every EU member state except the UK and the Czech Republic – though the Czechs are due to sign up any minute now if their new leader has his way. Once again, Britain looks destined to stand alone, etc.
Whether or not we forget about it, however, Europe marches on. While it has not received any attention, the fiscal compact has been making and is set to make further advances. The budget rules and submission timeline agreed back in 2011/12 have already swung into action: last October saw the first occasion on which every nation signatory to the compact had to present its annual budget to the Commission for scrutiny. And from 1 November this year, prudential supervision of financial institutions in all signatory countries – not just eurozone members – will become the prerogative of the ECB.
It is traditional to interpret the plenipotence of Brussels from a position of coyness. For example, the fiscal compact sets the Commission up with the same sort of mandate as the OBR here in Britain: a dispassionate and final compiler of economic data for national budgets. Yet EU member states still possess every freedom to come up with their own data (in some areas, for now). This is why Spain was able to dismiss the EU’s concerns over its budget this year as “a mere difference in growth forecasts”, and proudly plead that deficit targets would, nonetheless, be met. For Italy, facing similar concerns, the answer was even simpler. By the time this year’s budget had received Commission feedback the country had already decided – quite independently – to privatise a few more state assets, thereby meeting its solvency targets while not bowing to usurpation of fiscal policy at all.
It is at times like these that one can become grateful for England’s generous allocation under the Common Humour Policy. But for those taking a medium term view of European affairs and Britain’s continued involvement with them there are three very serious points to take on board.
- The sovereign debt crisis for Europe in particular was / is a defining moment in its history: the goal of “ever closer union” became not just a political ideal but an imperative of economic survival.
- The United Kingdom benefited throughout the crisis – however irrationally – from having decided to remain outside the euro.
- The UK view on the necessity of “ever closer union” has thus diverged ever more markedly from the views of other EU states, and those of the euro countries especially.
So what comes next?
Most obviously, point (3) will persist. ECB supervision of Britain’s banking system is not seen as necessary, will not happen this November – uniquely, perhaps, in the EU – nor will it happen in the foreseeable future. British budgets will not be subject to Commission scrutiny. Indeed, compliance with the fiscal compact rules in that regard would require us to change our tax year to match the calendar year, as it does elsewhere: the financial equivalent of metrication and likely to be just as welcome.
More broadly, Britain’s position in the EU has never been quite as comfortable as it has been for other, equally proud sovereign nations such as Luxembourg. That level of comfort seems ever more unlikely to improve. This blog quoted one expert observer on the subject back in November 2011, after that month’s emergency summit but before the UK veto had been exercised:
A rival treaty organisation, predicated on common economic government, would become de facto the new forum for integration. One by one, political powers would pass from the EU to the eurozone until the EU became a shell, an amplified free trade area, a kind of EFTA-plus. Which, of course, would suit Britain very well indeed
Two and a half years ago, a two-speed EU looked like a dramatic idea. Today it is getting closer to being policy, on all sides. In another two and a half years’ time the UK could be on the brink of a decision as to whether or not to remain a member of the EU at all.
When it comes to the gathering European question of Brexit we should apply the same quality of analysis as we do to markets. Forget about the fluff – who said what on which tape, which faceless figurehead gets to be Chief Bureaucrat for the next six months, or what precise party postures are adopted to squeeze votes out of people that electoral cycle. The years we have just lived through represent exactly the sort of tectonic movement that causes major earthquakes. Whether we like it, or want to believe it, or not: these years have widened the English Channel, and undercurrents which were always there have grown more powerful.
It’s possible, if not a little hopeful, to see how Britain’s increasingly likely exit from the EU as the relationship now stands might benefit all involved. Of course it might also be a disaster. As a pair of alternatives that at least speaks to volatility. And over the medium term, we should be prepared.