Tuesday, May 24, 2016
The EU and IMF deal over Southern Europe hangs over the Brexit debate
Five things to look out for this week in economics including the IMF-EU deal and the Marks and Spencer results, always a benchmark in judging our changing shopping habits
Is Europe the new Japan? It is an oft-posed question and one that is hanging over the Brexit debate. Leavers argue that if Europe is going to be a sclerotic economic region, maybe the UK is better getting shot of it. Remainers reply that quitting the EU does not mean you quit the European economic space and that in any case parts of Europe are doing all right. The problem is southern Europe, not the continent as a whole, and in particular Greece.
So what will Europe do about Greece? That is the prime thing to look for over the next few days. The International Monetary Fund thinks, quite rightly, that Greece can never repay its debts and that there should be some sort of debt write-off by Europe. It also thinks that Greece should not have to pay any interest on its borrowings before 2040. Germany, which would have to foot the lion’s share of the costs, wants to preserve the principle that the country must ultimately pay back the money it has borrowed. It would accept easier terms, such as a longer payback time and lower interest rates, but won’t shift on the principle. Both the European Union and the IMF were involved in the bail out of Greece but the two creditors now want to treat the country differently.
There is a meeting on Tuesday between the EU authorities and the IMF to see whether they can do a deal, perhaps by the EU taking over some of the IMF debt. We’ll see.
Greece is the immediate problem, but there is a wider message from the financial markets that the long term prospects for Europe are weak. The second thing to look for this week will be the contrast between Europe and the US. In financial terms the US is beginning to get back to normal. Europe is not. To take one measure, ten-year US government bonds yield 1.9 per cent. That is very low by historical standards but compares with the German equivalent of only 0.2 per cent or the French at 0.5 per cent. That may not be as bad as Japanese bonds yielding minus 0.1 per cent, but it is saying that investors do not expect many decent investment opportunities in Europe over the next few years. Otherwise why tie up your money in this way?
Janet Yellen, chair of the Federal Reserve Board, is speaking at the end of the week at Harvard, and everyone will be looking for a hint as to the pace at which US monetary policy will get back to normal. If she is reasonably upbeat, expect another US rise in interest rates before the summer is out. One reason for not having one next month: the possibility of Brexit and the unsettling impact this might have on global business confidence. But were that to happen it would be a rare case of the British tail wagging the American dog.
Number three is indeed confidence in Britain. Among the more specific claims about the impact of Brexit last week was the one by the Chancellor that house prices would drop by 17 per cent. It was slightly more hedged-about, but that was the headline figure. So this week let’s see whether people believe him. Will estate agents report a shading-off of business? Will more people decide to rent rather than buy? Will the warning have any effect at all? My guess is it won’t, because no-one believes anything the contenders are saying. But that would be interesting in itself, wouldn’t it?
Four, the migration story will hot up on Thursday. The ONS will publish two reports, the monthly ones on international migration drawn, among other places, from the international passenger survey, and the annual ones on the number of people who come for between a month and a year. Some of the data is already out, but this won’t stop people on all sides from spinning the numbers to fit their political views. What I think we will learn is what we already know: that if you have a fast-growing economy alongside slower-growing ones, people will move to the former to get jobs.
Finally something more precise: Marks and Spencer results, out Wednesday. M&S is only a company and most of the comment will be about how well or otherwise is it doing. Its food business is terrific but is it at last producing clothes that fashion-aware people want to be seen in? But it is much more than just a business, for it is gives a feeling for the way our lives are changing. We buy much more online; we are more price-conscious; we are more fickle; and so on. How M&S is seeking to adapt tells us about ourselves, always a fascinating subject, of course.