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Major economic decisions taken in haste all too often have unintended economic and political consequences that are then greatly regretted at leisure.
As an example, the September 2008 US government decision to allow Lehman Brothers to fail triggered the worst global economic recession in the post-war period. By so doing, it paved the way for the rise of political populism around the globe. If Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke were allowed to have a Lehman do-over, it is doubtful that, knowing what they know today, they would have let Lehman fail.
One has to wonder whether German Chancellor Angela Merkel and French President Emmanuel Macron are not repeating the US government’s 2008 mistake. Might they not be doing so by not engaging Boris Johnson in his most recent compromise proposal on the Irish border issue aimed at preventing the UK from crashing out of Europe without a deal?
By seemingly dismissing Mr. Johnson’s Irish compromise proposal, they are almost certainly setting up the stage for a hard Brexit within the next few months. That in turn is bound to deliver an unwanted body blow to a fragile European economy that could very well roil global financial markets. It is also bound to result in the return of a hard border between Northern Ireland and the Republic of Ireland that all parties to the Good Friday Agreement would like to avoid.
Mrs. Merkel and Mr. Macron seem to be acting in the full knowledge that the UK parliament has passed legislation requiring Mr. Johnson to seek an extension to the October 31 Article 50 negotiating deadline if he has not negotiated a Brexit deal by October 19. They also are acting in the full knowledge that such an extension would very likely trigger early UK parliamentary elections.
One illusion under which the European governments seem to be laboring is that an early UK parliamentary election will deliver a UK government willing to make greater compromises to reach a Brexit deal than Mr. Johnson has been to date. Never mind that opinion polls show that in any early “people versus parliament” election, Mr. Johnson would be returned to government with a commanding parliamentary majority. Never mind too that with the Brexit Party’s Nigel Farage breathing down his neck, Mr. Johnson will be forced to harden his stance on Brexit if he is not to lose votes to the Brexit party. That could put him a position where he had no choice but to opt for a hard Brexit after the election.
A more serious illusion under which Europe’s leaders seem to be laboring is that a hard Brexit will not have major spillover effects to the rest of the European economy. Never mind that with Germany now already in an economic recession, the last thing that a weak European economy needs is a major slump in the UK economy, one of its main trade partners. The Bank of England is warning that precisely such a UK economic slump would almost certainly follow a hard Brexit.
Never mind too that a sterling crisis would all too likely occur in the aftermath of a hard Brexit, which would almost certainly cause further Euro currency weakness. That in turn is bound to lay Europe open to further charges that it is is manipulating its currency for competitive advantage, which President Trump could use as a pretext for following through on his threat of imposing a 25 percent import tariff on European automobiles.
Fortunately, there is still time before the crucial October 17 European Summit for cooler heads to prevail and for a way out to be found from a looming Brexit train wreck. However, the noises now coming out of Brussels, Bonn, London, and Paris are far from encouraging.
By seemingly dismissing Mr. Johnson’s Irish compromise proposal, Merkel and Macron are almost certainly setting up the stage for a hard Brexit within the next few months.
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