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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm term Keene Jay Lee.

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Speaker 1: We bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Some

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Speaker 1: of the top news in the world of global economics

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Speaker 1: now and global finance, investors may be ignoring the risk

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Speaker 1: that financial conditions could tighten sharply and send tremors through

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Speaker 1: the global economy. This all according to the International Monetary Fund,

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Speaker 1: who want that overall market participants appear complacent about the

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Speaker 1: risk of a sharp tightening of financial conditions, jointing us

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Speaker 1: to discuss I please to say this morning in our

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Speaker 1: studio here in New York is Sebastia Malaby, CFR, Senior

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Speaker 1: Fellow for International Economics. Good morning to Sebastia, and great

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Speaker 1: to be with you. So let's get to that line

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Speaker 1: from the i m F. Do you think investors are

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Speaker 1: under appreciating the risk that financial conditions could tighten and

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Speaker 1: what that could mean for the global economy? But if

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Speaker 1: we focus on the US, I don't think that's true

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Speaker 1: right now, because when you've got growth at four percent,

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Speaker 1: that can mask a lot of financial fragility. But if

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Speaker 1: you project forward and you say, okay, this fiscal stimulus

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Speaker 1: from the tax cat in December is going to be

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Speaker 1: wearing off next year and into twenty by which time

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Speaker 1: the Fed world have hiked a little bit more, and

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Speaker 1: you've got a very fragile corporate credit situation. It's that

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Speaker 1: interaction between the likely growth slowdown in and a highly

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Speaker 1: leveraged corporate credit picture. That's what worries me. Even if

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Speaker 1: you didn't get a recession in because of the wearing

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Speaker 1: off of the fiscal stimulus, and you just had a

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Speaker 1: growth recession in other words, growth down at one percent,

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Speaker 1: that's enough to start kicking the fault rates up and

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Speaker 1: and and and credit could react. It's almost none austerity.

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Speaker 1: Let's review this. I think this is important. Back eight years,

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Speaker 1: what we learned about British austerity or Germanic austerity or

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Speaker 1: austerity austerity. What was the lesson learned? Well, first of all,

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Speaker 1: it produced populism small detail, which is quite a big

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Speaker 1: detail um. And second of all, it didn't really drive

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Speaker 1: debt to GDP down much um. And so it's a struggle.

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Speaker 1: You really need growth to be generated by productivity changes,

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Speaker 1: which means technology and so forth, and we don't have

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Speaker 1: a magic one for that. Um. So I think those

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Speaker 1: are some of the lessons. The trend, overwhelmingly for developed

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Speaker 1: economies has been for debt to GDP to climb throughout

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Speaker 1: the last ten years. Sebastian, I just wanted to what

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Speaker 1: extent this sort of curtails some of our abilities to

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Speaker 1: sort of respond to the next downturn, whether it be

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Speaker 1: financial or economic across Europe. In the United States, yeah,

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Speaker 1: I think that's a profound issue that last time around,

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Speaker 1: in two thousand and eight, there was enormous ammunition to respond,

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Speaker 1: both in terms of fiscal stimulus and in terms of

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Speaker 1: enormous monetary intervention. If you think about the next time,

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Speaker 1: there are different constraints in Europe in the US, but

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Speaker 1: they're big in both cases. In Europe, the issue is

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Speaker 1: that you might have a different central bank chief, not

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Speaker 1: Marry a draggy but somebody more kind of a Northern

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Speaker 1: European cautious persuasion could be ends vitamin of Germany, could

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Speaker 1: be somebody else. Um. And secondly, on the other side

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Speaker 1: of the table from the central bank in Europe, there

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Speaker 1: might not be Maria Monty, who was a responsible, technocratic

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Speaker 1: Italian leader. There might be the kind of populous leaders

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Speaker 1: that you have right now in Italy, and that would

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Speaker 1: change the equation Sebaston when you think about the constraints. Though,

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Speaker 1: at least here in the United States, there is some

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Speaker 1: spere capacity and monetary policy to respond to a financial

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Speaker 1: or economic downturn. In Europe that does not exist, both

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Speaker 1: in fiscal both in monetary policy. And also I think

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Speaker 1: something that doesn't get a lot of discussion is the

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Speaker 1: regulatory response. In two thousand and two thousand and nine,

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Speaker 1: it was every country for themselves bail out the banks.

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Speaker 1: It's gonna be very different if we have a banking

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Speaker 1: crisis in Europe again. The ability see if some of

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Speaker 1: these countries to actually do what they did last time.

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Speaker 1: It's just not going to be there, is it. Yeah,

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Speaker 1: And that's fundamentally why I worry more about Europe and

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Speaker 1: particularly a flash point like Italy, than I do about

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Speaker 1: the US. I mean, in the US, there's a legitimate

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Speaker 1: debate about the way that the Dodd Frank reforms curtailed

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Speaker 1: the FEDS ability to act as lender of last resort.

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Speaker 1: But hopefully a big dose of monetary easing combined with

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Speaker 1: further fiscal stimulus, if you really had to do it

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Speaker 1: is something that US can get away with it. Because

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Speaker 1: of the dollars reserve currency status in the world, you

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Speaker 1: can assue more. Dad. I mean, that's a really important

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Speaker 1: point in my conversation with Mada re Guard. This came

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Speaker 1: up the part of Asia to finally move the exorbitant

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Speaker 1: privilege over to China. I mean, that's a backstory in

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Speaker 1: Bali as well. But through all of the Sebastian and

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Speaker 1: frankly through all of your writings, we go back as

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Speaker 1: you started staying in this idea. There is something special

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Speaker 1: the dollars ascended. Do you see any change in that? No,

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Speaker 1: I see absolutely zero post a fact of changing that.

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Speaker 1: I think the dollars centrality in the global system has

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Speaker 1: gone up, not down since two and and this is

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Speaker 1: so important. From Barry I, Canna Berkeley, and from Joseph Harvard,

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Speaker 1: they agree with Mr Mallaby. But there is a real

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Speaker 1: debate about this now, debate about they're just saying no

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Speaker 1: where right. Dalio is weighed in on that debate as

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Speaker 1: well quite recently as well. Sebastian and I just wonder

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Speaker 1: whether the deficit actually matters. With this in mind, if

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Speaker 1: we go from five percent to ten percent here in

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Speaker 1: the United States, do we just assume it keeps getting funded. Yes,

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Speaker 1: I think we do. I mean the reason is that

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Speaker 1: we ran an experiment in two tho eight, two thousand

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Speaker 1: nine where the Chinese Central Bank governor put on the

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Speaker 1: website a sort of declaration of trying to make the

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Speaker 1: remand b international, trying to make the reman be a

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Speaker 1: global currency. You know, ten years later, has the dollar

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Speaker 1: been dethroned. No, it's actually more dominant. Why is it

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Speaker 1: more dominant. It's because fundamentally, countries around the world, and

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Speaker 1: especially corprates, want to issue debt in dollars. And if

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Speaker 1: your corporate sector has lots of dollar debt, the central

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Speaker 1: bank needs to protect itself by having dollar reserves. And

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Speaker 1: that isn't changing. And so central banks will hold dollars,

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Speaker 1: and private wealth managers will hold dollars because the markets

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Speaker 1: are deep and liquid and they have rule of law,

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Speaker 1: and because that's what the liabilities in. So if you're

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Speaker 1: trying to cover against a run on your banks or

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Speaker 1: on your corporates, you need dollars as your safeguard. Look

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Speaker 1: at the use of dollar swaps after the two eight crisis.

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Speaker 1: Everybody was screaming for dollars. So I think people are

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Speaker 1: going to want to hold dollars and that gives enormous

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Speaker 1: rope with which the US can continue to kind of

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Speaker 1: hang itself and strangle itself in terms of budget deficits.

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Speaker 1: Is that more true in a period of risk aversion?

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Speaker 1: We're still going to see this situation where it becomes

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Speaker 1: by treasuries, by the US dollar when we go through

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Speaker 1: a sustained period of risk aversion. Well, I mean that's

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Speaker 1: exactly the paradox. You know, the US can create a

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Speaker 1: financial cry, this a No. Eight and everybody's response is

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Speaker 1: they want to hold more donnas. And I don't think

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Speaker 1: that's going away. I think the U s can be

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Speaker 1: irresponsible to create, uh, you know, some kind of panic

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Speaker 1: and the response would be we want the US currency.

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Speaker 1: It's ironic, but it's the truth. Special Malloby, thank you

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Speaker 1: so much, And I really can't say enough about a

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Speaker 1: careful read of Mr Maloby's article in The Atlantic Magazine

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Speaker 1: on growth in the latest Nobel Prize, roner Paul Rohmer

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Speaker 1: of Stanford Quieter Markets today, we really like you can

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Speaker 1: almost truncate back the data checks Brazilian Royle three point

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Speaker 1: seven one yet to trade a day around that election,

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Speaker 1: and John, I would suggest we've been exceptionally Asian centric

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Speaker 1: today with Bali, I m f all the China news

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Speaker 1: and of course the guests we've had Lord Patton, the

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Speaker 1: former governor of Hong Kong, and s Aston Mallaby and such.

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Speaker 1: You know it Europe and there's I'm sorry and the

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Speaker 1: crush of the news flow. There's a lot going on

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Speaker 1: in Europe right now and I'm sorry all centers back

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Speaker 1: to this turmoil over populism, migration and such. I thought

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Speaker 1: the comments from Matteo Salveni were absolutely amazing, like like

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Speaker 1: essentially essentially essentially telling the market here's the line in

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Speaker 1: the sand. It's four basis points over Germany and we

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Speaker 1: don't think you're going there, which I just think is

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Speaker 1: staggering that it's the one oh one of how not

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Speaker 1: to communicate the financial markets at a time when you

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Speaker 1: are going through some serious stress. Um. I want to

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Speaker 1: bring a class Fistess and Pantheon macro Economics chief euros

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Speaker 1: Own economists to weigh in class, what did you think

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Speaker 1: of those remarks from the deputy Prime Minister in Italy.

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Speaker 1: Oh look, Jonathan, I mean, you have the nail, and

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Speaker 1: I completely agree. This is really really bad. I mean,

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Speaker 1: right now Italian politicians are picking fights with everyone. And

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Speaker 1: so even though you know, I could sit here and say, look,

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Speaker 1: we could sit here and talk about you know, you

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Speaker 1: have a current count surplus, you have a primary surplus.

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Speaker 1: This is not two thousand twelve. It's not that the

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Speaker 1: macroeconomics are much better, but I mean, at the moment, seriously,

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Speaker 1: with this kind of comments coming out, you know, the

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Speaker 1: market is just going to poinst them over and over again,

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Speaker 1: and and it's not clear to me how and how

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Speaker 1: and why they step back. I mean, he also said

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Speaker 1: something like, well, when we hit four hundred basis points,

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Speaker 1: you know we're going to take actions. Oh who the

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Speaker 1: easy beat? Now, this is we're in a very bad

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Speaker 1: equilibrium at the moment. I think we're going to snap

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Speaker 1: out of it eventually, but at the moment, it's it's difficult.

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Speaker 1: It's difficult. Let's talk about what four hundred basis points

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Speaker 1: actually is. It's Greece. That's where Greece trades fo hundred

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Speaker 1: basis points over Germany. And do you think you could

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Speaker 1: get that bad class before it gets better? Well, I mean,

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Speaker 1: I think you know once I think, I mean, I

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Speaker 1: think we have to we have to go with with

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Speaker 1: the with the sort of the tenor of of of

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Speaker 1: your first comment, namely that once you give a market

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Speaker 1: something to aim for, they might get there. Now, I

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Speaker 1: think that's a massive miss pricing Italian bondy's currently bondmarket

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Speaker 1: is currently are miss priced. I mean two yr yield

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Speaker 1: shouldn't be above one percent um and and certainly I

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Speaker 1: don't think ten yea yields should be should be as

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Speaker 1: high as they are. But it's it's almost like they're

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Speaker 1: welcoming in, right politicians. Is that if we're in a

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Speaker 1: situation now where where the more they push and the

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Speaker 1: more they think that it boasted their domestic political capital.

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Speaker 1: So it's like they like, it's like they welcome. Right.

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Speaker 1: That is not a good idea. We had a wonderful

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Speaker 1: magesterial conversation yesterday with Janice Vera Facus who's got an

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Speaker 1: acquaintance with crisis in real time and particularly negotiating with Germany,

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Speaker 1: the Netherlands and France, the other core countries and one

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Speaker 1: of our basic themes was Greece has got to be

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Speaker 1: different than Italy. And he was fascinating about how Italy

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Speaker 1: could mess this up from a pantheon economics basis, do

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Speaker 1: they have the structure in Italy not to mess this

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Speaker 1: up the institutional linkages of politics, economics, society in their

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Speaker 1: banking system is Italy not Greece. Um No, Italy is

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Speaker 1: not great, And I think and sometimes mess of our

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Speaker 1: funck is he He was right when he said that

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Speaker 1: what they should do is to use the fact that

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Speaker 1: Italy is the third biggest economy in eurosine so they

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Speaker 1: pull some weight in terms of the rules. But obviously

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Speaker 1: they've jettisoned all that by now. So now, unfortunately, we

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Speaker 1: are in equilibrium where you know, you play tis chat

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Speaker 1: with the with the Commission. The e c B had

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Speaker 1: already abandoned you because you know they can't help you.

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Speaker 1: So now there's a risk that you know, this escalates.

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Speaker 1: I mean, what I will say about Italy is that

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Speaker 1: you know, the macro economics are just much better, right,

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Speaker 1: I mean, it's like this is not we should not

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Speaker 1: this is not a stable equilibrium from a macro economic perspective.

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Speaker 1: We should not get here right, two point four percent

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Speaker 1: in two thousand nineteen, you have a primary surplus at

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Speaker 1: one point five If you are growing and unemployment is falling,

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Speaker 1: your external accounts are and surplos. I mean they should

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Speaker 1: not be as bad. But I mean, once we're in

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Speaker 1: this overshooting environment, you know who knows right, so and

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Speaker 1: then and the next year to dou will be the

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Speaker 1: rating aggies. They will come in and some of them

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Speaker 1: will jump ready to be. It's so frustrating from the

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Speaker 1: outside looking again when you see the European officials and

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Speaker 1: the Italian government essentially arguing over tens of basis points. Literally,

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Speaker 1: I have fifty basis points at a budget deficit and

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Speaker 1: probably not even This is what the argument essentially comes

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Speaker 1: down to, Klaus, And they're risking another crisis for it.

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Speaker 1: Is it worth it? Yeah? Yeah, no, no, it's not

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Speaker 1: worth it. And you know, some of the blame has

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Speaker 1: to have to put be at the EU as well.

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Speaker 1: I mean, it's odd, right that every time we have

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Speaker 1: one of these negotiations between a southern European country and

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Speaker 1: the EU, it always ends up like this, and there's

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Speaker 1: no reason. And by the way, the Italian people will

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Speaker 1: pay right because I mean, let's just let's go run

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Speaker 1: through the economic year. This will start to hurt next

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Speaker 1: year with a lag like you have two year yeards

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Speaker 1: one Rachel will go up with a lack banquets bankalown rate.

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Speaker 1: Of course they will. This is like, this is just

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Speaker 1: one of one. We know this, but the first half

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Speaker 1: of next year Italy. Italy could be close to recession

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Speaker 1: if this continues, because it growth is al really very low.

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Speaker 1: I mean, it's just amount of time before just make

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Speaker 1: that conclusion. So how does Mr Drug respond to this?

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Speaker 1: We have an historic headlined out of the Bloomberg that

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Speaker 1: they're going to keep rates where they are until I

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Speaker 1: don't know, on the edge of freezing over I guess

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Speaker 1: late summer of next year. Can that be derailed by

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Speaker 1: this tumult in Italy? No? Uh well the rates maybe

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Speaker 1: not chewy, but yeah, I'm fair of the rates next

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Speaker 1: year obviously, yes, I mean in some sense if Italy falls,

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Speaker 1: really if the Italian economy retakes a knock on the

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Speaker 1: basis of this, this is obviously going to feedback through

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Speaker 1: to the Ecbach reaction function. Growth going to be lower.

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Speaker 1: So yeah, that that that could be through. But then

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Speaker 1: again we're playing for time here, you know. We we

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Speaker 1: don't have to have that discussion until at some point

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Speaker 1: in the first half of next year, but not a

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Speaker 1: queys ending. And at the moment, the ECB has been

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Speaker 1: paced into a corner, as it did with Greece, in

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Speaker 1: the sense that when you have a faceoff like this

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Speaker 1: between the EU and and and a government needs to

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Speaker 1: be just have to kick back from So I think

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Speaker 1: some people would also argue that the e CP have

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Speaker 1: put themselves in a corner, and they did it several

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Speaker 1: years ago, unto John Claudritie, when they were responsible to

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Speaker 1: some extent to introduce read denomination risk into this market

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Speaker 1: because they didn't behave like a normal central bank. Are

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Speaker 1: they going to continue to behave like a normal central

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Speaker 1: bank now? Well, I mean I think I know, I

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Speaker 1: see your point. I mean that that that big, that

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Speaker 1: that that that great high. But I mean what the

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Speaker 1: ECB can do right, What we can do is the

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Speaker 1: ECB can help the Talian bond market if there's an

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Speaker 1: actual miss pricing. But if that miss pricing because Italy

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Speaker 1: is flirting with the idea of leaving the Eurozone, or

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Speaker 1: if markets believe that that's true, I mean you're you're gone.

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Speaker 1: I mean, then you don't have the ECB anymore by

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Speaker 1: definition when you leave the Eurozone. So one, the fact

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Speaker 1: that we still have this debate, which is incredible to me,

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Speaker 1: that just means that that the e g B is

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Speaker 1: really just I mean, listen, the e g B should

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Speaker 1: come in hard on Italian two years, you'll say. In

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Speaker 1: my views, they should just smack that down. It is

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Speaker 1: a violation of the e CBS forward guidance. Yeah, it has.

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Speaker 1: The Italian two yields has no business being one point.

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Speaker 1: But there are two Eurozone happened crisis hangovers. Class as

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Speaker 1: you know, there are two Eurozone crisis hangovers that still

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Speaker 1: exist today, and one is to do move between the

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Speaker 1: banks and the sovereigns hasn't gone away. You see it

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Speaker 1: in Italy. The other for me is that Italian peripheries,

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Speaker 1: and just peripheries in general, sovereign debt in Spain and Italy, Portugal,

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Speaker 1: Greece still trades like credit. And to what degree when

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Speaker 1: it trades like credit, does that curtail the populist ability

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Speaker 1: to really take this fight and have this fight for

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Speaker 1: a sustained period of time. Oh no, it does in

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Speaker 1: some sense that that again really is a really good point.

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Speaker 1: The fact that the bonds trade like credit obviously in

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Speaker 1: some sense empowers the EU and empowers the EP. Just

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Speaker 1: all right, let them run. Oh yeah, we'll see how

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Speaker 1: far they get, because at the end of the day

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Speaker 1: they end up with having to pay the pride. And

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Speaker 1: I mean, I'm very clear in my base case. If

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Speaker 1: we start to see growth slowing and bank loan and

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Speaker 1: variable mortgage rates time to go up. Let's see how

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Speaker 1: the balls do and the first time make year for

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Speaker 1: Salvenia and Demo Claus. Thank you so much. Close Festal

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Speaker 1: with Pantheon. Really good update there with us right now

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Speaker 1: a gentleman that certainly within banking and finance and banking

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Speaker 1: legislation needs little introduction. Michael Mayo as this week as

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Speaker 1: wells Fargo as well. Before we get the banking earnings

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Speaker 1: and all that. H ARE four one zero five is

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Speaker 1: an attempt to bring Mike Mayo sensibility to Washington. What

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Speaker 1: is it and is it gonna work? So this is

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Speaker 1: HR four zero one five the Core Governance Reform Act,

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Speaker 1: also known as the Mayo Act. Well it's the Anti

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Speaker 1: Mayo Act. This is the Corporate Governance reform. Having covered

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Speaker 1: the banking industry for the last three decades, seeing the

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Speaker 1: abuses that have taken place. As you know, Tom, I've

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Speaker 1: written about this in my book. You've been fired over this,

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Speaker 1: continue exactly and you know I testified to Congress over this.

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Speaker 1: So if you hear Corporate Governance Reform Act, I have

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Speaker 1: great ideas for this. But what this act would do,

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Speaker 1: it's it's cracking down on those advisors that advise shareholders

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Speaker 1: on how to vote and so the so it's proxy advisors,

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Speaker 1: it's Institutional Shareholder Services, Glass, Louis Egan, Jones, a couple

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Speaker 1: other small ones, and what they do is they advise

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Speaker 1: shareholders to vote when the main questions for every annual meeting.

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Speaker 1: And now the um you know, the this bill as

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Speaker 1: we're going to crack down these proxy advisors. We're gonna

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Speaker 1: make because that's what the big banks want. Right. Well,

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Speaker 1: I'm not I'm not saying big banks or other banks.

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Speaker 1: I'm just saying for me, as someone who represents shareholders,

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Speaker 1: I've done that for the banks, and this applies to

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Speaker 1: all industries. What this would require is that the proxy advisors,

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Speaker 1: before they publish their research, they'd have to show that

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Speaker 1: research to the companies, and the companies could say, hey,

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Speaker 1: this isn't quite right. The companies still agree, then the

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Speaker 1: company view would be listed alongside the views of the projects.

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Speaker 1: Come to the chases. This act good for Jamie Diamond. Well,

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Speaker 1: you know, I say I change it around. I say,

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Speaker 1: does this pass the city group test that? Well, by

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Speaker 1: by that, I mean so if a proxy advisor wants

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Speaker 1: to conduct research talking about city groups pay, then they'd

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Speaker 1: have to check with City Group. If they want to

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Speaker 1: conduct research saying we should separate the CEO and chairman job,

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Speaker 1: they'd have to show that to the city group. If

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Speaker 1: they say we want to have a shareholder value committee

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Speaker 1: to get these are already shareholder proposals that they're giving

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Speaker 1: recommendations on. So if they want to give recommendations that

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Speaker 1: they have to show their research. So for City Group,

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Speaker 1: for the last two decades, the CEOs over two decades

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Speaker 1: have gotten paid for um, sorry, I've gotten paid an

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Speaker 1: average of twenty million dollars a year, four million dollars

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Speaker 1: while the stock's gone down, While the stock's gone down

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Speaker 1: by at a time when the SMP has got up

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Speaker 1: two to threefold. So you know, if if I assess

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Speaker 1: or Glasslows wants to write about the pay at City Group,

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Speaker 1: they'd have to show that research to City Group before

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Speaker 1: doing this. This is the anti Mike Mayo by all means,

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Speaker 1: Ferre scrim over times in England gave him a lot

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Speaker 1: of time. Has gone a bit of a rant, didn't

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Speaker 1: we It's okay, it's as a friend of Oz, he

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Speaker 1: can do that. But you know, if I'm ad Egan Jones,

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Speaker 1: do I need to show my research at whatever bank

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Speaker 1: before my imagine we can we talk about the earnings

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Speaker 1: that come this week. A bit of a rant now

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Speaker 1: about some of what is going gone down in Washington

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Speaker 1: day see with the regulation still bullish City City Group.

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Speaker 1: It is our number one idea you have. I think

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Speaker 1: that the main course for City and all the banks

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Speaker 1: should be decent. I mean you have good cause control,

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Speaker 1: good credit, good cath return. If there's a concern out there,

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Speaker 1: it's that you don't get that dessert, the extras of

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Speaker 1: you know, extra margin increase, extra long growth, extra capital markets,

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Speaker 1: the extra animal spirits that should come after the tax cuts.

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Speaker 1: I prefer having a little bit less revenues today and

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Speaker 1: much more sustainable growth. In a way, it's the the

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Speaker 1: opposite before the financial crisis from people celebrated revenue growth

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Speaker 1: only for banks get hurt later. Now you have a

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Speaker 1: little bit less revenue growth, but it's sustainable. You'll really

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Speaker 1: bullish on the structural story for banks in America. Can

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Speaker 1: you just build on that framework, because we've got a

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Speaker 1: bit of time with you this morning, and then we

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Speaker 1: can get deeper into some of the stuff you concerned about.

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Speaker 1: Just why is the structural story for banks right now

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Speaker 1: so favorable for the longer term with a much longer

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Speaker 1: time a rising here. Well, I appreciate that question. There's

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Speaker 1: too much short termism. And so when we look at

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Speaker 1: the banks, despite you know, to be some cyclical softness,

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Speaker 1: you have um the cost uxture at banks. If you're

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Speaker 1: reaching a twenty five year structural breakout for the benefits

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Speaker 1: of scale. It was when US banks were first allowed

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Speaker 1: to expand nationally. You're seeing the benefit of that. There

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Speaker 1: was the scale. Now you're seeing a structural reduction in risk.

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Speaker 1: That doesn't mean loan losses aren't going higher. That doesn't

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Speaker 1: mean there won't be problems, but you've seen incredible de

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Speaker 1: leveraging and de risking. And so we think while lawsuit

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Speaker 1: will go higher, they won't go as high as in

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Speaker 1: the past. And then lastly, capital RETURNE. You have record

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Speaker 1: capital return at the bank, So I guess you could

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Speaker 1: you know, called this the three cs, credit, costs and

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Speaker 1: capital Very good. That sounds like there's no research report.

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Speaker 1: Michael Mayo with well, let's talk about perhaps detail or

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Speaker 1: lack thereof when it comes to some kind of divorce

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Speaker 1: settlement between the United Kingdom and the European You and

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Speaker 1: you're sterling up. Yes, perhaps a deal in the making.

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Speaker 1: Amanda slot Brookings Institution, Senior Fellow in Foreign Policy Center

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Speaker 1: on the United States and Europe. Amanda Slote, what do

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Speaker 1: you know about a potential deal? Well, all eyes are

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Speaker 1: certainly on London and Brussels at the moment. Next week

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Speaker 1: there's a meeting of the European Council, which is all

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Speaker 1: the leaders of the European Union, including the British Prime Minister.

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Speaker 1: The hope had been that next week's meeting was when

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Speaker 1: a Brexit deal was going to be finalized. People are

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Speaker 1: increasingly pessimistic that it may not be finalized next week,

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Speaker 1: but may require another special session in November to wrap

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Speaker 1: things up. What are the specific sticking points is it

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Speaker 1: still the border with northern Northern Ireland and the Irish Republic. Yes. Absolutely.

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Speaker 1: A lot of people have been coming out and saying

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Speaker 1: about eight of the withdrawal Agreement that divorced settlement is complete,

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Speaker 1: but the continued inability to determine how to handle the

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Speaker 1: border with Ireland remains the major sticking point and actually

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Speaker 1: could still prevent a deal from ultimately being done. Now

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Speaker 1: there is a report that David Davies, who is a

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Speaker 1: Member of Parliament and has now stepped up an assault

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Speaker 1: on Theresa May's Brexit plan, says that the Conservatives the

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Speaker 1: Tories would lose the next lession election unless Theresa May's

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Speaker 1: exit plan is scrapped. Is that just politicking? Well, there's

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Speaker 1: lots of politicking from all sides here. Theresa May has

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Speaker 1: to get a budget through Parliament at the end of

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00:23:40,040 --> 00:23:42,720
Speaker 1: the months and so some are threatening not to support

437
00:23:42,720 --> 00:23:45,120
Speaker 1: the budget if they don't agree with her brexit deal.

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00:23:45,840 --> 00:23:49,520
Speaker 1: She held snap elections after she became Prime Minister following

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00:23:49,520 --> 00:23:53,240
Speaker 1: the resignation of David Cameron, who lost the bregsit referendum

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00:23:53,840 --> 00:23:56,680
Speaker 1: was disastrous for her. She lost her majority in Parliament

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00:23:56,800 --> 00:24:00,240
Speaker 1: and is now dependent on the Democratic Unionist Party is

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00:24:00,280 --> 00:24:03,720
Speaker 1: the hardline unionist in Northern Ireland and they are actually

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00:24:03,760 --> 00:24:06,119
Speaker 1: making it much more difficult for her to get a

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00:24:06,160 --> 00:24:09,720
Speaker 1: deal through Parliament as well. So lots of different political

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00:24:09,760 --> 00:24:12,600
Speaker 1: interests from lots of different political parties, and John Bayner

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00:24:12,720 --> 00:24:15,399
Speaker 1: had a way to do this under the US system.

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00:24:15,440 --> 00:24:18,639
Speaker 1: Are Kitty Donaldson and Jessica Shanklman have a smart article

448
00:24:18,680 --> 00:24:22,280
Speaker 1: Amanda today about how the Prime Minister has to go

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00:24:22,440 --> 00:24:25,560
Speaker 1: find labor votes. I think this is something our our

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00:24:25,680 --> 00:24:30,399
Speaker 1: American audience and certainly I miss all the time. A

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00:24:30,520 --> 00:24:34,159
Speaker 1: party leader, a Conservative party leader in this case, doesn't

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00:24:34,200 --> 00:24:38,359
Speaker 1: just wander over and get labor votes, do they. No,

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00:24:38,600 --> 00:24:42,720
Speaker 1: there's certainly a massive whip effort that's underway to try

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00:24:42,760 --> 00:24:46,160
Speaker 1: and get agreement. I think there's people within the Labor

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00:24:46,200 --> 00:24:49,160
Speaker 1: Party that we're not supportive of the idea of Brexit,

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00:24:49,560 --> 00:24:52,680
Speaker 1: but they recognize that a no deal for the UK

457
00:24:53,000 --> 00:24:56,479
Speaker 1: is going to be even more disastrous than UH something

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00:24:56,480 --> 00:24:59,240
Speaker 1: that they might not fully support. So you raise the

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00:24:59,359 --> 00:25:01,800
Speaker 1: point there's a question of whether the UK and EU

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00:25:01,880 --> 00:25:04,800
Speaker 1: can reach agreement on a deal, but then the UK

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00:25:04,960 --> 00:25:08,439
Speaker 1: Parliament has to accept the deal and it's possible that

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00:25:08,520 --> 00:25:10,880
Speaker 1: this could fall apart at at that point as well.

463
00:25:11,280 --> 00:25:13,760
Speaker 1: But but the key thing for Americans I think is

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00:25:14,440 --> 00:25:18,959
Speaker 1: Prime Minister May. Can she go get labor votes? And

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00:25:19,000 --> 00:25:23,720
Speaker 1: if she does it, does it? Is it political suicide?

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00:25:24,800 --> 00:25:27,480
Speaker 1: You know? I think there's there's likely to be some

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00:25:27,560 --> 00:25:31,120
Speaker 1: sort of election after this anyway, you know, you've got

468
00:25:31,200 --> 00:25:33,560
Speaker 1: lots of of churn over this. The problem for some

469
00:25:33,640 --> 00:25:36,800
Speaker 1: of the Labor supporters as Labor is led by Jeremy Corbyn,

470
00:25:36,920 --> 00:25:39,840
Speaker 1: who's a Democratic Socialist and so one of the things

471
00:25:39,880 --> 00:25:42,520
Speaker 1: that keeping people in line is the idea that him

472
00:25:42,560 --> 00:25:45,240
Speaker 1: as Prime minister might be even worse than Theresa May

473
00:25:45,320 --> 00:25:48,600
Speaker 1: as as prime minister. So with all of the jostling

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00:25:48,720 --> 00:25:52,400
Speaker 1: in the UK cabiniche, with all of the unhappiness by

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00:25:52,520 --> 00:25:55,800
Speaker 1: David Davies and others, people have to be very cognizant

476
00:25:55,800 --> 00:25:59,080
Speaker 1: of what the political alternative could end up being. Amanda.

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00:25:59,240 --> 00:26:03,320
Speaker 1: No matter what we describe today, something will happen by

478
00:26:03,440 --> 00:26:09,080
Speaker 1: March of correct, Yeah, something will happen. There either will

479
00:26:09,119 --> 00:26:11,800
Speaker 1: be in agreement, there will be no deal in the

480
00:26:11,880 --> 00:26:14,119
Speaker 1: UK will crash out of the EU and have to

481
00:26:14,200 --> 00:26:17,960
Speaker 1: return to w t O rules. Or third, people are

482
00:26:18,000 --> 00:26:21,160
Speaker 1: continuing to talk about whether you have snap elections. There's

483
00:26:21,200 --> 00:26:25,200
Speaker 1: a continued push for a people's referendum, but those things

484
00:26:25,200 --> 00:26:28,359
Speaker 1: seem seem less likely at this point. Okay. The reason

485
00:26:28,400 --> 00:26:31,040
Speaker 1: I ask it in that way is that there is

486
00:26:31,119 --> 00:26:36,960
Speaker 1: going to be lingering feelings on both sides of this issue,

487
00:26:37,680 --> 00:26:42,000
Speaker 1: and many of these politicians are still going to be politicians.

488
00:26:42,000 --> 00:26:43,600
Speaker 1: And I want you to focus, if you can, on

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00:26:43,720 --> 00:26:49,040
Speaker 1: Scotland for a second, because the word is that Nicola Sturgeon,

490
00:26:49,640 --> 00:26:53,960
Speaker 1: the head of the Scottish Nationals Party, says this is

491
00:26:54,040 --> 00:27:00,240
Speaker 1: going to make independence for Scotland unstoppable. I think you're

492
00:27:00,240 --> 00:27:03,560
Speaker 1: absolutely right. This not only is having implications for the

493
00:27:03,640 --> 00:27:07,600
Speaker 1: UK's relationship with the EU, but it's having domestic consequences

494
00:27:07,680 --> 00:27:12,240
Speaker 1: across the UK. People in Scotland voted overwhelmingly not to

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00:27:12,320 --> 00:27:16,320
Speaker 1: go forward with brexiti of them wanted to stay within

496
00:27:16,359 --> 00:27:20,160
Speaker 1: the EU. There was a referendum in Scotland on independence

497
00:27:20,240 --> 00:27:24,840
Speaker 1: in which failed, uh and there's been questions about whether

498
00:27:24,960 --> 00:27:28,840
Speaker 1: or not this makes Scottish independence more likely. Opinion polls

499
00:27:28,840 --> 00:27:32,040
Speaker 1: have not so far shown a massive swing, but there

500
00:27:32,119 --> 00:27:34,520
Speaker 1: certainly is a feeling that if Scotland gets a bad

501
00:27:34,600 --> 00:27:38,720
Speaker 1: deal coming out of Brexit negotiations, particularly in terms of

502
00:27:38,760 --> 00:27:42,119
Speaker 1: where powers from the EU that are being repatriated to

503
00:27:42,200 --> 00:27:45,800
Speaker 1: the UK land. Uh, it is possible that that sentiment

504
00:27:45,840 --> 00:27:50,199
Speaker 1: could grow in Scotland for another independence referendum. Recently we

505
00:27:50,320 --> 00:27:54,480
Speaker 1: heard that Unilever has decided to maintain its headquarters or

506
00:27:54,560 --> 00:27:58,480
Speaker 1: dual headquarters in the UK and in the Netherlands. Is

507
00:27:58,520 --> 00:28:01,480
Speaker 1: that the exception that proves rule that many companies are

508
00:28:01,480 --> 00:28:04,840
Speaker 1: looking to leave the UK. I think a lot of

509
00:28:04,840 --> 00:28:07,719
Speaker 1: companies have been caught in a really difficult position because

510
00:28:07,840 --> 00:28:10,240
Speaker 1: even now, as you said, less than six months away

511
00:28:10,400 --> 00:28:13,359
Speaker 1: from when breggsit happens, is very unclear what a deal

512
00:28:13,400 --> 00:28:15,400
Speaker 1: looks like. And so I think a lot of companies

513
00:28:15,440 --> 00:28:18,320
Speaker 1: have taken the decision to hedge and so for some

514
00:28:18,400 --> 00:28:21,280
Speaker 1: of them that has been to relocate their headquarters. For

515
00:28:21,359 --> 00:28:25,960
Speaker 1: others it has been to to open multiple headquarters, keeping

516
00:28:25,960 --> 00:28:29,399
Speaker 1: one in in London and one in elsewhere. And so

517
00:28:29,560 --> 00:28:32,720
Speaker 1: this is is creating a tremendous amount of uncertainty for

518
00:28:32,720 --> 00:28:36,320
Speaker 1: for businesses. Okay, you came out of Lansing, I get it,

519
00:28:36,840 --> 00:28:40,760
Speaker 1: and then you went to the gorgiosity of Edinburgh, Scotland, right,

520
00:28:42,120 --> 00:28:44,880
Speaker 1: that's why about scott I know. But the bottom line

521
00:28:44,960 --> 00:28:46,960
Speaker 1: is is people want to live in Edinburgh. People want

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00:28:46,960 --> 00:28:50,480
Speaker 1: to live in London. Right. The real issue here for

523
00:28:50,560 --> 00:28:53,360
Speaker 1: companies like you and Levers, that's where people want to live,

524
00:28:53,520 --> 00:28:57,960
Speaker 1: right Sure, where people want to live, but I think

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00:28:58,000 --> 00:29:01,760
Speaker 1: also where they're able to get economic certainty on what

526
00:29:01,880 --> 00:29:04,120
Speaker 1: the rules of of the road are going to look like.

527
00:29:04,240 --> 00:29:07,040
Speaker 1: I mean, London certainly is going to remain a significant

528
00:29:07,120 --> 00:29:10,040
Speaker 1: financial center, but there is so much uncertainty at the

529
00:29:10,080 --> 00:29:13,000
Speaker 1: moment about what the future relationship between the UK and

530
00:29:13,040 --> 00:29:16,280
Speaker 1: the EU looks like. What everybody has been negotiating right

531
00:29:16,320 --> 00:29:18,800
Speaker 1: now is the divorce settlement. What they also need to

532
00:29:18,880 --> 00:29:22,280
Speaker 1: come some ways towards within the next couple of weeks

533
00:29:22,320 --> 00:29:25,120
Speaker 1: and then hash out during this twenty one month transition

534
00:29:25,160 --> 00:29:28,520
Speaker 1: period after next March, is what the future relationship between

535
00:29:28,520 --> 00:29:30,560
Speaker 1: the UK and JUST looks like. Do they have a

536
00:29:30,880 --> 00:29:35,240
Speaker 1: trade agreement? Uh? Does the UK follow EU customs rules,

537
00:29:35,320 --> 00:29:38,840
Speaker 1: regulations rules? What? What does that look like? Amanda, Thank

538
00:29:38,840 --> 00:29:47,920
Speaker 1: you so much, Amanda Slope with Brookings on Brexit. Thanks

539
00:29:47,920 --> 00:29:52,200
Speaker 1: for listening to the Bloomberg Surveillance podcast. Subscribe and listen

540
00:29:52,440 --> 00:29:57,760
Speaker 1: to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform

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00:29:57,840 --> 00:30:02,160
Speaker 1: you prefer. I'm on Twitter at I'm Keene. Before the podcast,

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00:30:02,200 --> 00:30:05,720
Speaker 1: you can always catch us worldwide. I'm Bloomberg Radio