Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm term Keene Jay Lee.
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Speaker 1: of the top news in the world of global economics
Speaker 1: now and global finance, investors may be ignoring the risk
Speaker 1: that financial conditions could tighten sharply and send tremors through
Speaker 1: the global economy. This all according to the International Monetary Fund,
Speaker 1: who want that overall market participants appear complacent about the
Speaker 1: risk of a sharp tightening of financial conditions, jointing us
Speaker 1: to discuss I please to say this morning in our
Speaker 1: studio here in New York is Sebastia Malaby, CFR, Senior
Speaker 1: Fellow for International Economics. Good morning to Sebastia, and great
Speaker 1: to be with you. So let's get to that line
Speaker 1: from the i m F. Do you think investors are
Speaker 1: under appreciating the risk that financial conditions could tighten and
Speaker 1: what that could mean for the global economy? But if
Speaker 1: we focus on the US, I don't think that's true
Speaker 1: right now, because when you've got growth at four percent,
Speaker 1: that can mask a lot of financial fragility. But if
Speaker 1: you project forward and you say, okay, this fiscal stimulus
Speaker 1: from the tax cat in December is going to be
Speaker 1: wearing off next year and into twenty by which time
Speaker 1: the Fed world have hiked a little bit more, and
Speaker 1: you've got a very fragile corporate credit situation. It's that
Speaker 1: interaction between the likely growth slowdown in and a highly
Speaker 1: leveraged corporate credit picture. That's what worries me. Even if
Speaker 1: you didn't get a recession in because of the wearing
Speaker 1: off of the fiscal stimulus, and you just had a
Speaker 1: growth recession in other words, growth down at one percent,
Speaker 1: that's enough to start kicking the fault rates up and
Speaker 1: and and and credit could react. It's almost none austerity.
Speaker 1: Let's review this. I think this is important. Back eight years,
Speaker 1: what we learned about British austerity or Germanic austerity or
Speaker 1: austerity austerity. What was the lesson learned? Well, first of all,
Speaker 1: it produced populism small detail, which is quite a big
Speaker 1: detail um. And second of all, it didn't really drive
Speaker 1: debt to GDP down much um. And so it's a struggle.
Speaker 1: You really need growth to be generated by productivity changes,
Speaker 1: which means technology and so forth, and we don't have
Speaker 1: a magic one for that. Um. So I think those
Speaker 1: are some of the lessons. The trend, overwhelmingly for developed
Speaker 1: economies has been for debt to GDP to climb throughout
Speaker 1: the last ten years. Sebastian, I just wanted to what
Speaker 1: extent this sort of curtails some of our abilities to
Speaker 1: sort of respond to the next downturn, whether it be
Speaker 1: financial or economic across Europe. In the United States, yeah,
Speaker 1: I think that's a profound issue that last time around,
Speaker 1: in two thousand and eight, there was enormous ammunition to respond,
Speaker 1: both in terms of fiscal stimulus and in terms of
Speaker 1: enormous monetary intervention. If you think about the next time,
Speaker 1: there are different constraints in Europe in the US, but
Speaker 1: they're big in both cases. In Europe, the issue is
Speaker 1: that you might have a different central bank chief, not
Speaker 1: Marry a draggy but somebody more kind of a Northern
Speaker 1: European cautious persuasion could be ends vitamin of Germany, could
Speaker 1: be somebody else. Um. And secondly, on the other side
Speaker 1: of the table from the central bank in Europe, there
Speaker 1: might not be Maria Monty, who was a responsible, technocratic
Speaker 1: Italian leader. There might be the kind of populous leaders
Speaker 1: that you have right now in Italy, and that would
Speaker 1: change the equation Sebaston when you think about the constraints. Though,
Speaker 1: at least here in the United States, there is some
Speaker 1: spere capacity and monetary policy to respond to a financial
Speaker 1: or economic downturn. In Europe that does not exist, both
Speaker 1: in fiscal both in monetary policy. And also I think
Speaker 1: something that doesn't get a lot of discussion is the
Speaker 1: regulatory response. In two thousand and two thousand and nine,
Speaker 1: it was every country for themselves bail out the banks.
Speaker 1: It's gonna be very different if we have a banking
Speaker 1: crisis in Europe again. The ability see if some of
Speaker 1: these countries to actually do what they did last time.
Speaker 1: It's just not going to be there, is it. Yeah,
Speaker 1: And that's fundamentally why I worry more about Europe and
Speaker 1: particularly a flash point like Italy, than I do about
Speaker 1: the US. I mean, in the US, there's a legitimate
Speaker 1: debate about the way that the Dodd Frank reforms curtailed
Speaker 1: the FEDS ability to act as lender of last resort.
Speaker 1: But hopefully a big dose of monetary easing combined with
Speaker 1: further fiscal stimulus, if you really had to do it
Speaker 1: is something that US can get away with it. Because
Speaker 1: of the dollars reserve currency status in the world, you
Speaker 1: can assue more. Dad. I mean, that's a really important
Speaker 1: point in my conversation with Mada re Guard. This came
Speaker 1: up the part of Asia to finally move the exorbitant
Speaker 1: privilege over to China. I mean, that's a backstory in
Speaker 1: Bali as well. But through all of the Sebastian and
Speaker 1: frankly through all of your writings, we go back as
Speaker 1: you started staying in this idea. There is something special
Speaker 1: the dollars ascended. Do you see any change in that? No,
Speaker 1: I see absolutely zero post a fact of changing that.
Speaker 1: I think the dollars centrality in the global system has
Speaker 1: gone up, not down since two and and this is
Speaker 1: so important. From Barry I, Canna Berkeley, and from Joseph Harvard,
Speaker 1: they agree with Mr Mallaby. But there is a real
Speaker 1: debate about this now, debate about they're just saying no
Speaker 1: where right. Dalio is weighed in on that debate as
Speaker 1: well quite recently as well. Sebastian and I just wonder
Speaker 1: whether the deficit actually matters. With this in mind, if
Speaker 1: we go from five percent to ten percent here in
Speaker 1: the United States, do we just assume it keeps getting funded. Yes,
Speaker 1: I think we do. I mean the reason is that
Speaker 1: we ran an experiment in two tho eight, two thousand
Speaker 1: nine where the Chinese Central Bank governor put on the
Speaker 1: website a sort of declaration of trying to make the
Speaker 1: remand b international, trying to make the reman be a
Speaker 1: global currency. You know, ten years later, has the dollar
Speaker 1: been dethroned. No, it's actually more dominant. Why is it
Speaker 1: more dominant. It's because fundamentally, countries around the world, and
Speaker 1: especially corprates, want to issue debt in dollars. And if
Speaker 1: your corporate sector has lots of dollar debt, the central
Speaker 1: bank needs to protect itself by having dollar reserves. And
Speaker 1: that isn't changing. And so central banks will hold dollars,
Speaker 1: and private wealth managers will hold dollars because the markets
Speaker 1: are deep and liquid and they have rule of law,
Speaker 1: and because that's what the liabilities in. So if you're
Speaker 1: trying to cover against a run on your banks or
Speaker 1: on your corporates, you need dollars as your safeguard. Look
Speaker 1: at the use of dollar swaps after the two eight crisis.
Speaker 1: Everybody was screaming for dollars. So I think people are
Speaker 1: going to want to hold dollars and that gives enormous
Speaker 1: rope with which the US can continue to kind of
Speaker 1: hang itself and strangle itself in terms of budget deficits.
Speaker 1: Is that more true in a period of risk aversion?
Speaker 1: We're still going to see this situation where it becomes
Speaker 1: by treasuries, by the US dollar when we go through
Speaker 1: a sustained period of risk aversion. Well, I mean that's
Speaker 1: exactly the paradox. You know, the US can create a
Speaker 1: financial cry, this a No. Eight and everybody's response is
Speaker 1: they want to hold more donnas. And I don't think
Speaker 1: that's going away. I think the U s can be
Speaker 1: irresponsible to create, uh, you know, some kind of panic
Speaker 1: and the response would be we want the US currency.
Speaker 1: It's ironic, but it's the truth. Special Malloby, thank you
Speaker 1: so much, And I really can't say enough about a
Speaker 1: careful read of Mr Maloby's article in The Atlantic Magazine
Speaker 1: on growth in the latest Nobel Prize, roner Paul Rohmer
Speaker 1: of Stanford Quieter Markets today, we really like you can
Speaker 1: almost truncate back the data checks Brazilian Royle three point
Speaker 1: seven one yet to trade a day around that election,
Speaker 1: and John, I would suggest we've been exceptionally Asian centric
Speaker 1: today with Bali, I m f all the China news
Speaker 1: and of course the guests we've had Lord Patton, the
Speaker 1: former governor of Hong Kong, and s Aston Mallaby and such.
Speaker 1: You know it Europe and there's I'm sorry and the
Speaker 1: crush of the news flow. There's a lot going on
Speaker 1: in Europe right now and I'm sorry all centers back
Speaker 1: to this turmoil over populism, migration and such. I thought
Speaker 1: the comments from Matteo Salveni were absolutely amazing, like like
Speaker 1: essentially essentially essentially telling the market here's the line in
Speaker 1: the sand. It's four basis points over Germany and we
Speaker 1: don't think you're going there, which I just think is
Speaker 1: staggering that it's the one oh one of how not
Speaker 1: to communicate the financial markets at a time when you
Speaker 1: are going through some serious stress. Um. I want to
Speaker 1: bring a class Fistess and Pantheon macro Economics chief euros
Speaker 1: Own economists to weigh in class, what did you think
Speaker 1: of those remarks from the deputy Prime Minister in Italy.
Speaker 1: Oh look, Jonathan, I mean, you have the nail, and
Speaker 1: I completely agree. This is really really bad. I mean,
Speaker 1: right now Italian politicians are picking fights with everyone. And
Speaker 1: so even though you know, I could sit here and say, look,
Speaker 1: we could sit here and talk about you know, you
Speaker 1: have a current count surplus, you have a primary surplus.
Speaker 1: This is not two thousand twelve. It's not that the
Speaker 1: macroeconomics are much better, but I mean, at the moment, seriously,
Speaker 1: with this kind of comments coming out, you know, the
Speaker 1: market is just going to poinst them over and over again,
Speaker 1: and and it's not clear to me how and how
Speaker 1: and why they step back. I mean, he also said
Speaker 1: something like, well, when we hit four hundred basis points,
Speaker 1: you know we're going to take actions. Oh who the
Speaker 1: easy beat? Now, this is we're in a very bad
Speaker 1: equilibrium at the moment. I think we're going to snap
Speaker 1: out of it eventually, but at the moment, it's it's difficult.
Speaker 1: It's difficult. Let's talk about what four hundred basis points
Speaker 1: actually is. It's Greece. That's where Greece trades fo hundred
Speaker 1: basis points over Germany. And do you think you could
Speaker 1: get that bad class before it gets better? Well, I mean,
Speaker 1: I think you know once I think, I mean, I
Speaker 1: think we have to we have to go with with
Speaker 1: the with the sort of the tenor of of of
Speaker 1: your first comment, namely that once you give a market
Speaker 1: something to aim for, they might get there. Now, I
Speaker 1: think that's a massive miss pricing Italian bondy's currently bondmarket
Speaker 1: is currently are miss priced. I mean two yr yield
Speaker 1: shouldn't be above one percent um and and certainly I
Speaker 1: don't think ten yea yields should be should be as
Speaker 1: high as they are. But it's it's almost like they're
Speaker 1: welcoming in, right politicians. Is that if we're in a
Speaker 1: situation now where where the more they push and the
Speaker 1: more they think that it boasted their domestic political capital.
Speaker 1: So it's like they like, it's like they welcome. Right.
Speaker 1: That is not a good idea. We had a wonderful
Speaker 1: magesterial conversation yesterday with Janice Vera Facus who's got an
Speaker 1: acquaintance with crisis in real time and particularly negotiating with Germany,
Speaker 1: the Netherlands and France, the other core countries and one
Speaker 1: of our basic themes was Greece has got to be
Speaker 1: different than Italy. And he was fascinating about how Italy
Speaker 1: could mess this up from a pantheon economics basis, do
Speaker 1: they have the structure in Italy not to mess this
Speaker 1: up the institutional linkages of politics, economics, society in their
Speaker 1: banking system is Italy not Greece. Um No, Italy is
Speaker 1: not great, And I think and sometimes mess of our
Speaker 1: funck is he He was right when he said that
Speaker 1: what they should do is to use the fact that
Speaker 1: Italy is the third biggest economy in eurosine so they
Speaker 1: pull some weight in terms of the rules. But obviously
Speaker 1: they've jettisoned all that by now. So now, unfortunately, we
Speaker 1: are in equilibrium where you know, you play tis chat
Speaker 1: with the with the Commission. The e c B had
Speaker 1: already abandoned you because you know they can't help you.
Speaker 1: So now there's a risk that you know, this escalates.
Speaker 1: I mean, what I will say about Italy is that
Speaker 1: you know, the macro economics are just much better, right,
Speaker 1: I mean, it's like this is not we should not
Speaker 1: this is not a stable equilibrium from a macro economic perspective.
Speaker 1: We should not get here right, two point four percent
Speaker 1: in two thousand nineteen, you have a primary surplus at
Speaker 1: one point five If you are growing and unemployment is falling,
Speaker 1: your external accounts are and surplos. I mean they should
Speaker 1: not be as bad. But I mean, once we're in
Speaker 1: this overshooting environment, you know who knows right, so and
Speaker 1: then and the next year to dou will be the
Speaker 1: rating aggies. They will come in and some of them
Speaker 1: will jump ready to be. It's so frustrating from the
Speaker 1: outside looking again when you see the European officials and
Speaker 1: the Italian government essentially arguing over tens of basis points. Literally,
Speaker 1: I have fifty basis points at a budget deficit and
Speaker 1: probably not even This is what the argument essentially comes
Speaker 1: down to, Klaus, And they're risking another crisis for it.
Speaker 1: Is it worth it? Yeah? Yeah, no, no, it's not
Speaker 1: worth it. And you know, some of the blame has
Speaker 1: to have to put be at the EU as well.
Speaker 1: I mean, it's odd, right that every time we have
Speaker 1: one of these negotiations between a southern European country and
Speaker 1: the EU, it always ends up like this, and there's
Speaker 1: no reason. And by the way, the Italian people will
Speaker 1: pay right because I mean, let's just let's go run
Speaker 1: through the economic year. This will start to hurt next
Speaker 1: year with a lag like you have two year yeards
Speaker 1: one Rachel will go up with a lack banquets bankalown rate.
Speaker 1: Of course they will. This is like, this is just
Speaker 1: one of one. We know this, but the first half
Speaker 1: of next year Italy. Italy could be close to recession
Speaker 1: if this continues, because it growth is al really very low.
Speaker 1: I mean, it's just amount of time before just make
Speaker 1: that conclusion. So how does Mr Drug respond to this?
Speaker 1: We have an historic headlined out of the Bloomberg that
Speaker 1: they're going to keep rates where they are until I
Speaker 1: don't know, on the edge of freezing over I guess
Speaker 1: late summer of next year. Can that be derailed by
Speaker 1: this tumult in Italy? No? Uh well the rates maybe
Speaker 1: not chewy, but yeah, I'm fair of the rates next
Speaker 1: year obviously, yes, I mean in some sense if Italy falls,
Speaker 1: really if the Italian economy retakes a knock on the
Speaker 1: basis of this, this is obviously going to feedback through
Speaker 1: to the Ecbach reaction function. Growth going to be lower.
Speaker 1: So yeah, that that that could be through. But then
Speaker 1: again we're playing for time here, you know. We we
Speaker 1: don't have to have that discussion until at some point
Speaker 1: in the first half of next year, but not a
Speaker 1: queys ending. And at the moment, the ECB has been
Speaker 1: paced into a corner, as it did with Greece, in
Speaker 1: the sense that when you have a faceoff like this
Speaker 1: between the EU and and and a government needs to
Speaker 1: be just have to kick back from So I think
Speaker 1: some people would also argue that the e CP have
Speaker 1: put themselves in a corner, and they did it several
Speaker 1: years ago, unto John Claudritie, when they were responsible to
Speaker 1: some extent to introduce read denomination risk into this market
Speaker 1: because they didn't behave like a normal central bank. Are
Speaker 1: they going to continue to behave like a normal central
Speaker 1: bank now? Well, I mean I think I know, I
Speaker 1: see your point. I mean that that that big, that
Speaker 1: that that that great high. But I mean what the
Speaker 1: ECB can do right, What we can do is the
Speaker 1: ECB can help the Talian bond market if there's an
Speaker 1: actual miss pricing. But if that miss pricing because Italy
Speaker 1: is flirting with the idea of leaving the Eurozone, or
Speaker 1: if markets believe that that's true, I mean you're you're gone.
Speaker 1: I mean, then you don't have the ECB anymore by
Speaker 1: definition when you leave the Eurozone. So one, the fact
Speaker 1: that we still have this debate, which is incredible to me,
Speaker 1: that just means that that the e g B is
Speaker 1: really just I mean, listen, the e g B should
Speaker 1: come in hard on Italian two years, you'll say. In
Speaker 1: my views, they should just smack that down. It is
Speaker 1: a violation of the e CBS forward guidance. Yeah, it has.
Speaker 1: The Italian two yields has no business being one point.
Speaker 1: But there are two Eurozone happened crisis hangovers. Class as
Speaker 1: you know, there are two Eurozone crisis hangovers that still
Speaker 1: exist today, and one is to do move between the
Speaker 1: banks and the sovereigns hasn't gone away. You see it
Speaker 1: in Italy. The other for me is that Italian peripheries,
Speaker 1: and just peripheries in general, sovereign debt in Spain and Italy, Portugal,
Speaker 1: Greece still trades like credit. And to what degree when
Speaker 1: it trades like credit, does that curtail the populist ability
Speaker 1: to really take this fight and have this fight for
Speaker 1: a sustained period of time. Oh no, it does in
Speaker 1: some sense that that again really is a really good point.
Speaker 1: The fact that the bonds trade like credit obviously in
Speaker 1: some sense empowers the EU and empowers the EP. Just
Speaker 1: all right, let them run. Oh yeah, we'll see how
Speaker 1: far they get, because at the end of the day
Speaker 1: they end up with having to pay the pride. And
Speaker 1: I mean, I'm very clear in my base case. If
Speaker 1: we start to see growth slowing and bank loan and
Speaker 1: variable mortgage rates time to go up. Let's see how
Speaker 1: the balls do and the first time make year for
Speaker 1: Salvenia and Demo Claus. Thank you so much. Close Festal
Speaker 1: with Pantheon. Really good update there with us right now
Speaker 1: a gentleman that certainly within banking and finance and banking
Speaker 1: legislation needs little introduction. Michael Mayo as this week as
Speaker 1: wells Fargo as well. Before we get the banking earnings
Speaker 1: and all that. H ARE four one zero five is
Speaker 1: an attempt to bring Mike Mayo sensibility to Washington. What
Speaker 1: is it and is it gonna work? So this is
Speaker 1: HR four zero one five the Core Governance Reform Act,
Speaker 1: also known as the Mayo Act. Well it's the Anti
Speaker 1: Mayo Act. This is the Corporate Governance reform. Having covered
Speaker 1: the banking industry for the last three decades, seeing the
Speaker 1: abuses that have taken place. As you know, Tom, I've
Speaker 1: written about this in my book. You've been fired over this,
Speaker 1: continue exactly and you know I testified to Congress over this.
Speaker 1: So if you hear Corporate Governance Reform Act, I have
Speaker 1: great ideas for this. But what this act would do,
Speaker 1: it's it's cracking down on those advisors that advise shareholders
Speaker 1: on how to vote and so the so it's proxy advisors,
Speaker 1: it's Institutional Shareholder Services, Glass, Louis Egan, Jones, a couple
Speaker 1: other small ones, and what they do is they advise
Speaker 1: shareholders to vote when the main questions for every annual meeting.
Speaker 1: And now the um you know, the this bill as
Speaker 1: we're going to crack down these proxy advisors. We're gonna
Speaker 1: make because that's what the big banks want. Right. Well,
Speaker 1: I'm not I'm not saying big banks or other banks.
Speaker 1: I'm just saying for me, as someone who represents shareholders,
Speaker 1: I've done that for the banks, and this applies to
Speaker 1: all industries. What this would require is that the proxy advisors,
Speaker 1: before they publish their research, they'd have to show that
Speaker 1: research to the companies, and the companies could say, hey,
Speaker 1: this isn't quite right. The companies still agree, then the
Speaker 1: company view would be listed alongside the views of the projects.
Speaker 1: Come to the chases. This act good for Jamie Diamond. Well,
Speaker 1: you know, I say I change it around. I say,
Speaker 1: does this pass the city group test that? Well, by
Speaker 1: by that, I mean so if a proxy advisor wants
Speaker 1: to conduct research talking about city groups pay, then they'd
Speaker 1: have to check with City Group. If they want to
Speaker 1: conduct research saying we should separate the CEO and chairman job,
Speaker 1: they'd have to show that to the city group. If
Speaker 1: they say we want to have a shareholder value committee
Speaker 1: to get these are already shareholder proposals that they're giving
Speaker 1: recommendations on. So if they want to give recommendations that
Speaker 1: they have to show their research. So for City Group,
Speaker 1: for the last two decades, the CEOs over two decades
Speaker 1: have gotten paid for um, sorry, I've gotten paid an
Speaker 1: average of twenty million dollars a year, four million dollars
Speaker 1: while the stock's gone down, While the stock's gone down
Speaker 1: by at a time when the SMP has got up
Speaker 1: two to threefold. So you know, if if I assess
Speaker 1: or Glasslows wants to write about the pay at City Group,
Speaker 1: they'd have to show that research to City Group before
Speaker 1: doing this. This is the anti Mike Mayo by all means,
Speaker 1: Ferre scrim over times in England gave him a lot
Speaker 1: of time. Has gone a bit of a rant, didn't
Speaker 1: we It's okay, it's as a friend of Oz, he
Speaker 1: can do that. But you know, if I'm ad Egan Jones,
Speaker 1: do I need to show my research at whatever bank
Speaker 1: before my imagine we can we talk about the earnings
Speaker 1: that come this week. A bit of a rant now
Speaker 1: about some of what is going gone down in Washington
Speaker 1: day see with the regulation still bullish City City Group.
Speaker 1: It is our number one idea you have. I think
Speaker 1: that the main course for City and all the banks
Speaker 1: should be decent. I mean you have good cause control,
Speaker 1: good credit, good cath return. If there's a concern out there,
Speaker 1: it's that you don't get that dessert, the extras of
Speaker 1: you know, extra margin increase, extra long growth, extra capital markets,
Speaker 1: the extra animal spirits that should come after the tax cuts.
Speaker 1: I prefer having a little bit less revenues today and
Speaker 1: much more sustainable growth. In a way, it's the the
Speaker 1: opposite before the financial crisis from people celebrated revenue growth
Speaker 1: only for banks get hurt later. Now you have a
Speaker 1: little bit less revenue growth, but it's sustainable. You'll really
Speaker 1: bullish on the structural story for banks in America. Can
Speaker 1: you just build on that framework, because we've got a
Speaker 1: bit of time with you this morning, and then we
Speaker 1: can get deeper into some of the stuff you concerned about.
Speaker 1: Just why is the structural story for banks right now
Speaker 1: so favorable for the longer term with a much longer
Speaker 1: time a rising here. Well, I appreciate that question. There's
Speaker 1: too much short termism. And so when we look at
Speaker 1: the banks, despite you know, to be some cyclical softness,
Speaker 1: you have um the cost uxture at banks. If you're
Speaker 1: reaching a twenty five year structural breakout for the benefits
Speaker 1: of scale. It was when US banks were first allowed
Speaker 1: to expand nationally. You're seeing the benefit of that. There
Speaker 1: was the scale. Now you're seeing a structural reduction in risk.
Speaker 1: That doesn't mean loan losses aren't going higher. That doesn't
Speaker 1: mean there won't be problems, but you've seen incredible de
Speaker 1: leveraging and de risking. And so we think while lawsuit
Speaker 1: will go higher, they won't go as high as in
Speaker 1: the past. And then lastly, capital RETURNE. You have record
Speaker 1: capital return at the bank, So I guess you could
Speaker 1: you know, called this the three cs, credit, costs and
Speaker 1: capital Very good. That sounds like there's no research report.
Speaker 1: Michael Mayo with well, let's talk about perhaps detail or
Speaker 1: lack thereof when it comes to some kind of divorce
Speaker 1: settlement between the United Kingdom and the European You and
Speaker 1: you're sterling up. Yes, perhaps a deal in the making.
Speaker 1: Amanda slot Brookings Institution, Senior Fellow in Foreign Policy Center
Speaker 1: on the United States and Europe. Amanda Slote, what do
Speaker 1: you know about a potential deal? Well, all eyes are
Speaker 1: certainly on London and Brussels at the moment. Next week
Speaker 1: there's a meeting of the European Council, which is all
Speaker 1: the leaders of the European Union, including the British Prime Minister.
Speaker 1: The hope had been that next week's meeting was when
Speaker 1: a Brexit deal was going to be finalized. People are
Speaker 1: increasingly pessimistic that it may not be finalized next week,
Speaker 1: but may require another special session in November to wrap
Speaker 1: things up. What are the specific sticking points is it
Speaker 1: still the border with northern Northern Ireland and the Irish Republic. Yes. Absolutely.
Speaker 1: A lot of people have been coming out and saying
Speaker 1: about eight of the withdrawal Agreement that divorced settlement is complete,
Speaker 1: but the continued inability to determine how to handle the
Speaker 1: border with Ireland remains the major sticking point and actually
Speaker 1: could still prevent a deal from ultimately being done. Now
Speaker 1: there is a report that David Davies, who is a
Speaker 1: Member of Parliament and has now stepped up an assault
Speaker 1: on Theresa May's Brexit plan, says that the Conservatives the
Speaker 1: Tories would lose the next lession election unless Theresa May's
Speaker 1: exit plan is scrapped. Is that just politicking? Well, there's
Speaker 1: lots of politicking from all sides here. Theresa May has
Speaker 1: to get a budget through Parliament at the end of
Speaker 1: the months and so some are threatening not to support
Speaker 1: the budget if they don't agree with her brexit deal.
Speaker 1: She held snap elections after she became Prime Minister following
Speaker 1: the resignation of David Cameron, who lost the bregsit referendum
Speaker 1: was disastrous for her. She lost her majority in Parliament
Speaker 1: and is now dependent on the Democratic Unionist Party is
Speaker 1: the hardline unionist in Northern Ireland and they are actually
Speaker 1: making it much more difficult for her to get a
Speaker 1: deal through Parliament as well. So lots of different political
Speaker 1: interests from lots of different political parties, and John Bayner
Speaker 1: had a way to do this under the US system.
Speaker 1: Are Kitty Donaldson and Jessica Shanklman have a smart article
Speaker 1: Amanda today about how the Prime Minister has to go
Speaker 1: find labor votes. I think this is something our our
Speaker 1: American audience and certainly I miss all the time. A
Speaker 1: party leader, a Conservative party leader in this case, doesn't
Speaker 1: just wander over and get labor votes, do they. No,
Speaker 1: there's certainly a massive whip effort that's underway to try
Speaker 1: and get agreement. I think there's people within the Labor
Speaker 1: Party that we're not supportive of the idea of Brexit,
Speaker 1: but they recognize that a no deal for the UK
Speaker 1: is going to be even more disastrous than UH something
Speaker 1: that they might not fully support. So you raise the
Speaker 1: point there's a question of whether the UK and EU
Speaker 1: can reach agreement on a deal, but then the UK
Speaker 1: Parliament has to accept the deal and it's possible that
Speaker 1: this could fall apart at at that point as well.
Speaker 1: But but the key thing for Americans I think is
Speaker 1: Prime Minister May. Can she go get labor votes? And
Speaker 1: if she does it, does it? Is it political suicide?
Speaker 1: You know? I think there's there's likely to be some
Speaker 1: sort of election after this anyway, you know, you've got
Speaker 1: lots of of churn over this. The problem for some
Speaker 1: of the Labor supporters as Labor is led by Jeremy Corbyn,
Speaker 1: who's a Democratic Socialist and so one of the things
Speaker 1: that keeping people in line is the idea that him
Speaker 1: as Prime minister might be even worse than Theresa May
Speaker 1: as as prime minister. So with all of the jostling
Speaker 1: in the UK cabiniche, with all of the unhappiness by
Speaker 1: David Davies and others, people have to be very cognizant
Speaker 1: of what the political alternative could end up being. Amanda.
Speaker 1: No matter what we describe today, something will happen by
Speaker 1: March of correct, Yeah, something will happen. There either will
Speaker 1: be in agreement, there will be no deal in the
Speaker 1: UK will crash out of the EU and have to
Speaker 1: return to w t O rules. Or third, people are
Speaker 1: continuing to talk about whether you have snap elections. There's
Speaker 1: a continued push for a people's referendum, but those things
Speaker 1: seem seem less likely at this point. Okay. The reason
Speaker 1: I ask it in that way is that there is
Speaker 1: going to be lingering feelings on both sides of this issue,
Speaker 1: and many of these politicians are still going to be politicians.
Speaker 1: And I want you to focus, if you can, on
Speaker 1: Scotland for a second, because the word is that Nicola Sturgeon,
Speaker 1: the head of the Scottish Nationals Party, says this is
Speaker 1: going to make independence for Scotland unstoppable. I think you're
Speaker 1: absolutely right. This not only is having implications for the
Speaker 1: UK's relationship with the EU, but it's having domestic consequences
Speaker 1: across the UK. People in Scotland voted overwhelmingly not to
Speaker 1: go forward with brexiti of them wanted to stay within
Speaker 1: the EU. There was a referendum in Scotland on independence
Speaker 1: in which failed, uh and there's been questions about whether
Speaker 1: or not this makes Scottish independence more likely. Opinion polls
Speaker 1: have not so far shown a massive swing, but there
Speaker 1: certainly is a feeling that if Scotland gets a bad
Speaker 1: deal coming out of Brexit negotiations, particularly in terms of
Speaker 1: where powers from the EU that are being repatriated to
Speaker 1: the UK land. Uh, it is possible that that sentiment
Speaker 1: could grow in Scotland for another independence referendum. Recently we
Speaker 1: heard that Unilever has decided to maintain its headquarters or
Speaker 1: dual headquarters in the UK and in the Netherlands. Is
Speaker 1: that the exception that proves rule that many companies are
Speaker 1: looking to leave the UK. I think a lot of
Speaker 1: companies have been caught in a really difficult position because
Speaker 1: even now, as you said, less than six months away
Speaker 1: from when breggsit happens, is very unclear what a deal
Speaker 1: looks like. And so I think a lot of companies
Speaker 1: have taken the decision to hedge and so for some
Speaker 1: of them that has been to relocate their headquarters. For
Speaker 1: others it has been to to open multiple headquarters, keeping
Speaker 1: one in in London and one in elsewhere. And so
Speaker 1: this is is creating a tremendous amount of uncertainty for
Speaker 1: for businesses. Okay, you came out of Lansing, I get it,
Speaker 1: and then you went to the gorgiosity of Edinburgh, Scotland, right,
Speaker 1: that's why about scott I know. But the bottom line
Speaker 1: is is people want to live in Edinburgh. People want
Speaker 1: to live in London. Right. The real issue here for
Speaker 1: companies like you and Levers, that's where people want to live,
Speaker 1: right Sure, where people want to live, but I think
Speaker 1: also where they're able to get economic certainty on what
Speaker 1: the rules of of the road are going to look like.
Speaker 1: I mean, London certainly is going to remain a significant
Speaker 1: financial center, but there is so much uncertainty at the
Speaker 1: moment about what the future relationship between the UK and
Speaker 1: the EU looks like. What everybody has been negotiating right
Speaker 1: now is the divorce settlement. What they also need to
Speaker 1: come some ways towards within the next couple of weeks
Speaker 1: and then hash out during this twenty one month transition
Speaker 1: period after next March, is what the future relationship between
Speaker 1: the UK and JUST looks like. Do they have a
Speaker 1: trade agreement? Uh? Does the UK follow EU customs rules,
Speaker 1: regulations rules? What? What does that look like? Amanda, Thank
Speaker 1: you so much, Amanda Slope with Brookings on Brexit. Thanks
Speaker 1: for listening to the Bloomberg Surveillance podcast. Subscribe and listen
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Speaker 1: you prefer. I'm on Twitter at I'm Keene. Before the podcast,
Speaker 1: you can always catch us worldwide. I'm Bloomberg Radio