WEBVTT - Episode 43: What have they done? 0:00:07.400 --> 0:00:10.720 Hi, and welcome back to Bloomberg Benchmark, a show about 0:00:10.720 --> 0:00:16.239 the global economy. It's Friday June. I'm Daniel Moss, Executive 0:00:16.360 --> 0:00:19.560 editor for Global Economics at Bloomberg and New York, and 0:00:19.600 --> 0:00:23.280 I'm joined on the line from London by my colleague 0:00:23.320 --> 0:00:28.600 Paul Gordon. Paul is responsible for Western European central banks, 0:00:28.960 --> 0:00:32.080 the news on the central banks. So Paul, what kind 0:00:32.120 --> 0:00:35.360 of night have you had? A long one, for certain, 0:00:36.320 --> 0:00:38.360 I was in at about four o'clock in the morning. 0:00:38.400 --> 0:00:40.440 I got up about four o'clock morning to get out 0:00:41.280 --> 0:00:44.080 the hotel and head over to the office and severally 0:00:44.120 --> 0:00:47.320 bemused handful of people on the street at that time. 0:00:47.360 --> 0:00:49.800 A little later on, my colleague was down at Canary Wharf, 0:00:49.800 --> 0:00:53.200 obviously a big financial district in London, and there people 0:00:53.240 --> 0:00:55.840 were looking at their phones, looking at the headlines. There 0:00:55.880 --> 0:00:58.040 was a lot of swearing, i can tell you, and 0:00:58.240 --> 0:01:00.600 a lot of the muse face. And there's a good 0:01:00.600 --> 0:01:02.160 reason for that, because these are the people who have 0:01:02.200 --> 0:01:05.800 been hit most of all. Initially, the markets have been plunging, 0:01:05.880 --> 0:01:08.399 as you're aware, and it is the bankers he may 0:01:08.400 --> 0:01:10.919 well be fearing for their jobs in some areas following 0:01:10.959 --> 0:01:14.440 a brexcept and Britain's vote to leave the EU wasn't 0:01:14.480 --> 0:01:17.560 really even that close, was it. Well, in the end, 0:01:17.959 --> 0:01:22.240 pretty much cent so no, nowhere near as close as 0:01:22.280 --> 0:01:24.640 some of the opinion polls had been in the run 0:01:24.720 --> 0:01:27.520 up to the vote, and nowhere near as close. Quite 0:01:27.520 --> 0:01:30.680 the reverse in fact of what the first opinion poll 0:01:30.720 --> 0:01:33.160 said once the polls closed yesterday. So a lot of 0:01:33.200 --> 0:01:36.680 people went to bed last night thinking, right, the Leave 0:01:36.800 --> 0:01:40.840 campaign has lost, Remain will win, And when they got 0:01:40.920 --> 0:01:43.080 up this morning they found it was a very different story. 0:01:43.480 --> 0:01:46.399 And the country is not just divided on whether to 0:01:46.480 --> 0:01:49.920 stay or whether to go. The results and where the 0:01:50.040 --> 0:01:55.160 results have come from indicate a nation divided economically some 0:01:55.200 --> 0:01:58.200 pretty stark ways. Talk about that, yes, I mean one 0:01:58.200 --> 0:02:01.800 of the key divisions that you seen is on age. 0:02:01.840 --> 0:02:04.680 The young have been supporters and the elderly much less. 0:02:04.720 --> 0:02:08.520 So There's been division on wealth as well, the wealthier 0:02:08.600 --> 0:02:11.120 people have wanted to stay and the poorer have not. 0:02:11.440 --> 0:02:14.960 And also geographically, with the North in many cases voting 0:02:14.960 --> 0:02:18.320 out and the South and particularly London voting in the 0:02:18.360 --> 0:02:21.799 other exceptions there are though, that Scotland and Northern Ireland 0:02:21.880 --> 0:02:25.000 voted to stay, and that does make the question of 0:02:25.040 --> 0:02:29.440 the UK that union three year old union also gets 0:02:29.480 --> 0:02:32.120 called into question. So speaking of London, it is one 0:02:32.200 --> 0:02:34.200 of the great cities of the world. It is by 0:02:34.280 --> 0:02:38.240 far the most populous region of the country. When you 0:02:38.320 --> 0:02:41.120 go to the Starbucks around the corner from our office 0:02:41.280 --> 0:02:44.400 for a red Eye with an extra shot, do you 0:02:44.480 --> 0:02:47.000 expect to see people with their head in their hands? 0:02:47.160 --> 0:02:50.280 Oh my god, what have we done? Well, I'll tell 0:02:50.320 --> 0:02:52.520 you there's a good point to remember is that when 0:02:52.560 --> 0:02:55.000 you do go to your local Starbucks, the person serving 0:02:55.040 --> 0:02:57.000 you may well not be British. They may well have 0:02:57.040 --> 0:02:59.400 come from one of the Southern European countries or one 0:02:59.440 --> 0:03:02.120 of the Eastern European countries. One person I spoke to 0:03:02.120 --> 0:03:04.320 earlier this morning, he asked me if I knew what 0:03:04.400 --> 0:03:06.760 the result was, and I told him where it was headed, 0:03:06.760 --> 0:03:10.120 that Leave was winning. He said that's good, and I said, well, 0:03:10.120 --> 0:03:11.519 why is that? And he said that's going to be 0:03:11.560 --> 0:03:14.239 good for the Southern European economies. All I could say 0:03:14.240 --> 0:03:16.760 there was, don't be so sure at the point they're 0:03:16.760 --> 0:03:20.040 being that, we don't yet know quite what ramifications of 0:03:20.080 --> 0:03:22.320 this are going to be on a global scale. It's 0:03:22.320 --> 0:03:23.760 fairly clear what they're going to be, at least in 0:03:23.760 --> 0:03:26.360 the medium term on a national scale, but globally not 0:03:26.480 --> 0:03:29.040 so much. We'll get back to the barista in a second, 0:03:29.040 --> 0:03:31.360 because I think that's emblematic of something that we do 0:03:31.560 --> 0:03:34.920 need to discuss. But first of all, under the immediate stuff, 0:03:34.920 --> 0:03:39.160 now you're responsible for Western European central banks, the biggest 0:03:39.200 --> 0:03:42.800 of which is the ECB, which in itself is a 0:03:42.840 --> 0:03:46.360 product of the EU and was seen at the time 0:03:46.360 --> 0:03:49.000 of its establishment in the late nineties as a just 0:03:49.080 --> 0:03:53.000 a really natural thing, like dirt. We're more closely integrated. 0:03:53.040 --> 0:03:57.360 Let's have a central bank that institution. Yes, well, there 0:03:57.360 --> 0:03:59.720 were plenty of calls you'll remember yourself at the time, 0:03:59.800 --> 0:04:02.160 to say, look, this doesn't actually make a lot of 0:04:02.160 --> 0:04:04.360 sense to have a monitory union when you don't have 0:04:04.480 --> 0:04:08.040 a proper fiscal union. But the push was there too 0:04:08.320 --> 0:04:11.160 deep in European integration, and Monsher Union was seen as 0:04:11.240 --> 0:04:14.480 one way of doing that. There is now some strain. 0:04:14.520 --> 0:04:16.080 There has been a lot of strain within the EU 0:04:16.240 --> 0:04:19.400 area for quite some time. What may happen now is 0:04:19.440 --> 0:04:22.560 that because of the success of the lead campaign in 0:04:22.600 --> 0:04:26.680 the UK, you get stronger calls for anti euro parties 0:04:26.960 --> 0:04:30.120 in countries like Spain, countries like Italy, and that makes 0:04:30.160 --> 0:04:32.880 the European central banks job far harder, and the European 0:04:33.000 --> 0:04:36.560 Central Bank is struggling. That undermines the khesive myths of 0:04:36.600 --> 0:04:39.960 the European Union in the eyes of some people. Wouldn't 0:04:39.960 --> 0:04:43.400 it be ironic if it was Britain, which never really 0:04:43.440 --> 0:04:47.440 wanted to join the euro system over which the ECB presides, 0:04:47.839 --> 0:04:50.600 was the thing that not the e c B the greatest, 0:04:50.880 --> 0:04:55.360 not Portugal, not Greece, not Italy, not Spain. That's entirely feasible. 0:04:55.600 --> 0:04:58.560 The ECB has was quite slow, i have to say, 0:04:58.720 --> 0:05:01.400 to respond today getting a state with out well behind 0:05:01.520 --> 0:05:03.960 the Bank of England and the Bank of Japan and 0:05:04.040 --> 0:05:06.359 some of the other banks that were open at that time. 0:05:07.080 --> 0:05:11.520 It's been it had some tense discussions, we understand, and 0:05:12.000 --> 0:05:14.480 that has highlighted some of the struggles within the European 0:05:14.520 --> 0:05:17.320 Central Bank that you are made up in nineteen countries, 0:05:17.400 --> 0:05:20.000 the nineteen central bank governors all with a slightly different 0:05:20.080 --> 0:05:24.279 views there. But ultimately this is quite a strain on 0:05:24.440 --> 0:05:26.840 the European central banks ability to operate. And you're right, 0:05:26.960 --> 0:05:30.040 it's coming from a non new country Britain. This lead 0:05:30.200 --> 0:05:33.400 vote is being characterized, at least in part as a 0:05:33.520 --> 0:05:39.039 rejection of the liberal economic establishment, which has by and 0:05:39.160 --> 0:05:43.920 large flourished since nineteen and the idea here was again 0:05:44.480 --> 0:05:53.440 seemingly inexorable, seemingly inevitable, free flow of goods, services, capital, 0:05:54.040 --> 0:05:57.640 and people. And the European Central Bank is about as 0:05:57.720 --> 0:06:00.640 polyglot as you can get. The Bank think of England 0:06:01.080 --> 0:06:04.279 is headed by a Canadian and you and me, Paul, 0:06:04.680 --> 0:06:07.640 were products of that system. Now I first met you 0:06:07.680 --> 0:06:10.479 when you were in Hong Kong. You were born in Britain, 0:06:10.600 --> 0:06:13.120 and your wife is from where and you now live 0:06:13.160 --> 0:06:17.359 in Frankfort, right. My wife is German, and my children, 0:06:17.480 --> 0:06:19.200 who knows where they come from. They were born in 0:06:19.279 --> 0:06:22.200 Hong Kong. They live in Germany, but they've got British 0:06:22.200 --> 0:06:26.719 grandparents and great grandparents. So there is this generation coming 0:06:26.760 --> 0:06:30.200 through that has an international feel to it, but it's 0:06:30.240 --> 0:06:33.159 not really the majority of the population. And that's really 0:06:33.600 --> 0:06:37.480 key for European politicians to think about Netlork. Not everybody 0:06:37.520 --> 0:06:41.280 benefits from globalization, or if they are benefiting from globalization, 0:06:41.320 --> 0:06:44.240 they don't realize it. They feel that they're suffering somehow. 0:06:44.240 --> 0:06:48.039 That others are benefiting more, and that's what's caused this backlash. 0:06:48.080 --> 0:06:50.880 That's dangerous for the European Union, for the European project, 0:06:51.440 --> 0:06:54.800 is dangerous for the as you know, the supposedly inexorable 0:06:55.400 --> 0:06:58.560 rise towards globalism, which is not really inexorable. It's been 0:06:58.600 --> 0:07:02.240 a sort of been a lot of politicians sort of haggling, 0:07:02.600 --> 0:07:06.720 sorting out deals between themselves, and there have been has 0:07:06.760 --> 0:07:10.640 been a jump start, start and stop progress over more 0:07:10.680 --> 0:07:13.360 than more than a hundred years. So I was not 0:07:13.480 --> 0:07:16.120 born in the United States. I was born in Australia. 0:07:16.560 --> 0:07:19.960 I've lived and worked around the world thanks to our employer, 0:07:20.120 --> 0:07:23.440 Bloomberg News. My son was born in the UK, my 0:07:23.520 --> 0:07:28.240 daughter was born here. Our colleagues, our producer Magnus born 0:07:28.280 --> 0:07:31.280 in Sweden. Our colleague Alec, who does a lot to 0:07:31.280 --> 0:07:34.800 make the podcasts get to air, lived for many, many 0:07:34.880 --> 0:07:37.720 years in Hong Kong. I mean, are we being rejected here? 0:07:37.880 --> 0:07:41.440 Is our model of the economy and the way we 0:07:41.600 --> 0:07:46.320 see ourselves when we travel, when we buy things, when 0:07:46.360 --> 0:07:50.320 we think about our aspirations for the future, we being rejected. 0:07:50.600 --> 0:07:52.720 There's a great question, and I don't suppose we have 0:07:52.760 --> 0:07:54.960 the answer to that. At this point. Again, this is 0:07:55.000 --> 0:07:57.360 something politicians going to have to sit back and think about, 0:07:57.600 --> 0:08:00.840 what are the economic benefits and how are those benefits 0:08:00.880 --> 0:08:03.880 being distributed, and if they're not being distributed fairly, you 0:08:04.000 --> 0:08:07.360 do get a political backlash, the political backlast that we've 0:08:07.400 --> 0:08:11.400 been seeing, and that may make the whole model as 0:08:11.680 --> 0:08:14.680 as you say, rejected, and that would be rather worrisome 0:08:14.720 --> 0:08:17.400 for our generation. But not everybody sees it that way. 0:08:17.440 --> 0:08:21.000 So the barista you mentioned in Starbucks, he or she 0:08:21.600 --> 0:08:24.480 doesn't have to go home tomorrow. What's going to happen 0:08:24.520 --> 0:08:26.240 for the next couple of years. This is going to 0:08:26.320 --> 0:08:29.840 be a rather sort of torturous back and forth process, 0:08:30.120 --> 0:08:34.240 but they will have to leave correct well. Interestingly, there 0:08:34.320 --> 0:08:37.520 was a survey done amongst the German investors that concluded 0:08:37.559 --> 0:08:41.200 only yesterday and of those respondents said they did not 0:08:41.320 --> 0:08:44.960 think of Brexit would ultimately result in the UK leaving 0:08:45.000 --> 0:08:48.040 the EUN and that goes against everything that the politicians 0:08:48.040 --> 0:08:51.040 on both sides of the British debate have said. But 0:08:51.080 --> 0:08:53.439 I did hear the argument made again today that maybe 0:08:53.440 --> 0:08:55.760 the European Union will come back with such a generous 0:08:55.760 --> 0:08:59.760 offer that Britain rethinks its stance. The most likely outcome, though, 0:08:59.800 --> 0:09:02.360 is s over the next two years, the British exit 0:09:02.400 --> 0:09:06.719 from the EU is negotiated without Britain taking partners negotiations, 0:09:06.840 --> 0:09:09.960 a deal is struck by which it has some kind 0:09:09.960 --> 0:09:12.880 of links to the EU. What they are remains completely 0:09:12.960 --> 0:09:15.880 unknown at the moment. There are models Norway as one, 0:09:15.960 --> 0:09:18.360 Switzerland is another, but they may not be suitable for 0:09:18.440 --> 0:09:21.120 the UK, and that means two years of quite a 0:09:21.160 --> 0:09:24.920 lot of uncertainty. The global economy just can't seem to 0:09:24.960 --> 0:09:28.079 find blue water at the moment, can it. You're right, 0:09:28.400 --> 0:09:30.280 you have this issue where you've got the rise of 0:09:30.400 --> 0:09:33.440 nations like China for a while, you have the rise 0:09:33.440 --> 0:09:35.559 of nations like Brazil, which is obviously going through a 0:09:35.640 --> 0:09:38.320 very tough time at the moment. And when you get 0:09:38.400 --> 0:09:42.240 those rapid periods of economic growth amongst sizeable or becomes 0:09:42.280 --> 0:09:46.720 sizable economies and then they slow down, there are international repercussions, 0:09:46.840 --> 0:09:50.440 and again you've got that anger amongst some groups of 0:09:50.480 --> 0:09:53.280 people built up as they've seen their manufacturing jobs outsourced 0:09:53.360 --> 0:09:56.520 in their view, and now things are slowing down and 0:09:57.040 --> 0:09:59.080 they're not really in a position to benefit one way 0:09:59.240 --> 0:10:03.040 or the other. And we could be in for some 0:10:03.160 --> 0:10:06.640 years of fairly tough times on a global scale, just 0:10:06.720 --> 0:10:09.959 when it looks like the global economy has dodged a bullet, 0:10:10.320 --> 0:10:13.160 for example, in January, there are all sorts of dire 0:10:13.280 --> 0:10:17.120 predictions about China and the market tumult that accompanied and 0:10:17.200 --> 0:10:21.240 that abated, and we moved forward. People thought Greece would 0:10:21.240 --> 0:10:25.200 blow up the euroregion. Okay, we survived that, We moved forward, 0:10:26.360 --> 0:10:29.360 and I guess we'll struggle along or drift along with 0:10:29.440 --> 0:10:33.600 global growth somewhere around two or three percent. But that's 0:10:33.600 --> 0:10:36.440 not great, Paul, is it? It's not great. There are 0:10:36.440 --> 0:10:38.679 many arguments out there that say that this may be 0:10:38.760 --> 0:10:41.520 the way it remains for a long while. The arguments 0:10:41.760 --> 0:10:44.920 sometimes sent on the demographics. There's just a relatively large 0:10:44.960 --> 0:10:49.520 supply of labor, which keeps prices down and keeps productivity low. 0:10:50.200 --> 0:10:54.240 There is, of course, the techno pessimism argument, which says 0:10:54.280 --> 0:10:58.559 that inventions from eighteen seventy through nine seventy were one off, 0:10:58.600 --> 0:11:01.040 they're not going to be repeated. That gave a vast 0:11:01.400 --> 0:11:04.440 boost to growth in the developed world and ultimately the 0:11:04.440 --> 0:11:07.280 rest of the world, and they can't be repeated. So 0:11:07.320 --> 0:11:09.640 those arguments come in. If you do want to see 0:11:09.679 --> 0:11:11.960 growth pick up, You've got to find some kind of 0:11:11.960 --> 0:11:14.720 a source, something which is going to push us along, 0:11:14.720 --> 0:11:17.760 and clearly, by its very nature that's as yet unknown 0:11:18.160 --> 0:11:20.560 and as shocking as it is. The central banks have 0:11:20.720 --> 0:11:23.520 made it known that they have prepared for this event, 0:11:23.600 --> 0:11:26.520 even though it wasn't the result they wanted. Let's talk 0:11:26.559 --> 0:11:29.680 about the person that's really in the hot seat. Bank 0:11:29.720 --> 0:11:33.920 of England Governor Mark Karney himself a product of the 0:11:34.040 --> 0:11:39.760 free flow of global goods, services, capital and people. Yes, 0:11:40.080 --> 0:11:42.400 he is part of the free flow people from Canada 0:11:42.480 --> 0:11:45.800 to the UK, and he's quite a few people. During 0:11:45.800 --> 0:11:48.520 this whole Brexit debate, the Bank of England has put 0:11:48.520 --> 0:11:51.920 out a numerous statements pointing to the downside risks of 0:11:51.920 --> 0:11:56.160 a Brexit, and some have taken that as seeing the 0:11:56.160 --> 0:11:59.360 Bank of England intervening in a political debate instead of 0:11:59.400 --> 0:12:02.040 staying out of it. To the Mark Karney's defense has 0:12:02.080 --> 0:12:04.839 been that nobody knows his personal view, that these were 0:12:04.840 --> 0:12:08.960 all economic statements of probability which may or may not 0:12:09.000 --> 0:12:11.080 come to fruition now we're seeing them being tested. But 0:12:11.160 --> 0:12:14.280 certainly the market slump was something that was predicted. The 0:12:14.360 --> 0:12:16.360 drop in the pound it was something that was predicted, 0:12:16.840 --> 0:12:21.480 but because he is identified with that, with the remain stance, 0:12:21.720 --> 0:12:23.880 through no fault of his own, he would say there's 0:12:23.920 --> 0:12:27.200 a question mark over his future. Now Now, Governor Carney 0:12:27.240 --> 0:12:30.520 made a televised address in addition to the statement that 0:12:30.600 --> 0:12:33.360 the Bank of England put out, and if I'm interpreting 0:12:33.360 --> 0:12:38.199 it that correctly, the first line of defense is liquidity operations. 0:12:38.280 --> 0:12:41.840 Just throw as much liquidity at British lenders as possible, 0:12:42.240 --> 0:12:45.560 and the second line monetary policy, well will get to 0:12:45.600 --> 0:12:48.079 that in a few weeks. Is that the right interpretation, 0:12:48.440 --> 0:12:51.400 It might be he wasn't quite that specific, certainly on 0:12:51.440 --> 0:12:53.760 the liquidity, there's no doubt about that. The Bank of 0:12:53.800 --> 0:12:56.960 England has two fifty billion pounds which it can throw 0:12:57.000 --> 0:12:59.680 at banks should they need it. Banks can also access 0:12:59.720 --> 0:13:03.280 swap clients with major banks around the world, including the FED, 0:13:03.520 --> 0:13:05.960 the e CV, the Bank of Japan, the Swiss national banks, 0:13:05.960 --> 0:13:10.280 and liquidity really shouldn't be an issue here. The key thing, 0:13:10.440 --> 0:13:13.560 as you say, is what happens next if there needs 0:13:13.559 --> 0:13:16.000 to be some kind of response to deal with the economy, 0:13:16.080 --> 0:13:18.240 and that's difficult one to say. The slump in the 0:13:18.280 --> 0:13:21.440 pound could push up inflation, which reduces the room for 0:13:21.480 --> 0:13:23.520 the Bank of England to cut interest rates if it 0:13:23.559 --> 0:13:25.920 needs to do so. But rates are at zero point 0:13:25.960 --> 0:13:29.920 five the ECB as rates zero. It shows you can 0:13:30.040 --> 0:13:32.880 take them that low, and some economists have said that's 0:13:32.920 --> 0:13:34.560 precisely what the Bank of England is going to have 0:13:34.600 --> 0:13:37.920 to do. And does Governor Carnee have some work to 0:13:38.000 --> 0:13:42.440 do in terms of repairing relations with the out camp? 0:13:42.480 --> 0:13:46.320 Who now, of course are the in camp? Depends who's 0:13:46.320 --> 0:13:47.880 going to have to deal with I guess I mean 0:13:47.880 --> 0:13:49.760 at the moment, of course, we still have the pre 0:13:49.800 --> 0:13:53.560 existing government. David Cameron will step down. It remains to 0:13:53.720 --> 0:13:56.280 be seeing what happens with the rest of his colleagues, 0:13:56.280 --> 0:13:59.480 but their positions are obviously not very strong. Whoever is 0:13:59.520 --> 0:14:02.679 coming in is at least initially almost certainly going to 0:14:02.760 --> 0:14:05.440 have to deal with Mark Kearney, and Mark Conny is 0:14:05.440 --> 0:14:08.520 going to have to handle that quite sensitively. He probably 0:14:08.559 --> 0:14:10.840 has the skill to do so. Questions whether he chooses to, 0:14:11.200 --> 0:14:13.320 and that remains to be seen. Well, we better let 0:14:13.360 --> 0:14:16.079 you go and get that red eye with an extra shot. 0:14:16.160 --> 0:14:19.280 But first I'm just wondering when you come home to 0:14:19.400 --> 0:14:22.000 Frankfort tonight and you walk in the door and you 0:14:22.080 --> 0:14:25.200 see your polyglot family, What on earth are you going 0:14:25.240 --> 0:14:30.120 to say to them? Sorry, honey, we shrunk the union. Seriously. 0:14:30.560 --> 0:14:33.400 I did text my wife to say, you know, she 0:14:33.480 --> 0:14:36.080 asked how things were going, and I said, it's madness 0:14:36.080 --> 0:14:39.560 at the moment, and she replied, it's sadness. And that's 0:14:39.560 --> 0:14:41.800 the response I'm going to get when I go home. Well, Paul, 0:14:41.920 --> 0:14:44.680 thanks for joining us. Benchmark will be back next week 0:14:44.720 --> 0:14:46.960 and until then, you can find us on the Bloomberg 0:14:47.040 --> 0:14:50.680 Terminal and Bloomberg dot com, as well as on iTunes, 0:14:50.880 --> 0:14:53.800 pocket Cast, and Stitcher. While you're there, take a minute 0:14:53.800 --> 0:14:56.360 to rate and review the show so more listeners can 0:14:56.400 --> 0:14:58.880 find us. You can talk to and follow us on 0:14:58.920 --> 0:15:02.280 Twitter at Dan almost DC and Paul you are p 0:15:02.520 --> 0:15:15.040 Gordon sixty six on Twitter. See you next week. M. M.