Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Always
Speaker 1: with Michael McKee. Daily we bring you insight from the
Speaker 1: best in economics, finance, investment, and international relations. Find Bloomberg
Speaker 1: Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of course
Speaker 1: on the Bloomberg. We are here with Paul Donovan from UBS.
Speaker 1: He's the managing director of Global Economics. And I suppose
Speaker 1: that it's fairly obvious that, um, there would be an
Speaker 1: impact on Great Britain should the country vote to leave,
Speaker 1: and there've been all kinds of estimates about what that
Speaker 1: might be. But I'm a little I'm curious about what
Speaker 1: the impact on the rest of the world will be
Speaker 1: and on the US. Janet Yellen goes up to Capitol
Speaker 1: Hill today for her semi annual Monetary policy testimony, and
Speaker 1: I'm sure she'll be asked the same thing, because she
Speaker 1: said last week it would have an impact on the
Speaker 1: US and they took that into consideration when they decided
Speaker 1: to hold rates. But how bad an impact would it be? Well,
Speaker 1: you've got two areas where you get an impact. I
Speaker 1: think on the first, you have obviously an impact on
Speaker 1: the European Union itself. There would be consequences of this
Speaker 1: for the European Union. European Union is an enormous trade
Speaker 1: partner for the United States, so there's got to be
Speaker 1: a concern about trade linkage. Is it's not just the
Speaker 1: UK as the fifth or sixth largest economy in the world.
Speaker 1: You've got the EU as arguably the largest or second
Speaker 1: largest economy in the world that would also be affected.
Speaker 1: And then the second thing, of course, is the financial
Speaker 1: system into linkages and the financial contagion now here. I
Speaker 1: think we need to be a bit cautious. This is
Speaker 1: not two thousand and seven. What happened after two thousand
Speaker 1: and seven has caused a parochialization of finance around the world,
Speaker 1: and so we don't have the interlinkages that we did have,
Speaker 1: But there are still sufficient interlinkages there that if you
Speaker 1: get disruption in the financial markets, that may have implications
Speaker 1: for the US financial sector. Is it something that would
Speaker 1: seriously disrupt I mean, would we see the yeah, George
Speaker 1: Soros out saying we're going to see crash in the pound,
Speaker 1: Would we see a concominant level of stress on US
Speaker 1: financial markets or is it a second order effect? I
Speaker 1: don't think it would be quite so dramatic, and it
Speaker 1: may evolve more slowly. I think that there is the
Speaker 1: prospect for a more immediate reaction in the UK, which
Speaker 1: will in the event of an exit vote, would would
Speaker 1: then have a period of uncertainty, so you would then
Speaker 1: see reactions in financial markets to that in the United States.
Speaker 1: I think this would be a slower burn and evolution
Speaker 1: of the economic consequences um and so not an immediate
Speaker 1: dramatic change in financial markets, but something that comes out
Speaker 1: over the course of several months. What is your aptermism
Speaker 1: of stability? I mean everybody des as you and I
Speaker 1: talked earlier about first derivative and second derivative moves. I mean,
Speaker 1: the heart of the matter, particularly for Global Wall Street,
Speaker 1: is not levels that movement not change, but brutal is
Speaker 1: Trouchet would put it. Are we entering a brutal period
Speaker 1: whatever this vote turns out to be. Well, I think
Speaker 1: that a remain vote has consequences as well as an
Speaker 1: exit vote, so we you know, we can't look at
Speaker 1: this as just being um A one way better remain
Speaker 1: vote will also change things, and it will change things
Speaker 1: in Europe. But of course this isn't the only political
Speaker 1: event that we've got this year, you know. We we've
Speaker 1: just had Italian local elections which proved to be anti establishment,
Speaker 1: We've got the Spanish elections. We've got over thirty elections
Speaker 1: taking place in the States in November um or, most
Speaker 1: of which will have some bearing on where we're going.
Speaker 1: So this whole issue about political risk is not going
Speaker 1: away from the markets. And my concern is that when
Speaker 1: we look at politics today, it's becoming more more polarized,
Speaker 1: and I think this is about the way that politics
Speaker 1: is being organized. The new social media aspects of politics
Speaker 1: tend to drive people to more extreme positions, it seems,
Speaker 1: and that is something markets don't handle very well. How
Speaker 1: do you get, I don't know, at chance of Trump
Speaker 1: and a sixty chance of Clinton, for example, how do
Speaker 1: you price in the probability of that when they are
Speaker 1: so diametrically opposed on their policies. I find extraordinary the
Speaker 1: challenge that you guys walking by your headquarters today, walking
Speaker 1: over from the hotel, have to synthesize the politics of
Speaker 1: the moment. Yeah, it's to me, Mike, it's absolutely original.
Speaker 1: And it's not just the US the United Kingdom, it's
Speaker 1: nation and nation. Literally, I mean the dialogue just in
Speaker 1: the last twenty four hours of Mr Putin and Mr
Speaker 1: Trump just as one example, absolutely original, I think. I
Speaker 1: mean this is of course, in in the nineties, I mean,
Speaker 1: who cared who was president of the United States in
Speaker 1: the nineties. As long as al Greenspan was alive and
Speaker 1: well and running a federal reserve, that's all you focused on.
Speaker 1: But things have changed now. And of course the real
Speaker 1: risk for me that comes of this is again this
Speaker 1: parochialization effect. Economics is global. I can go anywhere in
Speaker 1: the world and talk about CPI and people hopefully will
Speaker 1: know what I'm talking about. But politics is local, it's cultural,
Speaker 1: it's embedded in in the society in which you live.
Speaker 1: It's if political risk is rising, that's something that is very,
Speaker 1: very difficult for international investors to necessarily understand. And so
Speaker 1: the instinct is to say, well, actually, you know what,
Speaker 1: I'm just going to invest at home. I'm not going
Speaker 1: to invest overseas. And then I think the mistake because
Speaker 1: you lose the diversification of your portfolio. But that's the
Speaker 1: gut instinct. In this sort of environment that we were
Speaker 1: talking about, extraordinary monetary policy, I want to get your
Speaker 1: feeling and whether it is still working. Certainly, the the
Speaker 1: FAN is keeping rates low and holding under its balance
Speaker 1: sheet even though they're not currently buying other than reinvesting
Speaker 1: with the Japanese are buying, the European Central Bank is buying.
Speaker 1: Are we seeing any progress, Are we seeing loans grow?
Speaker 1: We're not seeing any additional growth or inflation anywhere? Well,
Speaker 1: that's that's not entirely true. I mean, if we look
Speaker 1: at the United States, so the Federal Reserve is actually
Speaker 1: tightening quantitative policy now in the sense that their balance
Speaker 1: sheet is falling as a share of GDP, and economically speaking,
Speaker 1: that's tightening. But they're tightening policy at a time when
Speaker 1: core inflation analyzed to and a half percent in the
Speaker 1: first half of this year. When you've got core inflation,
Speaker 1: the trimmed mean inflation rate, service sector inflation all out
Speaker 1: or above twenty year averages, so we are seeing an
Speaker 1: inflation issue and the third is tightening in response to that.
Speaker 1: In the Eurozone, we can see that when we lose
Speaker 1: the oil base effect, we will get higher inflation coming through.
Speaker 1: Growth in the Eurozone this year probably comes in a
Speaker 1: round about one and a half percent, but that's above
Speaker 1: trend for the Eurozone. And I think that the improvement
Speaker 1: in bank lending, the improvement in the transmission mechanism in
Speaker 1: Europe where banks pushing money into the economy, that's helping
Speaker 1: the Eurozone economy. One can question how much of a
Speaker 1: help negative interest rates are. I don't regard that as
Speaker 1: a monetary policy. I regard that as a fiscal policy.
Speaker 1: But for the most part, I think the extraordinary measures
Speaker 1: have helped imagine what would have happened if we didn't
Speaker 1: have them. That's the thing we've got to do. I've
Speaker 1: never asked this question, and I embarrassed to say that
Speaker 1: that's the case. Is the United Kingdom productive? Front and center?
Speaker 1: And Janet Yellen will mention this inner testimony today. Productivity
Speaker 1: in the United States is front and center. Is the
Speaker 1: United Kingdom productive? Looking at capital, labor and that mysterious
Speaker 1: total factor productivity. So, I mean, the great problem economists
Speaker 1: have with productivity is that productivity is the bit of
Speaker 1: the economy we don't understand. Literally, we we work out
Speaker 1: what we do understand, and then everything else we call
Speaker 1: it productivity. In the UK, productivity has been lower. It's
Speaker 1: it's been a bit like the United States, we've had
Speaker 1: very good employment honin old GDP has been okay, but
Speaker 1: the productivity numbers have have been lower. Part of the
Speaker 1: problem though we've got in the UK, as we've got
Speaker 1: in the States, is the data is being revised all
Speaker 1: the time. Nobody's really sure what's happened. We've got an
Speaker 1: island nation, essentially a smaller nation with great respect for
Speaker 1: scale issues. We've got odd capital dynamics, a hugely weighted
Speaker 1: London financial was seventeen percent of GDP. It's financial something
Speaker 1: something along that wine an interesting original manufacturing component. I
Speaker 1: can't even begin to have to measure productivity in a
Speaker 1: more polarized island. Well, I mean this is this is
Speaker 1: one of the challenges, particularly with the role of the
Speaker 1: financial sector. You know, what is the productivity of an economist?
Speaker 1: What's the value of an economist? But this, of course
Speaker 1: is a real problem. How do we we accurately capture
Speaker 1: in an economy like the United Kingdom, which is basically
Speaker 1: leading in terms of the move towards service sector growth.
Speaker 1: I mean, it's one of the first economies to go
Speaker 1: down that route. So what is it um that actually
Speaker 1: dictates what our productivity is? When so much is service
Speaker 1: section that's so difficult to measure. Then we've got things
Speaker 1: like the rise and self employment. Number of companies in
Speaker 1: the UK has risen twenty five cent since the crisis,
Speaker 1: nearly all self employed people. How do you measure their productivity?
Speaker 1: A lot more difficult to capture? What could be done
Speaker 1: about it? If there were if you were a member
Speaker 1: of Congress, or if you were Janet Yellen or Mario
Speaker 1: Dragging today before the European Parliament and they said what's
Speaker 1: the policy change that would affect that? What would you say, Well,
Speaker 1: I don't think in terms of trying to improve productivity,
Speaker 1: it comes from the monetary policy side. This is not
Speaker 1: what monetary policy is for. This is supply side economics.
Speaker 1: This is flexibility of labor markets. It's skills training, but
Speaker 1: it's also flexibility of skills. One of the great problems
Speaker 1: I think at the moment is that in some parts
Speaker 1: of the world we're churning out university graduates who are
Speaker 1: low skilled workers because all they've got to do is
Speaker 1: memorize the textbook to pass the exam. That's great, until
Speaker 1: the textbook becomes obsolete. In two years time. You two
Speaker 1: are obsolete. So we need to get that flexibility of
Speaker 1: skills and wanting. I gotta get this question is critical
Speaker 1: The Guardian, which is clearly a Remain paper headline Soros
Speaker 1: EU exit risks Black Friday. Do we risk a Black
Speaker 1: Friday's Mr Soros out over his skis. I think we
Speaker 1: risk many things, both on exit and on Remain. I
Speaker 1: think that one of the features of the campaign from
Speaker 1: both sides has been a strong language which is not
Speaker 1: necessarily helping understand the debate that's going on that we
Speaker 1: should be having. This has not perhaps been a terribly
Speaker 1: measured negotiation and debate between the two sides, and the
Speaker 1: strong language has been very common. Paul donavent very valuable
Speaker 1: to have you with us today. Paul Donovan is with UBS.
Speaker 1: We greatly appreciate. I am being with television and radio
Speaker 1: Michael McKee and Tom King globally on Bloomberg Radio from London. Well.
Speaker 1: As I mentioned, Tom and I are here in London
Speaker 1: for the Brexit vote. A lot of possible outcomes remain.
Speaker 1: We don't know yet which side will come away with
Speaker 1: the victory since it is too close to call officially
Speaker 1: with the polls, which means that if you are investing
Speaker 1: and you want to take a stand, you also want
Speaker 1: to hedge that stand. Bill Blaine is an old friend
Speaker 1: of Bloomberg Surveillance, a strategist at mid Partners. It's always
Speaker 1: good to be in the same city as you. Um,
Speaker 1: and we're curious, what are people doing too to take
Speaker 1: risk off in this uh in this time. Well, that's
Speaker 1: an absolutely fascinating question, Mike quota people doing to prepare
Speaker 1: for the vote? Well, and that everyone's got different guesses
Speaker 1: and that's all they are about what's going to happen.
Speaker 1: We do have a binary outcome. Britain is either going
Speaker 1: to vote in or out. At the moment, it is
Speaker 1: looking pretty unclear which one it will be. I guess
Speaker 1: we'll know by four o'clock in the morning Friday morning.
Speaker 1: But what then happens following it? A lot of people
Speaker 1: expect that Sterling is going to crash out of bed
Speaker 1: and it will be the end of all things British.
Speaker 1: A lot of people take the opposite view to that
Speaker 1: and think, well, look, if Britain decides to leave Europe,
Speaker 1: then it's not a British problem. It immediately becomes a
Speaker 1: European problem. So I'm afraid for the people who are
Speaker 1: looking to short term trade this market, It's very much
Speaker 1: a question of guestimates and placing your bets on anything
Speaker 1: except for Green. The real issue is what is the
Speaker 1: long term investment scenario here. If you're a serious investor
Speaker 1: in your thinking about the next five to ten, fifteen
Speaker 1: to twenty five years for the insurance money and the
Speaker 1: pension money, which is going to be better for Europe
Speaker 1: and the UK? Is it going to be in or out? Well,
Speaker 1: I suppose you probably don't want to make that decision
Speaker 1: until you get to Friday. We're seeing a lot of
Speaker 1: money on the sidelines now, well, I think there's there's
Speaker 1: there's a growing I mean that this has been an
Speaker 1: absolutely fascinating campaign, Mike. I mean a lot of us
Speaker 1: started off looking at it and saying it would be
Speaker 1: madness for Britain to pull out, it would be foolish,
Speaker 1: look at the risks were running. That's very much a
Speaker 1: status quo type of arguments, and I do think that
Speaker 1: is the way the vote is going to be. So
Speaker 1: many people just don't know whether it's a better thing
Speaker 1: to be in or out, So the easy thing to
Speaker 1: do is just stick with the status quo and stay
Speaker 1: in and I rather suspect that's the way the vote comes.
Speaker 1: But I think now there is enough lot of the
Speaker 1: financial markets, and I mean by that the serious investment
Speaker 1: money that is considering the long term implications of the
Speaker 1: Euro and Europe. And I think one of the issues
Speaker 1: there is the Euro simply doesn't work very well. You've
Speaker 1: got all these countries trying to adapt very quickly to
Speaker 1: using an unfamiliar currency. The only thing that can use
Speaker 1: is monettery policy. Fiscal policies not on the table. That
Speaker 1: means that these economies aren't working. And it's just like communism,
Speaker 1: which was a great idea in economics but fundamentally didn't worked.
Speaker 1: And I think the worry for long term investors are
Speaker 1: is that if Britain stays in Europe long term, does
Speaker 1: that create long term financial damage. Well that's certainly been
Speaker 1: the view of a lot of people on the leave side. Um,
Speaker 1: but you really don't know the answer to that either.
Speaker 1: Guess the thing that this this referendum might none of
Speaker 1: us know the answers to anything. Everything is speculation. I
Speaker 1: happen to go with the David Cameron and Remain Camp
Speaker 1: are probably right. You're going to have tremendous dislocation, but
Speaker 1: probably not as bad as people think because if sterling weekends,
Speaker 1: people are going to jump in and buy it. I
Speaker 1: saw analysis today that said you want to own British
Speaker 1: hotel stocks if if they vote to leave because sterling
Speaker 1: will weekend and then you know you'll be overrun with
Speaker 1: US Yanks. You know you may not want that. Yeah,
Speaker 1: that's a very good point. Michael McKee and Tim keenan London,
Speaker 1: thrilled to finally meet Bill Blaine uh who writes the
Speaker 1: Morning Porridge, People's Healthy Breakfast Street absolutely Healthy bread rated
Speaker 1: every morning. What my porridge? You with your porche your
Speaker 1: surveillance point when I mean in the United States we
Speaker 1: have oatmeal. Here we come here we have like porridge
Speaker 1: is one the longest established health foods on the planet.
Speaker 1: The reason we Scots are so big, strong and powerful
Speaker 1: is every morning scotsman start the day bullet porridge and
Speaker 1: glasso whiskey. I'm sure that Lord LaMotte did I got
Speaker 1: the map out? I had no I knew. I think
Speaker 1: I knew the sheld Islands north of Scotland, but I
Speaker 1: didn't know three hundred some miles north of Scotland. So
Speaker 1: it's along the long way. I think Shetland's needer to
Speaker 1: Norway then instead. That's exactly what he said. Chancellor Darling
Speaker 1: is from that neck of the woods jail, Prime Minister
Speaker 1: Brown and others. I I know them. I when I
Speaker 1: was a student, I used to canvas for Alistair Darling.
Speaker 1: How will they respond? Is? I mean, I'm trying to
Speaker 1: get through the hysteria in the panic like the Guardian
Speaker 1: George sort of world. I think you're hitting in one
Speaker 1: of the main things that is going to happen. Let's
Speaker 1: forget about the vote and why you should go one
Speaker 1: way or the other and talk about the unintended consequences thereof.
Speaker 1: And one of the ones is going to be in
Speaker 1: British politics the Labor Party here in the UK the
Speaker 1: traditional opposition to the current government, which are the Conservatives
Speaker 1: are the Tories, or it's the other way around that
Speaker 1: the Conservatives are the opposition to Labor. But at the
Speaker 1: moment Labor Party is very very weak after damaging lead
Speaker 1: ship run and they had a strong leader in David Cameron.
Speaker 1: But of course David Cameron has called this referendum which
Speaker 1: looks like backfiring terribly on him and we've seen a
Speaker 1: new challenger arrive in the form of Boris Johnson, Everyone's
Speaker 1: favorite mop topped blonde as they call them. Um, it
Speaker 1: is likely that we will see a change around in
Speaker 1: the Conservative Party with a new leader emerging. The question
Speaker 1: is does that mean Labor will be able to reinstitution
Speaker 1: insinuate itself in British political thinking. We're not terribly sure.
Speaker 1: It is there a delineation in uh in policies that's
Speaker 1: significant to the British people right now because you've got
Speaker 1: Corbyn and Cameron campaign together on the Brexit issue. Well
Speaker 1: that that's again a very good question because it used
Speaker 1: to be that the best Conservative Prime minister that we
Speaker 1: had since Margaret Thatcher was of course Tony Blair, who
Speaker 1: was in fact elected by the Labor Party, and Tony
Speaker 1: Blair fold very right wing policies, which works extremely well
Speaker 1: and one of the reasons that the Conservative got in
Speaker 1: last time as they were pursuing effectively the same old
Speaker 1: Blay right policies. But now we have a Labor Party
Speaker 1: that has gone hard left or harder left, and it
Speaker 1: seems to be we have a Conservative Party that is
Speaker 1: on the verge of implosion now. I think that's very
Speaker 1: interesting because if you look at what's going on in
Speaker 1: the rest of the world, whether it's in Europe where
Speaker 1: you have far left, far right and other protest parties emerging,
Speaker 1: and even in the States where the massive protest vote
Speaker 1: against established politicians looks to us to be exactly the
Speaker 1: same thing. Can I reb up the script of Alan
Speaker 1: Campbell is of the United Kingdom and he does great
Speaker 1: statistical work for Bloomberg. He's come up with a d
Speaker 1: x Y equivalent for the pound and it's a shocking picture.
Speaker 1: It will be my single best chart tomorrow on television
Speaker 1: here of London, and and and Bill. I'm thrilled to
Speaker 1: speak to you about it right now. This is a
Speaker 1: an index with focused waitings on the majing major trading
Speaker 1: partners of the United Kingdom, and I think people would
Speaker 1: be shocked by the waitings euro thirty six US dollar.
Speaker 1: It's a real balance between Europe and the UK in
Speaker 1: America that David Cameron and others have to deal with.
Speaker 1: I think that this this index is absolutely the question
Speaker 1: of the moment. Let's forget all list nonsense about whether
Speaker 1: we should be in or out in terms of what
Speaker 1: it means for UK taxpayers or whatever. But this focus
Speaker 1: on UK p LC or UK INC. Because my whole
Speaker 1: thinking at the moment is this is not about This
Speaker 1: is far too important to leave to politics. This is
Speaker 1: an issue about how the UK performs. Is one of
Speaker 1: the strongest marcantile nations on the country, and you can
Speaker 1: see from this index that we're pretty finally balanced between
Speaker 1: our trade with Europe and the rest of the world.
Speaker 1: The problem is our trade with Europe is in danger
Speaker 1: because of the failed economic theory that lies behind the Euro.
Speaker 1: I'll go with that, but the chart is studying in folks.
Speaker 1: I'll put this chart on a radio plus you'll see
Speaker 1: it featured heavily for the next three days here in
Speaker 1: the United Kingdom. The single message of the chart is
Speaker 1: on a currency basis. The index is pound index p
Speaker 1: O U n D on the Bloomberg, the United Kingdom
Speaker 1: is not recovered from the crisis of oh eight because
Speaker 1: they're getting no help from Europe. And what I'd like
Speaker 1: to look at is the Euro on the same basis,
Speaker 1: because I rather suspect that you'll find exactly the same
Speaker 1: thing that Europe and the UK have languished in the
Speaker 1: wake of the crisis in fact, I would argue that
Speaker 1: the UK is the strongest performing European economy since the crisis,
Speaker 1: So we can do the same analysis on the rest.
Speaker 1: I'll think that will be very very thoughtful piece of
Speaker 1: analysis to present people as to why the Euro isn't
Speaker 1: working and ultimately that's the problem here. So we're they
Speaker 1: on Campbell and our team over on the death Star
Speaker 1: Bloomberg gil P Mike. We announced pound index go p
Speaker 1: O U N D and it's it's I I. You know,
Speaker 1: they talked to me about this a few days ago
Speaker 1: and it beautifully shows the tension that you hear from
Speaker 1: the chance to learned from the Prime minister. Yeah. But
Speaker 1: here's the other thing. I mean, one of the reasons
Speaker 1: the UK economy is successful is we have our own economy.
Speaker 1: One of the reasons that Europe is struggling is because
Speaker 1: it's using somebody else's economy, unless, of course, she happens
Speaker 1: to be a jam Mike. I put this out on
Speaker 1: Bloomberg Radio Plus. The first look at it. I'm Bloomberg
Speaker 1: Radio Plus. Uh. It's interesting because you as a not
Speaker 1: a brit but a United Kingdom. You're a Scott We
Speaker 1: have to make that clear. But you get old scott
Speaker 1: and British too, and you have been agonizing over this
Speaker 1: as we follow your your daily notes. Um, you're you
Speaker 1: come down at a different times on both sides, and
Speaker 1: you know what I feel like, Paul on the road
Speaker 1: to Damascus there was I I started off saying, hey,
Speaker 1: this is an absolutely no brainer. We've got to stay
Speaker 1: in Europe. We mustn't rope that rock the boat. But
Speaker 1: then I started looking at stuff like this and thinking
Speaker 1: what is the long term effect of tying yourself and
Speaker 1: your economy to an economic theory that doesn't work? And
Speaker 1: it was actually jailed for me. This is quite a
Speaker 1: funny story. It was actually jailed for me. I was
Speaker 1: on the BBC one morning. They are another broadcaster by
Speaker 1: the way, So I was on the BBC and they
Speaker 1: had this Chinese academic complaining that in China they spend
Speaker 1: far too much time in economics analyzing failed Western economics,
Speaker 1: and they want to spend more time doing Marxism. So
Speaker 1: I just simply reminded him that dask Capital and the
Speaker 1: Communist Manifesto were written next door in the British library.
Speaker 1: And that got me thinking communism is an utterly failed
Speaker 1: it's a wonderful economic theory, but it's utterly failed and
Speaker 1: I'm afraid I've got to look at the Euro and
Speaker 1: just the Euro because the dream of Europe is fantastic.
Speaker 1: I don't agree with integration, but I love the idea
Speaker 1: of a single European marketplace. But the Euro is holding
Speaker 1: back growth. It is creating massive unemployment for the youth
Speaker 1: of Europe, and I think that is holding back economies
Speaker 1: that link themselves to Europe, not just the ones that
Speaker 1: are members of the Europe, of the Euro. So that's
Speaker 1: why I'm changing my view, and instruments like this Bloomberg
Speaker 1: Pound index are fascinating. Now. Britain benefits because sterling is moving,
Speaker 1: it's a traded commodity and we adjust our economy. We
Speaker 1: continue to be mercantile as a result of that, whereas
Speaker 1: the rest of Europe has trapped under the dead and
Speaker 1: of the Euro. There's a there's a firm statement for
Speaker 1: your time. You got it thirty seconds to ask built
Speaker 1: about the trains, the trains, the times of London rail
Speaker 1: firms to be find of trains one minute late. Front page.
Speaker 1: This is front page notes, not London loose. We have
Speaker 1: to go further than that we have to look at
Speaker 1: the way that we've got to make trains more efficient
Speaker 1: in Europe, and that means every time a train's late,
Speaker 1: we take the chairman of that training company out and
Speaker 1: do something vicious to them. I'll go for that. You
Speaker 1: should not move to America. You have no idea. I
Speaker 1: don't blame Thank you so much, min Partners, and why
Speaker 1: don't you get it started with our next guests, because
Speaker 1: you have a new research note just published by baronburg Bank. Well,
Speaker 1: it's interesting Hugers meeting is with us. He's Barrenberg's chief economists.
Speaker 1: One of the people that I presume works for you.
Speaker 1: Callin Pickering, just out with a note taking the other
Speaker 1: side of what Bill Blaine was just saying that the
Speaker 1: UK has been held back by the euro. Uh. Your
Speaker 1: note suggests that that's a myth that the UK has
Speaker 1: been able to succeed economically under the EU. They don't
Speaker 1: use the Euro but under the EU. Yes, that's absolutely correct,
Speaker 1: and we've pointed that out repeatedly. The fact is that
Speaker 1: Britain did badly while it was outside the European Union.
Speaker 1: It fell behind badly. For instance, in the nineteen sixties
Speaker 1: and early nineteen seventies, while on the continent Germany and France,
Speaker 1: Italy and a few others were integrating. The Britain is
Speaker 1: now doing very well. Of course, having joined the then
Speaker 1: European Economic Community in nineteen seventies three was not just
Speaker 1: the only point it helped. The other point was that
Speaker 1: the UK did have serious economic reforms under such and
Speaker 1: continues to benefit from that. But the evidence is clear.
Speaker 1: Within the European Union. The UK has become the economy
Speaker 1: among the D seven with the fastest trend rate of
Speaker 1: growth per capita within the EU, and before it joined
Speaker 1: the EU it had the lowest trend rate of growth
Speaker 1: per capita among the G seven nations. To think that
Speaker 1: outside the biggest common market in the world, with little
Speaker 1: access to the big European market for services, that outside
Speaker 1: the EU, the UK could thrive is just contrast all
Speaker 1: available economic facts. Well, a mercantile nation does need trading partners.
Speaker 1: But your assumption is that they would not be able
Speaker 1: to cut a deal to be a sort of Norway
Speaker 1: like member of the European Economic Association. Well, they already
Speaker 1: have a special deal. They have their opt outs. The
Speaker 1: Norway style deal means that they accept full freedom of
Speaker 1: the movement of labor, which is exactly what the Brexit
Speaker 1: campaign is viciously opposed to and in a way which
Speaker 1: really sometimes is put in interesting words. Just look at
Speaker 1: the u KIP and what they have put up as
Speaker 1: a posed. So the Norway deal would come with free
Speaker 1: movement of labor, it would come with accepting payments into
Speaker 1: the EU budget and without the rebate that Britain currently has.
Speaker 1: And on top of that it's pretty unclear whether the
Speaker 1: EU would actually offer Britain and Norway style deal after
Speaker 1: Britain had fired for divorce. That's the heart of the matter.
Speaker 1: There's there's all sorts of shades hulger to this in
Speaker 1: all of the United Kingdom right now and particularly London.
Speaker 1: What can Brussels offer? Mr Younker I saw a passing
Speaker 1: commented they didn't seem like he wanted to offer anything.
Speaker 1: Is Brussels or quote unquote continental Europe? Are they? Are
Speaker 1: they in need of offering something to the English people. Well, Brussels,
Speaker 1: the European Union, the other twenty seven countries have already
Speaker 1: offered a sort of amended deal to camera. This is
Speaker 1: what the vote now is about. If the UK now
Speaker 1: reject the deal. Then of course the EU would not
Speaker 1: offer a better deal. The EU would say, Okay, if
Speaker 1: you really don't want to get out, it don't do
Speaker 1: want to get out. Then as German finances the short
Speaker 1: Blair said out is out, and that would be it. Eventually,
Speaker 1: there would of course be negotiations, there will be trade
Speaker 1: going on, there will be new agreements, but these new
Speaker 1: agreements would be agreements with outsiders. From an EU standpoint,
Speaker 1: they would take time, a long time to conclude. They
Speaker 1: would be significantly worse in terms of market access, especially
Speaker 1: for services for the UK. Then what the UK now
Speaker 1: has as a full member of the biggest common market
Speaker 1: in the world, and with rules on which the UK
Speaker 1: at the moment has a signaling to say, Mike, something
Speaker 1: to look for. I'm not up to speed on this, Mike,
Speaker 1: and I'm gonna quote this very carefully. Help me out,
Speaker 1: if you would. It is called servation, and it's maybe
Speaker 1: the next poll. It's the next poll. Let is later today,
Speaker 1: I don't know servation. It's the United Kingdom. And obviously
Speaker 1: we're poll crazy here right now in the United Kingdom.
Speaker 1: And servation is the next one down the pike. Every
Speaker 1: wiggle in the polls have some impact on the markets.
Speaker 1: On sterling is a new poll do out in no
Speaker 1: an hour or so, we will will keep an eye
Speaker 1: on that. Let me ask you Holger the UK. The
Speaker 1: argument that Bill Blaine was making for the UK was
Speaker 1: not so much on a currency basis, because clearly there
Speaker 1: are impacts and trade impacts, but um the idea that
Speaker 1: the euro Zone construct and we have to keep in
Speaker 1: mind that we're talking about Britain leaving the EU. They're
Speaker 1: not in the euro Zone, but the euro Zone is
Speaker 1: that the heart of the EU. That that has not worked,
Speaker 1: that they have not been able to treat each other
Speaker 1: as equals. The southern and periphery countries have become junior
Speaker 1: partners with all the attendant problems that they've had. The
Speaker 1: banking system is in trouble, and that Britain doesn't need that. Um. Yes,
Speaker 1: Britain is not part of the Eurozone, as you already said,
Speaker 1: and in that sense, Britain is somewhat aloof from what's
Speaker 1: going on on the continent. But if we look at
Speaker 1: what's going on in the continent, the first thing we
Speaker 1: have to say that the Eurozone includes Germany, which is
Speaker 1: a very successful economy which has a full employment, price
Speaker 1: stability of his coal surplus and which exports three times
Speaker 1: as much more than three times as much to China
Speaker 1: than does the UK. Germany is an example that in
Speaker 1: the Eurozone and in the EU, you're not held back
Speaker 1: by EU rules. And as to what the problem countries
Speaker 1: of the Eurozone um as far as those are concerned,
Speaker 1: we have seen significant progress in Spain, Portugal, Italy and Cyprus,
Speaker 1: as well as Ireland. Some of the faster growing economy
Speaker 1: is at the moment in Europe, Our Ireland, our Spain,
Speaker 1: are Cyprus. That is, economies who, thanks to the help
Speaker 1: from other Eurozone members did overcome their problems. So to
Speaker 1: dismiss the Eurozone as something that doesn't really work misses
Speaker 1: the point that we have seen significant progress in the
Speaker 1: eurodon recently. Harger. Is there a London on the continent
Speaker 1: if this goes ugly and they leave, which I guess, Mike,
Speaker 1: I can say looking at the tape is not the
Speaker 1: bet right now. But if they leave, is there a
Speaker 1: London equivalent out there? No, there is no London equivalent
Speaker 1: out there. There will be a London equivaland out there
Speaker 1: on the continent. If Britain leaves, it would be sad.
Speaker 1: What it would probably mean is that London could no
Speaker 1: longer be the virtually un challenged center for its services
Speaker 1: in Europe. London could no longer be to the same
Speaker 1: extent that it's now the place where global firms resigned
Speaker 1: to sell services from London to the entire common market.
Speaker 1: London would still be a great place, an exciting place,
Speaker 1: a financial center. It would just be somewhat diminished with
Speaker 1: some jobs being lost to Dublin, to Amsterdam, to Frankfurt,
Speaker 1: to Paris, and if the Scots vote themselves out of
Speaker 1: the UK, probably a lot of lots being lost from
Speaker 1: London going to Edinburgh. Girl. I think many of our
Speaker 1: American listeners, and I put myself in this group, don't
Speaker 1: understand the quality or the makeup the distinction of European
Speaker 1: economic growth. We love to say, oh it's not as
Speaker 1: good as America, there's eurosclerosis in other terms from another time.
Speaker 1: But when you say there's one and a half percent
Speaker 1: growth or two percent growth, what's the dynamic of that
Speaker 1: across consumption, investment, government and net exports. So first of all,
Speaker 1: if we have in the Eurozone growth around one point
Speaker 1: six percent and in the US of around two point
Speaker 1: one percent In terms of per capita, that is almost identical,
Speaker 1: as the US has more growth in its population. Secondly,
Speaker 1: Eurozone growth is now driven largely by consumption. There is
Speaker 1: a bit of investment in there, but consumer spending, which
Speaker 1: in Europe is about of the total less than in
Speaker 1: the US. Consumption is rising. Employment is rising, not quite
Speaker 1: as satisfactory as in the US over recent years, but
Speaker 1: employment is rising, real wages are edging up the little.
Speaker 1: The region is recovering from the double blow of the
Speaker 1: post Lehman and the euro crisis. All in all, the
Speaker 1: Eurozone and pretty much most of Europe are on the
Speaker 1: right economic track. Having said that, the political risks to that,
Speaker 1: especially the Brexit risk, does loom large, as that could
Speaker 1: cause a bit of confidence crisis and a setback, especially
Speaker 1: to business investment. Brexit not the only vote this week.
Speaker 1: The Italians voted last weekend and Spain. Thank you for
Speaker 1: bringing this up. You've been keeping an eye on those.
Speaker 1: What are the consequences of those elections and what do
Speaker 1: they mean for markets? Um, they don't mean very much
Speaker 1: for markets as long as there is no Brexit. There
Speaker 1: are of course always political risks here, and there are
Speaker 1: the risks everywhere in the world. Yes, but in case
Speaker 1: of Brexit, markets would probably look with much more scrutiny
Speaker 1: at other risks and would like the overreact to other
Speaker 1: risks if there's one risk of Brexit had materialized, and
Speaker 1: that's when the Italian and Nish policy situation could come
Speaker 1: into focus. All that has happened so far in Italy
Speaker 1: is that regional elections have partly gone against the Prime minister.
Speaker 1: That in itself is pretty normal. Um in Italy, we
Speaker 1: have to watch whether the Prime Minister Renly will win
Speaker 1: in October a referendum on a significant institutional constitutional reform.
Speaker 1: Even he probably will, but it's not clear, and if
Speaker 1: he doesn't win, that the Prime Minister may be out
Speaker 1: of office. But that's a risk for October. In Spain
Speaker 1: we have this Sunday repeat elections to Parliament. Opinion polls
Speaker 1: suggests that the outcome will be almost identical to the
Speaker 1: outcome we had in December when the Prime Minister Choi,
Speaker 1: the pro reformed chap who has seen Spain through the
Speaker 1: aftermath of the euro crisis, when he lost his majority.
Speaker 1: If that result is confirmed this Sunday, we might have
Speaker 1: a period of uncertainty in Spain, probably followed by the
Speaker 1: big maint theme party center, right, center left working together. Holger,
Speaker 1: what will you listen for from Janet Yellen this morning?
Speaker 1: I don't think there's much she can tell us really
Speaker 1: ahead of the Brexit vote. What I would listen to
Speaker 1: is when there's anything she says that would suggest that,
Speaker 1: even if things calm down in markets as they seem
Speaker 1: to be doing now, even if there is no Brexit,
Speaker 1: that nonetheless the said, would not raise rates in July.
Speaker 1: But I guess ahead of the Brexit vote, there isn't
Speaker 1: really much we can learn before we know something about
Speaker 1: this big risk, right, Alger Schmaning, thank you so much.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
Speaker 1: listen to interviews on iTunes, SoundCloud, or whichever podcast platform
Speaker 1: you prefer. I'm on Twitter at Tom Keane, Michael McKee
Speaker 1: is at Economy. Before the plot cast, you can always
Speaker 1: catch us worldwide. I'm Bloomberg Radio. H