The European Union is still all anyone can talk about, Brexit, lunch, and dinner, but it has become clear that the early assessments of the impact of the departure of the United Kingdom were greatly exaggerated. A scary global stock selloff reversed as quickly as it occurred. Financial stocks did not come all the way back, though, and it is Italian banks, RBS, and Asian banks with operational centers in London that carry the lingering impact of the British referendum result.
Insider predictions of rapid bank layoffs did not come to pass, though there are worldwide hiring freezes and similar defensive measures in the investment arms of 20 global banks. The course of the British exit from the European Union will probably be known by the end of this year, but it could be a process gradual enough that the 20 to 30 percent staffing cuts required in London banking could be met mainly through pay freezes and attrition.
Banks in Italy were living on the edge before the Brexit vote and now look desperate for capital with no clear path to obtaining it. The EU has reportedly approved a temporary measure by Italy to backstop bank liquidity in the event of a market meltdown. It is not nearly enough, but it was the best Italy could do. A plan to recapitalize the banks with government backing did not meet EU rules. Italian bank stocks declined so much this week that it is now hard to imagine setting the banks right using private capital.
There is speculation about Italy exploring an EU exit of its own if needed to save its banks, and there are rumblings from four other countries that would seem to cast doubt over the EU’s future. The U.K. will need to select a new prime minister and get its strategy together before it can negotiate directly with the EU, and even then, U.K. leaders might be driven to drag out the process because of some EU officials’ insistence on punishing the U.K. for its decision to leave. Complicating this, a trade wall against the U.K. would damage every EU country in one way or another, so the debate about the U.K.’s exit terms could itself be a wedge splitting the EU. Even if an agreement can eventually be reached, the negativity of the Britain question may cast a shadow over the EU through 2017. In the middle of this crisis, Germany has taken a particularly inflexible stance, saying that no rules can be bent and no problems can be solved. Yet as it stands, Germany is the only country that has much to lose economically if the EU were to dissolve. Politically, to survive, the EU must be seen as “a force for good” not just by every member country, but by the majority of people in each country. That failed in the U.K. partly because of domestic politics and government policies to redistribute wealth from workers to billionaire-investors, but there was more to it than that. Nearly 40 percent of the net new jobs in the U.K. during the last three years were awarded to foreigners. That is, in retrospect, a politically unworkable formula in a country that faced a chronically weak labor market. Political support for the EU is a particular problem in France, where the EU never enjoyed majority voter support, but it is potentially a problem in any member country.
Adding to the fragility of the situation, Finnish finance minister Alexander Stubb has returned to private life and can no longer be called upon to persuade European ministers to think rationally and systematically when faced with what looks like an insoluble problem. It will be a new era if the European Union turns into the European Argument, but tonight it seems there is a real risk of that happening.