CLIFF TAYLOR
After the market upheavals on Friday in the wake of the Brexit vote, the weekend has provided a pause for breath. Here are the implications for the economy of developments so far this weekend and what to look out for in the days ahead:
1. Push for the talking to start soon: Foreign ministers from the six founding members of the EU called for Britain to get a move on and appoint a new prime minister to allow the negotiations on its exit terms to start. However Angela Merkel, the German chancellor, urged calm. Meanwhile the political chaos in Britain means it remains unclear the pace at which things will proceed.The ball is in Britain's court, as under EU rules it has the right to kick off the process via a formal notification to Brussels of its wish to leave.
For Ireland, there is a balance here. For as long as the status quo prevails, trade and commerce can continue unaffected by any rule changes. However businesses will want clarity at some stage about the rules they will face. The difficulty here is that whatever about the exit process, talks on what new trading rules should apply could take even longer, unless both sides make big concessions. Ireland’s interest is for trade between Britain and the EU to remain as free as possible. But there are warning signs. German’s Handlesblatt newspaper reported on Sunday the view from the finance ministry there, that an association treaty should be negotiated with Britain , but that this should not involve “too many concessions” being made to the UK in terms of access to the single market. Ireland will argue against this kind of approach, wanting trade and commerce rules to remain as close as possible to where they are now.
It is worth closing watching the mood music here, but it is hard to see any real talking before the Autumn.
2. Moody markets: Markets lost ground heavily on Friday, though the FTSE in London did regain some poise later in the day. The cost to Britain was again underlined by a decision by rating agency Moodys after markets closed on Friday to change the outlook on British debt to negative, meaning it could downgrade its debt in the near future.Goldman Sachs has cuts its UK 2017 GDP growth forecast from 2 per cent to 0.2 per cent, effectively meaning the UK skirting recession.
While there were huge market moves on Friday, there was no major “stress” emerging in the financial system, as happened during the crisis that started in 2008. Prices swung wildly, but markets did not freeze or liquidity disappear. The market opening next week will be closely watched. Among the areas to look at are sterling and its euro and dollar exchange rates and financial stocks, which all took a battering on Friday. The markets will also be watching the bond markets in peripheral countries, including Ireland, to see whether they are hit as cash moves back into core markets such as Germany and speculation grows about the longer term future of the EU.
3. Bank warning to the City of London: The governor of the Bank of France , Villeroy de Galhau,warned the City of London on Saturday that financial firms based there could not automatically expect so-called "passporting" rights to continue to allow them to operate freely in other EU markets. Under the EU single market, financial firms - banks, insurers and so on- who have a base in one country and are regulated there - are free to do business throughout the EU. The Bank of France governor warned that if the UK left the single market, then its passporting rights would do. This would have implications, for example, for London based banks and insurers doing business here and possibly for Irish financial firms operating in the UK. Britain could choose a Norway style arrangement, seeking membership of the European Economic Area, which would still give it access to the single market. But this would mean complying with EU rules, which, as the Bank of France governor noted, would seem a bit strange after a leave vote.
There is lot of talk of investment banks moving out of London to other centres such as Dublin, with a report in Saturday's Financial Times suggesting some moves are imminent. It is worth watching in the days ahead whether any of these early gains come in the Irish direction.
