Soft Brexit and Moderate Trump

Banking leaders discuss the economic consequences of political upheaval in the United Kingdom and United States

01/12/2016 Barcelona

IESE Business School

(L to R) Sofía Rodríguez, Banc Sabadell; Enric Fernández, Caixabank, and IESE Prof. Xavier Vives / Photo: Edu Ferrer

20% of British financial sector revenue is of European origin – giving it up would be a seminal decision. And, with its epicenter in the City of London, the UK's financial system is an important asset not only for the British economy, but also for the European and world economy.

This is one of the reasons why Sofía Rodríguez, chief economist at Banc Sabadell, defended the hypothesis of a Soft Brexit at an Alumni session: "Economic Consequences of Brexit and the Election of Donald Trump."

Politicians are working on negotiating an exit for the United Kingdom but maintaining close economic links with the European Union. This is being given a variety of names: from Flexibrexit to Brexit a la Carte.

"I very much doubt that a reversion to the policies of the 1980s is the solution to the failures of globalization in the 21st century," says Sofía Rodríguez.

"The only certainty with regard to Brexit is that the British people have given a mandate to the authorities to leave the EU. What the referendum result does not say is how to do it, nor is it clear what relationship the British want with the Union."

The disillusionment that has led the British to decide to leave the Union, and the Americans to vote for Donald Trump, "will not be solved with a return to economic policies typical of the 80's. That will not work."

Trust, in Spite of Everything

Political issues, such as the UK's demand to limit the mobility of people – a key concern for Union members – and the refusal to submit to the European court, will determine the future of Brexit.

A reinstatement of full sovereignty may be counter weighted by the loss of passport rights for British financial institutions. "Institutions will play their safeguard role," argues the Banc Sabadell board director.

She also reminds us that the current account deficit in the United Kingdom is 5% of GDP, financed by loans from, in many cases, Europe. "It's important not to come to a sudden stop," she therefore trusts the ability of negotiators to inspire confidence in international investors during the transition.

While the polls decided on the UK leaving the EU, in the United States the election was won by the least establishmentarian candidate.

For Enic Fernández, chief economist of Caixabank, political reality will moderate Donald Trump. On the one hand, he needs the support of the Republican majority of Congress; on the other, "if you want to maximize the chances of re-election you should take a less harsh approach."

Fernández expects a moderately expansive fiscal policy, with a "stimulus for infrastructure spend: the type of expenditure the country can most benefit from."

The Commercial War with Mexico

During the election campaign, Trump flew the flag of protectionism. In order to apply "some measures that will please his followers," the new White House occupant "could introduce tariffs justified by anti-dumping policies, which are symbolically powerful but will not incite reprisals from his associates."

Sofía Rodríguez predicts that Trump will be "much more aggressive with Mexico than with China, with which the United States has a more equal relationship and cannot, therefore, be so harmful."

"I very much doubt that a reversion to the policies of the 1980s is the solution to the failures of globalization in the 21st century." Sofía Rodríguez, chief economist at Banc Sabadell

The Trump effect foretells of greater economic activity. In fact, Enric Fernández points out that inflation forecasts went up just three days after the Republican's victory. "We are in a scenario where expectation of interest rate rises has increased."

There is expected to be an increase in rates in December 2016, and three more increases for each of the two successive years.

A recovery that, according to the economic leader of CaixaBank, will also be reflected in the risk premium. "In addition, the stock market has welcomed Trump, especially in the United States, with an upward adjustment of the long-term interest rate curve."

To substantiate his claims, Fernández uses the hypothesis of a more moderate decision-making Trump.

From a political point of view, he predicts that in both the cases of Britain and North America, there will be "disappointed" voters. However this, he points out, "should serve for other countries to realize how important it is to implement policies that generate more inclusive growth and social cohesion."