Initial wealth effects of the Brexit vote on UK ADRs

On 23 June 2016, the United Kingdom voted to exit the European Union. The outcome of this vote, called Brexit, impacted financial markets in the days following the vote results. This article investigates the impact of Brexit upon UK equities trading as American Depository Receipts (ADRs) on the New York Stock Exchange. On the day after the vote results were in, UK ADRs lost over 10% of their value with an additional loss of over 5% the following day. These losses were significantly greater than those of the S&P 500 and the FTSE 100 indexes.     

Brexit,the City and the Contingent Power of Finance

Brexit poses a profound challenge to the economic fortunes of the financial services sector in the United Kingdom (UK) because it threatens to sever access to the single market in the European Union (EU). Recognising this, the City of London’s largest financial firms and main representative bodies supported a Remain vote in the June 2016 referendum, and subsequently lobbied for a ‘soft’ Brexit policy to preserve the City’s lucrative passporting rights. Despite this, the government led by Theresa May pursued a ‘hard’ Brexit policy which threatened to leave the UK outside the single market. How can we explain the City’s apparent failure to influence the UK’s Brexit policy? We argue that whilst the UK financial sector wielded formidable latent structural power, its capacity to translate this into instrumental influence in the policy process was constrained by three factors: the political statecraft of Brexit, leading the government to downgrade the concerns of the financial industry; the reconfiguration of institutional structures, which undermined the City’s voice within government; and constraints on business organisation, caused by collective action problems and heterogeneous preferences. These three factors constitute important scope conditions which highlight the contingent power of finance in liberal market economies.     

Exporting Assets: EMU and the Financial Drivers of European Macroeconomic Imbalances

ABSTRACT

European Economic and Monetary Union has fostered an unstable complementarity in European financial markets between the growth models favoured by European savers (in the northern ‘core’ of Germany and other exporting states) and its borrowers (in the debt-fuelled and demand-driven eurozone periphery, including countries like Greece and Ireland). In the 2000s, the result of this development was a sharp decrease in real interest rates across the eurozone periphery, leading to rapid but inflationary growth. This eroded the competitiveness of exporters in the European periphery, making them more reliant on capital inflows to pay for growing current account deficits. Those deficits became problematic after the disruption of eurozone financial markets beginning in 2008. The policy response to the crises has focused on reducing the competitiveness gap between the core and periphery – while overlooking the financial forces that contributed to those competitiveness differentials in the first place. Indeed, it is the fragile and perverse complementarity in eurozone financial markets – more than any external shock or competitiveness differences – that lies at the root of Europe’s ongoing crisis.     

Skill Formation,Immigration and European Integration: The Politics of the UK Growth Model

ABSTRACT

While a reluctant European player now heading for the Exit, the UK was also an enthusiastic adopter of several key EU economic policies – namely, the skills and technology policies of Agenda 2020 and labour mobility. These initiatives worked with existing British policy, and structural biases, to exacerbate the already bifurcated structure of UK capitalism – between the high-paid technology and financial services sector on the one hand, and low-cost, low-wage sectors on the other hand. In particular, and central to the argument of this paper, immigration from Eastern and Central Europe after 2004 helped to sustain low-cost manufacturing and services industries by undermining firms’ incentives to invest in training. This combined with endemic failures in the UK’s skills system, which is heavily geared towards producing graduates with general skills but neglects the needs of mid and lower segments of the labour market. EU integration, therefore, exacerbated cleavages over skills between high- and low-productivity sectors and may have contributed to social divisions that led to Brexit.     

Finance,power, and the British balance of payments

ABSTRACT

The Brexit referendum marks a critical juncture in Britain’s political economy. Benjamin Cohen argues that a nation’s monetary sovereignty lies in its balance of payments (BoP) flexibility (2008, 2015). I argue that a country’s position in the global financial régime must also be accounted for when explaining its BoP dynamics. This allows us to understand why, while sterling has long lost its ‘world currency’ status, Britain’s BoP exhibits some of the same features associated with American ‘exorbitant privilege’. To appreciate the UK’s own BoP flexibilities as well as to flesh out the Anglo-American axis in the international financial order, I compare the UK’s external balance sheets with those of the US. Given the complexities and uncertainties inherent in BoP analyses, I advise against micro-analyses of the BoP in favour of a broader approach that takes into account macro-dynamics as well as the International Political Economy (IPE) concerns outlined above. Elaborating such an analysis for the UK BoP, I explore the potential implications of Brexit for Britain’s external balance sheets and its political-economic future. While Britain’s financial power has helped insulate its balance sheets from external shocks, Britain’s impending departure from the European Union heralds a period of considerable uncertainty.     

Regulation and efficiency in European insurance markets

With a series of directives completed in 1994 the European Commission tried to open and harmonize national European insurance markets. This has led to considerable deregulation in several countries. This paper surveys pre-1994 regulation in Germany and the UK and the Commission's policy. It argues that it is unlikely that the policy will have a significant impact on direct international competition between European insurance markets, until there is standardization of insurance law. However, the tightly regulated markets will become more like the loosely regulated UK market. The paper evaluates this outcome and concludes that the European Commission's policy may thereby have improved the welfare of insurance buyers in the previously highly regulated countries such as Germany. The paper also uses efficiency-frontier estimation to compare the dispersion of firm efficiencies in the German and British life insurance market. The results support the hypothesis that tighter solvency regulation allows the survival of a larger proportion of higher-cost firms.     

The Political Economy of Brexit and the Future of British Capitalism First Symposium

The political economy of Brexit generates new challenges for the UK’s national business model and for European capitalism more broadly. Two symposia examine the implications of the UK’s withdrawal from the EU in key economic policy areas. These symposia contribute to two main bodies of academic literature: the political economy literature on varieties of capitalism, with a specific focus on the UK, and the political economy literature on key economic policy areas of the EU. This short introduction to the first symposium first outlines the key features of the British variety of capitalism and highlight the main questions raised by Brexit in that respect. It then summarises the main findings of the papers of the first symposium and tease out some common themes.     

Paying Our Way in the World? Visible and Invisible Dangers of Brexit

The UK economy has long been associated with a weak balance of payments, reflecting an underlying growth model reliant on private household consumption. A deficit in goods trade, chiefly with the EU, has been offset by surpluses in services trade and foreign investment earnings. The Single Market provided wider markets for the UK, but did not fundamentally alter Britain's structural weaknesses. The Brexit vote took place against the background of Britain running its largest peacetime current account deficit. Financing Britain's external position represents a key challenge post-Brexit. Post-Brexit models for Britain partially address this. Any emergent model will critically depend on the nature of the Brexit deal with the EU, not least in terms of the impact on financial services and on supply chains. This paper sets out the recent evolution of the UK's current account position, particularly in relation to the EU. It then highlights particular areas of potential disruption from Brexit and sketches out scenarios of possible evolution of the Britain's external position in response to this.     

European policy and markets: Did policy initiatives stem the sovereign debt crisis in the euro area?

We investigate how European policy initiatives influenced market assessments of sovereign default risk and banking sector fragility during the sovereign debt crisis in four adversely affected countries — Portugal, Ireland, Spain and Italy. We focus on three broad groups of policies: (a) ECB policy actions (monetary and financial support), (b) EU programs (financial and fiscal rules as well as financial support in crisis countries), and (c) domestic austerity programs. We measure immediate market impact effects: what policies changed risk perceptions, using CDS spreads on sovereign bonds and banks in this assessment. We employ dynamic panel and event study methodologies in the empirical work. We find that a number of programs initially stabilized sovereign and bank bond markets (e.g. Outright Monetary Transactions program), although announcement and implementation impacts on markets differed in some cases (e.g. second Covered Market Bond Program). Actions designed to shore up sovereign markets often lowered risk assessments in bank bond markets and policies designed to ensure safety and soundness of the European banking system in some cases significantly impacted sovereign debt markets. Finally, a number of policies designed to stabilize markets had surprisingly little immediate impact on either sovereign or bank bond market risk assessments.     

Did Baltic stock markets offer diversification benefits during the recent financial turmoil? Novel evidence from a nonparametric causality-in-quantiles test

Motivated by financial liberalization investors seek for new investment opportunities through international portfolio diversification. To this end we explore any asymmetric causal relationship between developed European stock markets (Germany, France and UK) and emerging Baltic markets namely; Estonia, Latvia and Lithuania. Our analysis focuses on the period before and after countries’ EU accession and pre- and post the global financial crisis. For this purpose, both the standard parametric test for causality and a novel nonparametric test for causality-in-quantiles are employed. The results of both the parametric and nonparametric Granger causality test support a causal relationship in mean that runs from all of the major markets to the Baltic markets across both samples. The results imply the existence of significant nonlinear return and volatility spillover from European markets to Baltic markets. Policy implications for international investors are also discussed.     

Uncertainty and the United States’ election effect on the economy: some thoughts and empirical illustrations

This study discusses the general impact of Donald Trump’s election on the US and European economies as well as the effect of this political news on financial markets. To this end, we discuss different hypotheses from a theoretical view and empirically illustrate these thoughts when possible. Our analysis suggests that while the expected Trump measures might boost the US economy in the short term, these actions would have negative long-term consequences in the United States. Further, this new US policy will affect European economies and destabilize financial markets while increasing uncertainty, which could constrain growth and increase the downside risk.     

Worldwide impact of IMF policies during the Asian crisis: who does the IMF help,creditors or crisis countries?

This paper examines the effects of International Monetary Fund (IMF) policy announcements on financial markets worldwide. We investigate reactions from stock, bond, foreign exchange and futures markets and banking and financial companies during the Asian crisis. We explore the impact of IMF bailouts not only on crisis countries, but also on main creditor countries. We study the impact of local governments’ and public responses in crisis countries to account for interaction between the IMF and local parties. We show IMF involvement and local governments’ co-operation actually helps crisis countries but not creditors. We show that in crisis countries, financial markets generally react unfavourably to their governments’ initial demands for IMF assistance, while compliance of the crisis countries with the IMF policy action is commonly perceived as good news. Financial markets in crisis countries react negatively to prolonged negotiations and government actions against IMF policy. Creditor countries’ financial markets are not responsive to IMF actions in crisis countries. We discuss policy implications of findings.     

Bound by Gravity or Living in a ‘Post Geography Trading World’?* Expert Knowledge and Affective Spatial Imaginaries in the Construction of the UK’s Post-Brexit Trade Policy

A key battle has been fought within the UK cabinet on the direction of post-Brexit trade policy. The opposing sides have favoured either continued alignment or a ‘hard’ break with the European Union’s (EU’s) regulatory and customs regime, in the latter case to allow the UK to pursue an independent and ambitious trade policy agenda. Contrary to much commentary on ‘post-truth’ politics, both sides have relied on rival forms of expertise to support their claims. I argue for the need to not only re-emphasise the malleability and political nature of expert knowledge, but also appreciate its emotional bases. The Treasury has led the charge in favour of a softer Brexit by drawing on econometric (‘gravity’) models that emphasise the economic costs of looser association with the EU. In contrast to this attempt at technocratic legitimation, the specific legal expertise drawn upon by cabinet advocates of ‘hard’ Brexit has appealed to an emotive political economy of bringing the UK, and its (in this imaginary) overly regulated economy, closer to its ‘kith and kin’ in the Anglosphere, deepening the UK ‘national business model’. I conclude by calling for more explicitly emotive and values-based argumentation in the public debate on the UK’s future trade policy to improve the quality of democratic deliberation.     

Regional and gender differentials in the persistence of unemployment in Europe

The persistence of unemployment increased during the recent great recession in many European countries, although with diversified impacts. We therefore analyse such impacts in four European countries – Italy, Spain, France and the UK – which represent different institutional frameworks and may reflect the so-called continental European and Anglo-Saxon frameworks. We analyse the determinants of unemployment persistence using individual-level data from the European Union Statistics on Income and Living Conditions (EU-SILC) panel for the period 2007–2013. These data enable us to take into account initial conditions and state dependence in addition to individual and household characteristics. We focus on gender and regional effects, which have a strong impact on the persistence in the state of unemployment. We find that gender gap is significant in Italy and the UK, implying that male workers show a higher probability of remaining unemployed. In Italy, such a pattern is due to the worsening of male workers’ conditions during the crisis, whereas in the UK, male workers show higher unemployment rates than women. Regional effects are significant in all countries analysed and underline a relevant structural factor that should be addressed on policy grounds in Europe. Such effects are greater in Spain and Italy.     

The Influence of Uncertainty on Investment in the UK: A Macro or Micro Phenomenon?

While the theory examining the relationship between uncertainty and investment has suggested new research avenues, it has not had strong predictive power. Nevertheless, at the policy level the benefits for investment of a more stable economic climate are being emphasised. These considerations point to the need for empirical work. Accordingly, this paper draws on industry level panel data, obtained by marrying the UK Census of Production with the CBI Industrial Trends Survey, and applies dynamic panel data methods to distinguish between macro and micro sources of uncertainty and to consider the role of financial factors. It is found that both sources of uncertainty exert a considerable negative impact on investment, while financial factors may be important in some industries.     

Backtesting expected shortfall: evidence from European securitized real estate

Events such as the European sovereign debt crisis, terrorism and Brexit cause more uncertainty and volatility in capital markets. This encourages us to use both conditional and unconditional forecasts (backtests) for expected shortfall (ES) in 8 indices of listed European real estate securities and Real estate investment trusts (REITs). Using the method proposed by Du and Escanciano, we find that ES is generally superior to Value-at-Risk in describing and capturing risk during extreme events such as the financial crisis. Our results are important to regulators, risk managers and investors.     

Economic uncertainty in South Africa

The idea that heightened uncertainty among firms contributed to the Great Recession and the lacklustre subsequent recovery has inspired a substantial literature examining the impact of changes in uncertainty on output and investment decisions. Yet to date there has been little research on business uncertainty in emerging markets. This paper is one of the first to develop a set of survey-based proxies for business uncertainty for an emerging market, South Africa, based on micro-data from business tendency surveys. These survey-based proxies are combined with more common measures of uncertainty, based on financial data and text mining, to obtain a composite measure of economic uncertainty. The paper then examines whether the uncertainty indicators have plausible and significant relationships with real economic activity, even after controlling for other economic variables. The indicators exhibit a significant negative correlation with real GDP growth, consistent with the findings for developed countries, and a positive shock to uncertainty is generally followed by a significant decrease in real activity growth.     

The Impact of Exchange Rate Volatility on UK Exports to EU Countries

This paper investigates the impact of exchange rate volatility on UK exports to European Union (EU) countries by means of a newly developed ARDL bounds testing procedure to cointegration. Using monthly data disaggregated by market of destination and sectors for the period 1993ml to 2001m6, our results indicate that UK exports to the EU14, at both aggregate and sectoral level, are generally income elastic, relative price inelastic and largely unaffected by short‐term exchange rate volatility. Re‐estimation of the model using a long‐term measure of volatility, however, provides evidence supporting the hypothesis that exchange rate uncertainty has a negative and significant influence on UK exports to EU countries.     

Making sense of Brexit losses: An in-depth review of macroeconomic studies

Almost all economic assessments of Brexit conclude that there would be significant losses for both the UK and the EU. This paper examines the driving forces behind these results. We consider the strong economic relationships between the UK and EU both at the sectoral and macroeconomic levels that are at risk from Brexit. We review fifteen studies that explore various Brexit scenarios (hard and soft) and explain why their different methodologies and assumptions yield different degrees of economic damage. Our review concludes that GDP losses for the UK from a hard Brexit range from 1.6% to 7.8%, while a soft Brexit would moderate the losses by roughly half. We also find that potential UK trade agreements with third countries could partially compensate for significant Brexit losses.     

Distressed acquisitions: Evidence from European emerging markets

We analyze factors behind 23,213 distressed acquisitions in European emerging markets from 2007 to 2019. Besides the impact of financial ratios, legal form, ownership structure, firm size, and age, we emphasize the role of institutions and channels of their propagation. We show that the quality and enforcement of insolvency laws are linked with the lower probability of distressed acquisitions, followed by corruption control and progress in banking reforms. The impact of institutions is larger in less-advanced countries as compared to economically stronger ones. The effect of institutions increased after the financial crisis but declined as the economic situation improved.