During the last one month, hectic discussion has been going on across the world over Britain's exit from European Union (EU), which has gained popularity as an acronymic term Brexit. Everywhere, in national or international media, this issue has been predominantly occupying wide coverage with threadbare discussion, hot debate, arguments and counter-arguments. Implicit and explicit objective of such discussion was to determine the countries going to derive benefit or incurring losses from this event. In fact, no country in the world except the USA has apparently been benefited from Brexit because US will continue to remain as the world's leading economy without any formidable competitor. Similarly, US dollar will continue to uphold its position as the most acceptable international currency. However, some stock traders and many fund managers of the developed world might have reaped some benefits from the sudden upheaval of capital market allegedly influenced by Brexit. The bond market, which has remained in static condition during the last 5/7 years, has registered sharp rise with 7 and 17 per cent increase in 10 year term bond and 30 year term bond respectively. Such move in the capital marked impacted by Brexit was not new at all because capital market by nature is very sensitive. Any international event from US election to terror attack and Iran issue to oil price has always impacted the capital market.
THE GREAT DEPRESSION & SUBSEQUENT MEASURES: In order to assess the current economic scenario prevailing in the world, we will have to go back to the nineteen thirties when the world fell under the Great Depression. The magnitude of the depression was so severe that a perception was developed that capitalistic economy as an effective theory would not succeed. Under this situation British Economist, Keynes (John Maynard Keynes), came up with an economic theory which helped the world economy survive. Because of applying Keynesian theory, the economy bounced back. However, after the Great Depression, the proponents of capitalistic economy realised that mere economic theory might not last long with positive growth, so they strongly felt the necessity of the leading role of a particular country which would steer the economy towards sustainable growth. This crucial responsibility was then bestowed on the USA which immediately realised that attaining economic supremacy would not be possible unless military supremacy was established. Consequently, an undue competition was created among some developed countries for achieving military supremacy which had eventually led to the Second World War. It is widely said that the objective of dropping nuclear bombs in the Japanese cities Hiroshima and Nagasaki at the fag end of the war was to strike the message of military supremacy. The post Second World War world was divided into two parts, the capitalist world and communist world, which again created cold war between the two superpowers, America and Russia. Because of persisting cold war era for a long time, no country could emerge as a unique superpower in the world. Subsequently, communism could not continue to perform as was thought of. In this situation, the USA not only established itself as a military superpower but also consolidated its position in the world politics.
THE POST SECOND WORLD WAR ECONOMIC SCENARIO: After attaining military superpower, the USA extensively concentrated on establishing its economic power. Keeping this in view, it went for mammoth investment in building infrastructure, establishing financial control, enacting various stringent rules & regulations. At the same time, talents from across the world were brought in the US by way of brain draining. Similarly, capital from the whole world began to pour in the US. Resultantly, American economy maintained steady growth. Although some fluctuations over the cycle of boom and recession were not an exception, yet the growth parameter had never gone down the minimum threshold. It is further alleged that the role of some international organisations viz. World Bank, IMF, GAAT, WTO was not so favourable for other developed and developing countries as was for the USA. Therefore, the US economy had been growing with spectacular success in almost all areas of the economy whereas other developed countries were lagging behind. Keeping pace with the growth of US economy and its leading role in the world economy, US dollar also emerged as an widely accepted international currency. About 80 per cent international trade was denominated in US dollar and most international corporations, business entities and sovereign countries maintained reserve in US dollar which kept the intrinsic value of this currency very high.
In the meantime, Japan emerged as a strong economy heralding a big challenge to the US economy. After successfully overcoming the setback inflicted in the Second World War, Japan went for massive industrialisation. Especially, electronics goods, clothing and automobiles manufactured by Japan quickly occupied the world market. As a result, most developed countries including the USA started experiencing adverse balance of payment against Japan and the trade gap started ballooning with Japan. At the same time, Japanese currency, Yen, also emerged as a very strong currency in the international market. In order to get rid of such adverse situation, the USA applied various international trade tools and started negotiation with Japan. At that time China emerged as a formidable trade competitor globally backed by robust investment and a stupendous manufacturing spree. The speciality of Japanese goods was the quality regardless of price, while Chinese goods were featured with cheap price regardless of quality. During the last decade, China supplied all kind of goods at so low price that it was almost impossible for any other country to compete. Therefore, the world marked was swamped with Chinese goods. Such unilateral demand for Chinese goods across the world helped China achieve rapid economic growth. Chinese economic growth was so high that within a very short time, the country emerged as the second largest economy in the world. On the other hand, Japan having confronted with undue price competition, lost its lead role in the international market. During the last one decade, stagnating situation has been prevailing in Japanese economy and no fiscal measure including negative interest rate could remove such prolonged stagnancy from their economy.
ECONOMY PARALLEL TO THE US ECONOMY: Existence of competitive economic environment was strongly felt by leaders of the developed world. Especially, European countries were convinced to establish an economy parallel to the US economy and a currency system that would perform well against US dollar. As a result, European countries collectively introduced ERM (Exchange Rate Mechanism), which had been performing well at the beginning of the nineties, but this system developed trouble as most of its currencies had started eroding their intrinsic value. Depreciation of currencies under ERM was so severe that at a certain point the existence of ERM was at stake. Just like Brexit, Britain then hurriedly withdrew its currency, Pound Sterling, from ERM without giving any thought to the consequence of the future of ERM. So, Britain's decision of withdrawal form the European Union is not surprising at all. German Chancellor, Angela Merkel, has compared Britain's such behaviour with Cherry picking.
THE EU & BREXIT: In spite of such ups and downs in world economy, leaders of the developed world, particularly European countries, did not give up the hope of establishing a strong economy parallel to that of the US and a widely acceptable international currency which would be able to perform as a substitute to the US dollar. From this thought, European Union was established and a common currency, Euro, was introduced. Britain had joined with EU but refrained from accepting the common currency. Britain's partial joining the EU was considered with negative views by analysts and many were sceptical about Britain's continuity with EU in the long run. Such scepticism has come true with Britain's exit from EU. Soon after introduction, Euro had received welcoming response from countries engaged in international trade. Substantial volume of international trade was denominated in the currency within a very short time. Even considerable amount of deposits and foreign reserves switched from US dollar to Euro. As a result, dependence on US dollar considerably declined in the international market. It is believed that the reason for sharp fall in the value of US dollar in 2006 & 2007 was due to the emergence of Euro as a widely accepted currency in world trade because trade in Euro was rapidly rising. In order to face the dominant role of US economy in world market, the move was always underway to establish competitive economy, currency and organisation, viz. European Union, BRICS (Brazil, Russia, India, China and South Africa), Euro. However, no measure could come as ever successful.
Needless to say, we will have to wait for some time to witness the eventual consequence of Brexit, i.e. whether Britain or EU will be benefited from this move. However, it may be assumed that the USA will find itself in an advantageous position because, among other reasons, its currency appears to be gaining the overwhelming strength it once had.
The writer is a banker based in Toronto, Canada. [email protected]