European Central Bank

Brexit Q&A


What is Brexit? Borrowing from the mash up “Grexit,” which referred to the potential exit of Greece from the eurozone, “Brexit” is used to describe the referendum ("Should the United Kingdom remain a member of the European Union or leave the European Union?"), to be held on June 23rd. British, Irish and Commonwealth citizens who live in the UK, along with Britons who have lived abroad for less than 15 years, will determine whether to “leave” or “remain” in the EU.  What is the European Union? In 1957, the Treaty of Rome created the European Economic Community (EEC), or "Common Market," which was the basis of what is now known as the European Union, or “EU”. The idea behind the EU was that countries that trade with one another become economically interdependent and more likely to avoid conflict, a pressing concern in the shadow of two world wars on the Continent.

There are 28 member-nations in the EU: Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK.

What is the Eurozone? The eurozone is a subset of the EU that shares a common currency, the euro. The Treaty of Rome, the Single European Act of 1986 and the 1992 Maastricht Treaty all paved the way for the Economic and Monetary Union (EMU) and a single currency -- the euro.

The currency was launched in 1999 for electronic transactions, and physical notes and coins were first issued in 2002. The 11 initial members of the EMU included: Austria, Belgium, Finland, France, Germany, Italy, Ireland, Luxembourg, Netherlands, Portugal, and Spain. Greece joined in 2001, followed by Slovenia in 2007, Cyprus and Malta in 2008, Slovakia in 2009, Estonia in 2011, Latvia in 2014 and Lithuania in 2015. Today, the euro area numbers 19 EU Member States.

Do all EU countries use the Euro? No. Three of Europe's largest economies -- Norway, Sweden, and the United Kingdom -- do not use the euro. Great Britain maintains its own currency, the Pound Sterling.

What is the “Leave” Argument? Those who are in support of leaving say membership in the EU has led to high levels of immigration (one main tenant of EU membership is "free movement", which means you don't need to get a visa to go and live in another EU country); too many rules and regulations; and high costs. UK Treasury figures show that net contribution to the EU (including a negotiated rebate and money that is paid but sent) is £7.1 billion or $10.2 billion. The Leave argument is that not only would the UK save that money, but as Europe’s second-biggest economy, it could negotiate a better trade deal as a non-EU member.

What is the Remain Argument? Trading with other EU nations, as well as an influx of immigrants is good for the U.K. economy, according to the Remain camp. Additionally, there is a fear that if the U.K leaves the EU, international businesses will flee the UK, in search of a home in another EU nation. 

What’s Expected? Recent opinion polls have shown a dead heat, but bookmakers’ odds still point to a victory for “Remain”.

When will we know the results? Polls close at 22:00 GMT (6:00ET) Thursday, 23 June and most believe that it will take about 6 hours to get a clear picture of who won, especially if the vote is as close as anticipated.

If “Leave” wins, how long will it take for Britain to leave the EU? Following a vote to leave, the UK government would have to decide when to invoke Article 50 of the Treaty of Lisbon, which outlines the legal process by which a state can withdraw from the EU. Once it does, the UK and the EU would begin to negotiate a withdrawal agreement, which at a minimum would be two years.

During the negotiation process, the UK would obey EU treaties and laws, but not take part in any decision-making, as it negotiated a withdrawal agreement. That period could be extended by unanimous agreement, which is why many analysts believe that it could take four or five years to tackle the myriad of issues, the biggest of which is how trade would be handled between the EU and the rest of the world. If the UK wanted to rejoin the EU, it could, but it would have to start the process from scratch.

If “Leave” wins, would other nations, like Greece, follow? Brexit could potentially be the first step towards the break-up of the EU, or the exit of one or more countries from the euro. Additionally, many believe that Scotland would launch a second effort to leave the U.K. – the first occurred about two years ago.

What are the market implications of Brexit? A vote to leave would negatively impact the British Pound, UK interest rates and stocks. According to the IMF, Brexit would likely plunge the UK into recession and could spark a stock market crash and a steep fall in house prices. It could also potentially create spillover effects in global markets, as uncertainty, the enemy of investors, would dominate. If Leave wins, economists expect UK GDP to shrink by 1.5 to 4.5 percent by 2021.

What are the political implications of Brexit? A Leave vote could see the departure of Prime Minister David Cameron, who started this risky process after he won the 2015 general election. Cameron was responding to pressure from his own Conservative MPs and the UK Independence Party (UKIP), both of which had heard from disgruntled constituents about the issue of EU control.

MARKETS: It was a “risk-off” week, as the combination of loose global central bank policies, worries over economic growth and fear over Brexit pushed investors into the sovereign bond markets. On Tuesday, the yield of the German 10-year bond fell below zero for the first time ever. The S&P 500 and NASDAQ had their largest weekly drops since late April.

  • DJIA: 17,675 down 1% on week, up 1.5% YTD
  • S&P 500: 2071 down 1.2% on week, up 1.3% YTD
  • NASDAQ: 4800 down 1.9% on week, down 24.1% YTD
  • Russell 2000: 1145, down on week, up 2.5% YTD
  • 10-Year Treasury yield: 1.61% (from 1.64% a week ago)
  • July Crude: $47.98, down 2.2% on week
  • August Gold: $1,294.80, up 1.5% on week
  • AAA Nat'l avg. for gallon of reg. gas: $2.34 (from $2.34 wk ago, $2.80 a year ago)


Mon 6/20:

Tues 6/21:

10:00 Janet Yellen’s semi-annual testimony before Senate Banking Committee

Weds 6/22:

10:00 Janet Yellen’s semi-annual testimony before House Financial Services

10:00 Existing Home Sales

Thursday 6/23:


10:00 New Home Sales

Friday 6/24:

8:30 Durable Goods Orders

10:00 Consumer Sentiment

Central Bank Bingo with Mohamed El-Erian


The world’s largest central banks are once again dominating the chatter among traders and economists. Last week, the European Central Bank announced additional measures to simulate the moribund Eurozone; this week, the Bank of Japan will weigh potential action after its surprise decision to adopt negative interest rates in January; and the U.S. Federal Reserve will likely refrain from a rate hike at its two-day policy gab fest. The heightened central bank focus made last week a perfect time to interview Dr. Mohamed El-Erian, author of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse. El-Erian is Chief Economic Advisor at Allianz, chair of President Obama’s Global Development Council and a LinkedIn Influencer. Between December 2007 and March 2014, he was chief executive and co-chief investment officer of global investment management firm PIMCO.

I sat down with El-Erian during a LinkedIn webcast to discuss how far the economy and markets had come since the bear market lows of March, 2009 (the S&P 500 has soared over 240 percent, including reinvested dividends), as well as the significant challenges that still lie ahead for investors and for the global financial system.

As markets bottomed seven years ago, El-Erian and his PIMCO colleagues coined the phrase “The New Normal” to describe what was likely to be a slow growth economic recovery. That prediction was spot-on: the U.S. is now in the seventh year of 2 to 2.25 percent GDP. El-Erian credits the actions of central banks for even that measly pace. When it became clear that government stimulus plans were not large enough, central banks were forced to adopt a “Whatever it takes” mentality. In doing so, they were able to avoid a multi-year depression.
Unfortunately, the unintended consequence of aggressive central bank actions was an environment where investors relied on monetary policy to do the heavy lifting to promote growth. That reliance encouraged excessive risk taking, which helped drive up asset prices beyond economic justification and turbo-charged income and wealth inequality. (Those who already owned assets were the biggest beneficiaries.)

It’s not as if the Fed, the ECB and the Bank of Japan don’t get it, but just when global central banks are looking to hand off the responsibility of promoting growth, there seem to be no takers.

So where do we stand right now, seven years after we bottomed out? We have come to what El-Erian calls a “T-Junction”. As we approach the end of this recovery road, there is an equal probability that we turn left and right. On one side of the T, we remain in a stable, but slow growth world, riddled with high unemployment, increasing income inequality and political extremism. On the other side, we have politicians who wake up and get serious about creating an inclusive economy; make pro-growth structural reforms, remove debt overhangs in problem areas like student loans and get the overall architecture right. The result would be higher growth, job creation, decreasing income inequality and a drop in financial instability.

Could the stakes be any higher this political season? That’s why El-Erian says that we desperately need candidates to acknowledge the anger that the “inequality of opportunity” can breed; and then to address that anger with policies that promote inclusive growth and restore faith in the system. In other words, we need an “Economic Sputnik” moment. Perhaps that seems like a distant possibility this moment, but El-Erian remains optimistic that one can occur.













  • DJIA: 17,213 up 1.2% on week, down 1.2% YTD
  • S&P 500: 2022 up 1.1% on week, down 1.1% YTD
  • NASDAQ: 4748 up 0.7% on week, down 5.2% YTD
  • Russell 2000: 1087, up 0.5% on week, down 4.3% YTD
  • 10-Year Treasury yield: 1.98% (from 1.88% a week ago)
  • Apr Crude: $38.50, up 7.2% on week 7.2%, 4th straight weekly climb
  • Apr Gold: $1,250.80, down 0.9% on week
  • AAA Nat'l avg. for gallon of reg. gas: $1.92 (from $1.81 wk ago, $2.45 a year ago)


Mon 3/14:

Tues 3/15:

Bank of Japan meets

FOMC Meeting Begins

8:30 PPI

8:30 Retail Sales

8:30 Empire State Mfg Survey

10:00 Business Inventories

10:00 Housing Market Index

Weds 3/16:

8:30 CPI

8:30 Housing Starts

9:15 Industrial Production

2:00 FOMC Decision

2:00 FOMC Economic Projections

2:30 Janet Yellen Press Conference

Thursday 3/17:

8:30 Philadelphia Fed Business Outlook Survey

10:00 JOLTS

Friday 3/18:

10:00 Consumer Sentiment

Super Mario to the Rescue, Greek Election, Fed Fun


After four years of doing absolutely nothing to propel the moribund Euro Zone economy, European Central Bank President Mario Draghi (aka Super Mario) finally unveiled the ECB’s version of bond buying last week, where it will buy €60 billion ($68 billion) of bonds a month in an effort to boost stagnant growth and fight falling prices. The ECB will fire up the printing presses in March and will conduct the purchases “until we see a sustained adjustment in the path of inflation.” So although the European version of QE at first seemed half the size of that in the US and UK, the open-ended prospect seemed to quell fears that it was not enough.

While on the topic of Europe, it is worth noting that there is a big election in Greece today, where Alexis Tsipras, the leader of the leftwing, anti- austerity Syriza party is leading in the polls. There are fears that Tsipras might lead Greece out of the euro zone (the so-called “Grexit”), but it now seems more likely that he will seek a restructuring of debt with the Troika (the European Commission, the European Central Bank and the International Monetary Fund).

As a reminder, Greece has suffered through six years of economic contraction, triggered by over-the-top spending, the financial crisis and then exacerbated by fiscal belt-tightening imposed by the Troika. According to Capital Economics, Greek “gross domestic product is now a quarter smaller than it was in 2008. A quarter of the working age population is out of work. Only half of the eligible young have jobs.” Both the Troika and Greece have reason to come to terms, which should prevent a Grexit, at least for now.

Here in the US, the week ahead should be a little less dramatic. The Federal Reserve will conduct a two-day policy meeting, where it is widely expected to maintain its recently adopted language that it “can be patient in beginning to normalize the stance of monetary policy.” With wage growth tepid, no meaningful increase in core inflation and global uncertainty swirling, the Fed is likely to sit still and do nothing.

On Friday, the first reading of fourth quarter growth is due. GDP is expected to increase at a 3.2 percent annualized rate. That would be downshift from the strong 5 percent gain in the third quarter, but would still be a lot better than the 2.25 percent pace of the recovery.

Finally, there was some concern late last week, after the National Association of Realtors released its Existing Home Sales report. While sales accelerated in December, for all of 2014, existing home sales dropped by 3.1 percent from 2013, the first annual decrease since 2010. The problem was a lack of inventory, but as Bill McBride of Calculated Risk points out, “the NAR inventory data is ‘noisy’ and difficult to forecast based on other data.” The good news is that “distressed sales were down sharply - and normal sales up around 7 percent.” With the economy strengthening, confidence building and mortgage rates at 18-month lows, home sales should accelerate in 2015.

MARKETS: Stocks rose, snapping a three-week losing streak and the euro dropped to its lowest level ($1.12) in 11 years.

  • DJIA: 17,672, up 0.9% on week, down 0.8% YTD
  • S&P 500: 2051, up 1.6% on week, down 0.3% YTD
  • NASDAQ: 4757, up 2.7% on week, up 0.5% YTD
  • Russell 2000: 1189, up 0.3% on week, down 1.3% YTD
  • 10-Year Treasury yield: 1.79% (from 1.84% a week ago)
  • March Crude Oil: $45.59, down 7.2% on week
  • February Gold: $1,292.60, up 1.2% on week
  • AAA Nat'l average price for gallon of regular Gas: $2.04 (from $3.29 a year ago)


Mon 1/26:

DR Horton, Microsoft, Texas Instruments

Tues 1/27:

3M, Apple, AT&T, Caterpillar, Coach, DuPont, Pfizer, P&G, Yahoo

FOMC 2-day meeting begins

8:30 Durable Goods Orders

9:00 Case Shiller Home Price Index

10:00 New Home Sales

10:00 Consumer Confidence

Weds 1/28:

Boeing, Facebook

2:00 Fed Policy Announcement

Thurs 1/29:

Amazon, Conoco Phillips, Ford, Harley Davidson, Visa

8:30 Weekly Jobless Claims

10:00 Pending Home Sales

Fri 1/30:

Altria, Chevron, MasterCard

8:30 Q4 GDP (1st estimate)

9:45 Chicago PMI

9:55 U Mich Consumer Sentiment