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Treaties, deals, central banks and the whole global political order

We’re living in interesting times, for sure, so we turned to George Lagarias, chief economist at Mazars, for a snapshot of markets and what it means for investors. His observations on the current international state of play provide food for thought.


“Last weekend, Boris Johnson, the front runner for the Tory party leadership, suggested that he would withhold payments agreed with the EU over the Brexit Bill. France’s President Emmanuel Macron suggested that this would amount to a sovereign default. To gather momentum, other key Tory candidates followed. While the legal obligations around these payments to the European Union are not clear, the overarching story is compelling: ‘If it is just a treaty, then we can back out at will’.

“But then, what is the point of a treaty? What is the point of any deal, trade or not, for that matter? Treaties may reflect a particular dynamic at a given time period and, as time changes, they may be in need of an update, or an overhaul, to reflect the current dynamics. They often stay in place, however, because of the need to foster stability, even over temporary shifts in the balance. If we scrapped the idea of honouring obligations altogether, then the world we would create would be one of casual alliances and raw strength, over one of stability.

“As the global leader, the US is spearheading this new path that is the world we are shaping. In terms of investments, this means a structural pick up in volatility, which does create opportunities, but systemic risks are still in check, as long as investors trust central banks. In a manner, maybe the very responsible and accommodative functioning of the central banks themselves has fostered political moral hazard. The question, going forward, is will central banks, the pillar of the global economic and financial system and the main driver of growth in the past few years, themselves fall victims of this sea change in the global political order? That’s when investment risks may become systemic.”

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