Since I sent my last public blog on “Brussels, Bombs and Brexit” in March things have largely evolved the way I imagined. Financial markets had massively under-estimated the probability of a UK exit from the EU. However, this weekend a spate of opinion polls have shown the the Leave camp is between 2% (FT Poll of Polls) and 19% (Opinium) ahead of the Remain camp. And today’s Sun ran with “BeLeave in Britain” as its header. British voters have legitimate concerns about immigration, sovereignty, and the EU’s economic track record. But a Brexit might be the catalyst of a financial crisis that was coming any way – or arguably just thrown oil on a crisis that has already started.
Today I write from Marbella, Southern Spain, where my family has had a holiday home for the last 45 years. What might be surprising is that I have met many British here who will be voting out of the EU despite their love for Spain and freedom of travel across Europe. They don’t consider this mutually exclusive.
There are at least 4 key forces that are driving the Brexit.
After the Brussels bombing it seemed obvious that public opinion would start to be concerned about unfettered immigration in to the EU especially from a demographic that might include those sympathetic to IS terrorism. Trump mentioned the growth of radical Islam in Brussels before the bombing but was lambasted in the press for being politically incorrect. I think many British voters are smart enough to distinguish between outright racism and prudent protection of the borders given the escalation of IS attacks around the world.
Also leaving the EU and continuing a friendship with Europe are not mutually exclusive. Many Eurosceptics hope that Brexit will spark other European states to exit and a more prosperous future.
I don’t think that many would disagree that the EU is stuck in an unhealthy state of equilibrium. A number of southern states are basically being run by the EU and IMF, and the Greece enigma keeps getting pushed further back. Everyone knows that a day of reckoning will come. And this would include the ECB and the German financial system recognising losses on their balance sheets. It is perhaps these latent losses are contributing to the sell off in Deutsche Bank’s stock price (which I have been warning of in Dow Theory Letters since last year).
Some think that it is wise to get out of the EU now before the whole project collapses. From a game theory perspective, this might make sense. And financial markets might reward the UK for this in the medium to long term.
The EU was always imagined by its founders to become a United States of Europe. Some suggest that the USA and CIA were very influential in its founding and funding – https://en.wikipedia.org/wiki/American_Committee_on_United_Europe
But many people don’t take sovereignty (or civil rights) very seriously until things become critical. The journalist Philip Johnston recently wrote:
“If there is one word in the political lexicon guaranteed to make the eyes glaze over, it is sovereignty. We have fought wars over it, executed a king in its name, shared it, pooled it and stood alone in our finest hour in its defence; and yet for most people it remains a rarefied concept, discussed with almost hushed reverence by academic constitutionalists and a handful of Westminster anoraks. The usual suspects were in action again last Thursday when sovereignty was debated in the House of Commons with probably no more than a couple of dozen MPs bothering to turn up.”
Funnily enough I gave a talk at SOAS, University of London last week and met a 21 year old law student who was just graduating. She assumed that as I was fairly educated I would be supporting the Remain camp. In a previous life I studied law (and took a keen interest in constitutional law) and I was most surprised she hadn’t considered the sovereignty issues. For some of us, these are quite serious and perhaps more people are waking up to this.
The well-followed economics journalist, Ambrose Evans-Pritchard (Telegraph) pulled no punches yesterday in a very punchy article:
“Stripped of distractions, it comes down to an elemental choice: whether to restore the full self-government of this nation, or to continue living under a higher supranational regime, ruled by a European Council that we do not elect in any meaningful sense, and that the British people can never remove, even when it persists in error.
For some of us – and we do not take our cue from the Leave campaign – it has nothing to do with payments into the EU budget. Whatever the sum, it is economically trivial, worth unfettered access to a giant market.
We are deciding whether to be guided by a Commission with quasi-executive powers that operates more like the priesthood of the 13th Century papacy than a modern civil service; and whether to submit to a European Court of Justice (ECJ) that claims sweeping supremacy, with no right of appeal.”
Those that cared about sovereignty were also shocked by the way the referenda of France and Netherlands were ignored in the Lisbon Treaty. [The EU blatantly went against the wishes of the public].
And of course, whatever you think of Greece’s economic record, their wishes were totally trampled upon as well. The new Prime Minister and Finance Minister ran a referendum that was ignored.
Backlash of the Fear Campaign
I think that there is a global backlash against politicians and perhaps the media. Trust has collapsed. So Cameron’s campaign of fear mongering has not gone down well. Sir John Nott, the Defence Secretary under Thatcher, suspended his membership of the Conservative party after all the propaganda that was published.
The Remain camp keep citing apocalyptic forecasts about the future of the UK outside the EU. At the end of last week Lord Bamford Chairman of JCB, the country’s largest manufacturer, said that he thought that we would do fine out. He is also very concerned about sovereignty.
The exit of the world’s 5th largest economy (some say poised to be 3rd largest economy) which houses London (the world’s no 1 or 2 financial centre) from the EU will be sure to raise huge question marks over the viability of the EU, especially given the well-documented imbalances in the EU economy and the zombie state the some of the southern nations are in. Even if the British vote to stay in, other EU members are turning skeptical. As I wrote in Dow Theory Letters last week: “In recent Italian elections, anti EU candidates did rather well. And British researchers — who surveyed 9 EU countries — found that 45% of people believed that their country should hold a referendum on whether to remain in the EU. In France 55% think that a referendum should be held. Apparently 48% of Italians want to leave the EU. Many southern Europeans are seeing that the EU is not necessarily helping resuscitate their economies.”
I think it will trigger capital flight from both the UK and Europe and a repatriation of capital to the US. Longer term the UK will do better than those that remain, but I don’t think that Leave immediately takes us to the land of rainbows and unicorns because of the global environment, which is perhaps the most dangerous in decades.
The summer of 2016 could be a summer of turmoil. First, we could have more bad news about the Chinese economy at any time, which is plagued by overcapacity and potentially a non-performing loan crisis. The IMF have recently made a bleak assessment. And this article by Ruchir Sharma, the global strategist for Morgan Stanley, clearly makes the important points. More on this in future articles. Second, the US Presidential election will heat up even more. It is proving to be very divisive and I expect we will witness further bouts of social unrest. I also think that financial markets might not react well to the increasing chance of a Trump presidency, although longer term he might prove to be an astute pragmatist and surprise many if he gets in. I calculate that there is still a slight chance of a constitutional crisis in the USA. Third, there is the very serious risk that further ISIS strikes continue and that they launch something spectacular like 9-11.
Moves in financial markets are ominous. Capital is flowing out of risk assets: the 10 year bund has turned negative and US treasuries (my preferred option) are still getting a strong bid.
One thing I am fairly sure of though; in years to come British holidaymakers will probably continue to come to spend their money in southern Spain regardless of our membership. The combination of ocean, stunning blue skies,the backdrop of mountains and Spanish culture attracted us before the greater integration of the EU and will continue afterwards.
And London will take the difficult times on the chin, as it has always done, and survive long enough to thrive yet again. Besides, we live in a globalised economy where cities are becoming more important than states. But this is a topic for another day…
Despite everything, I intend to enjoy my holiday. And the locals are not all worried. The cashier at our local Spanish bank said as we departed this morning “lets bring back the peseta! Before a cup of coffee was 60 cents and now 1.2 euros!”
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