Chaos in the EU: Brussels, Bombs and Brexit

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Sadly, the noise coming out of the intelligence community along with a little common sense meant that the tragic events today in Brussels were not entirely unpredictable.  I think that there are a number of profound ramifications.

According to Stratfor, which released a reaction soon after the bombings “Several governments in Western Europe will likely soon announce new national security legislation, improved controls on fighters returning from conflicts in the Middle East and North Africa, as well as enhanced intelligence sharing with their neighbors. EU members will also resume discussions on how best to combat terrorism abroad in troubled nations such as Libya and Syria. Europeans will become more willing to contribute to the coalition against the Islamic State, possibly with more weapons and training for the Iraqi military and Kurdish militants, increased deployment of combat aircraft and participation in NATO surveillance missions in Turkey.”

So yes, there will be further curbs on civil liberties in the Eurozone – which are being eroded dramatically already since the Paris bombings. And more noise for bombing Syria.

There has also been a lot of chatter about the risks to London by the UK authorities and also former intelligence officers in the media.  I have been writing about these risks for some time now and I think that this will accelerate.

The other ramification is that there will be further backlash against unfettered immigration across the Eurozone. Merkel is already rapidly losing popularity for allowing in many refugees from unknown countries last year.

Finally, and possibly most importantly for financial markets, this will all affect the Brexit debate.

Gideon Rachman wrote in the Financial Times yesterday.

There is an “unwillingness among mainstream political analysts to believe the warning signs from the opinion polls. Several recent polls have shown small majorities in favour of the UK leaving Europe when the country holds its referendum on June 23. But most political pundits I speak to still think it is pretty unlikely that Britain will really vote to leave. When it comes to both Mr Trump and Brexit, the political establishments in Washington and London find it hard to believe the public will ultimately make a choice that the establishment regards as self-evidently stupid.”

I boldly made a prediction before the Scottish referendum that despite the data leading up to the vote, the Scots would not vote to leave the UK. However, my reading of the tea leaves is that there is a very significant – and rising – probability that we will vote for a Brexit in June. People are fearful of the out of control migration crisis, frustrated with the powers of the non-elected EU bureaucracy and there is a strong argument out there that Switzerland has done very well being outside of the EU. London is a global city and can trade globally. Quite a number of high profile figures are supprting the Leave campaign including Boris Johnson. And the Labour Leader, Corbyn, is thought to be a closet “Leave” supporter. Melvyn King in his recent book “The End of Alchemy” also wrote a scathing chapter against the Eurozone,

The British pound has been weakening as the likelihood of a Brexit has risen. However, astute people in the City of London with whom I speak think that this might spark off further crisis in the Eurozone. I concur with this.  The underlying problems with the Eurozone are not resolved. Just look at Greece. And the German tax payer has a much higher contingent bill than their politicians have told them.  The strains will become more apparent again I believe – just watch the European banking sector for one gauge.

I think we are back in the calm before the storm for financial markets globally. [Yes the UK will also be affected] There are no end of potential catalysts for the next leg down in asset prices, but Europe increasingly looks like it could be the big one.  Remember that this is against the backdrop of expensive valuations of stocks and a global economy that is plagued by overcapacity – that is, ceterus paribus, prone to deflation. This is why China is suffering so much and why various commodity prices hit 10, 20 or 30 year lows.

And it seems to me that the IMF and BIS are highly aware of the coming economic crisis and are busily working on the post crisis financial architecture.

“The risks of failing to implement the necessary policy adjustments should not be underestimated. They include entrenching instability in the global [financial] system and, ultimately, triggering an epoch-defining seismic rupture in policy regimes.”

BIS Chief Economist.

Now is the time to think about what financial system YOU would like to see in place.

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I also write the weekly International Investor column at Dow Theory Letters

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