Brexit is heating up, fast.
The military is involved in preparations for a hard Brexit.
The Troubles are set for a comeback in Ireland.
Export and import reliant businesses are cutting back investment.
Border security and infrastructure is being readied.
Europe’s politicians are urging the EU to loosen up on its negotiation stance.
British journalists are describing their gardening habits in anticipation of food rationing.
British grocers are mystified by the government announcements that British grocers are stockpiling food.
Who knew the World Trade Organisation’s trading regime could be so chaotic! It’s no wonder Britain struggles to trade with the world outside the EU if this is what such trade looks like…
Then again, how Britain trades with the rest of the world will be up to Britain in the future…
If the EU wants to lose a key export market to competition from around the world… well it won’t be very popular at the next EU election.
Which is why the referendum might’ve been a mistake for Brexiteers. This May, democracy could upend the EU from the inside. And we might miss out on the fun.
I’m not talking about the European nation states turning on the EU. That’s what most eurosceptics stand for. I’m talking about democracy turning the EU on its head from the inside of the EU institutions themselves.
The EU has pencilled in elections for the end of May. Last time around, the EU was already looking wobbly.
In 2014, the BBC reported that “Voter discontent over immigration and huge job losses translated into big gains for Eurosceptics of various political hues, more than doubling their representation. About one-third of the 751 MEPs are Eurosceptic.”
Given what’s happened since in national elections and immigration, can you imagine where that leaves us now!?
With parties such as Alternative for Germany (AfD), the Five Star Movement and many others now proving themselves in national parliaments or even government, how will EU voters vote in 2019?
The balance in the EU parliament is unusually fragile. In 2014, voter turnout was less than 43%. If the eurosceptics are energised by the likes of Brexit, Italy and AfD, they will have enormous sway. And it seems they are attempting to unite to make that happen.
Former Donald Trump adviser Steve Bannon has appointed himself the lead man in Europe’s resistance movement. He’s agitating to upset the EU with his new organisation, called The Movement. Which is not to be confused with the organisation called The European Movement that’s trying to keep the UK in the EU.
Bannon and Boris Johnson are supposedly in frequent contact. He’s also met with Jacob Rees-Mogg. But his biggest fan might be Viktor Orbán, Hungary’s prime minister.
Having tried to isolate Hungary from Europe’s “lame duck” leadership, Orban is now on the offensive instead.
Now that he has support in many of Europe’s national parliaments, Orban is proposing cooperation between these groups. He sees them as standing for Christian democracy, as opposed to liberal democracy. The difference being an anti-multicultural and anti-communist position.
But immigration is clearly the key battleground: “We must focus all our attention on the European elections of 2019. It’s high time the European elections were about one serious common theme, immigration.”
The trouble with immigration in the EU is that it only takes one rogue nation to open a back door. With Italy trying to shut the front door at the moment, it appears to be Spain that has opened the back.
The German media is reporting that the coast near Gibraltar is the new refugee highway. Perhaps the Royal Navy should turn humanitarian and help them all into the EU…
Having a villain like Spain will probably help the populist campaign to take over the EU. Clearly, Europe’s borders need to be protected at the EU level if the protection is meaningful.
The aim of the game for the upstarts will be to capture about a third of the EU’s parliamentary seats with a new coalition in 2019, according to one calculation.
Which seems a little conservative to me if the BBC’s 2014 figures are correct. Or perhaps the bar that makes you eurosceptic has shifted lately.
The coming change at the EU is why I’ve been urging the UK’s negotiators to drag out Brexit as long as possible. An extension to the negotiating period is provided for in the treaty that governs Brexit. The deadline you keep hearing about is a false one.
The EU we will be negotiating with will change fundamentally by June 2019. The EU’s negotiator Michel Barnier knows this, which is why he announced his exit from the negotiations in advance so long ago.
The good news about Brexit is that Britain’s relationship with the EU will not be fixed, no matter the outcome. It will change over time as British policy recovers its powers and the EU changes internally too.
The UK’s future has the potential to be brighter. The EU’s not so much…
Why the Germans will pull the plug on the euro
I’ve always worried that the Germans would be the ones to destroy the eurozone. They have a great deal to gain and less to lose from such a departure.
There’s one angle of this I haven’t written about yet. Because it looks complex. And it is thanks to the artificial complexity that the eurozone has imposed.
But in the end, what I want to show you today is fairly simple.
Your household probably produces more than it consumes. That is, income exceeds expenditure.
The UK household savings rate is at 4.3%. Not that you can trust the figures. The US just revised their savings rate going back to 2012. They doubled it…
Back to your savings.
Imagine if those savings were automatically invested.
Wait… they are thanks to auto-enrolment laws, unless you’ve opted out.
Imagine if those savings were automatically invested in an investment you can’t sell or redeem. A loan to the nations of southern Europe, who probably can’t afford to repay it. A loan that pays 0% interest. Which must never be repaid.
It’s not a very rewarding investment… You’d probably be rather annoyed.
Well, that is the state Germany as a nation finds itself in.
Usually, nations with an export boom acquire foreign assets. It’s sort of their reward for working hard, being productive and following decent public policy. You get rich in terms of foreign assets.
The aim of the game is to build up an asset base that you can sell off in retirement as demographics take their toll.
But in the eurozone, something different has happened. The Germans haven’t accumulated foreign assets. They’ve accumulated something called Target2 balances instead.
The link between trade surpluses and Target2 is the complicated part. But it’s determined by an accounting entity, explained by Hans-Werner Sinn in his book The Euro Trap. In other words, it is inherently true.
The think tank Official Monetary and Financial Institutions Forum explains the terms of the Target2 balances, with my emphasis added: “Under current regulations, Target-2 balances are treated simply as central bank balance sheet entries that are unredeemable, without expiry dates and produce interest at the ECB’s main refinancing rate (0%).”
Target2 is also the reason the EU’s internal trade flows don’t rebalance over time. Which will lead to the largest bankruptcy in history. But that’s another story.
The thing to highlight here is that the Germans are being shafted, even while the Italians, Spaniard and Greeks are being robbed. It’s a lose/lose scenario. With not rebalancing mechanism.
On paper, the Germans are immensely wealthy thanks to their export boom. But it is not wealth they’ll ever be able to realise by selling up. The wealth is a central bank accounting entry that reacts to trade and financial flows.
With Target2 balances hitting records that surpass the height of the European sovereign debt crisis of 2012, Target2 could become a major political issue in Germany again. It’s very easy to twist the Target2 issue into eurosceptic outrage, largely for good reason.
What if the end of the euro isn’t triggered by Italy or Spain, but by Germany?
Until next time,
Nick Hubble
Capital & Conflict
Category: The End of Europe