What would a political crisis do now?

Nick Hubble

Angela Merkel and Emmanuel Macron are in trouble. The politics of tolerance and charisma are not working.

What if Europe’s leaders fall? One after the other? Could financial markets stomach political uncertainty now?

I’m not just talking about political storms like Italy’s. Populists don’t have to make it into government to cause trouble. Just look at what Brexit did to the pound.

The real worry is that the centre of Europe loses its political stability. If nobody is around to stand up to the likes of Italy, where does that leave things?

Let’s examine just what’s going on inside Europe first.

Europe’s centre is no longer centrist

Chancellor Merkel is dealing with an immigration crisis. Well, she’s dealing with the political blowback of her own immigration crisis.

Her southern German political partners are kicking up a fuss thanks to too much immigration. The New York Times headline puts it like this: “Bavaria: Affluent, Picturesque — and Angry”.

The American paper sees the Bavarian uprising as a calculated political test. Might the same politics that worked in the US, Hungary, Austria, Finland, Sweden, Denmark, Czech Republic, UK, France, Slovenia and of course Italy work in Germany?

The actual debate in Bavaria, which nobody in the English-speaking media seems to mention, is all about chain migration. Here’s what the biggest thorn in Merkel’s side, Bavaria’s Christian Social Union (CSU) leader Horst Seehofer, recently said:

“Of those who calculate these matters, I’m on the extremely conservative side. I’m calculating based on a per refugee factor of 0.5. Yesterday experts have told us we could easily use figures of 2,3 or 4. I’m calculating based on a factor of 0.5, which means, for every two refuges, one will bring a single family member. Then they’ll be at three million.

“What that means for security, integration, the ability to finance our government, for the function of our government including the judicial branch – that is a different country. And the population doesn’t want Germany or Bavaria to become a different country. And I’m understating things.”

Keep in mind that Germany arguably had an immigration assimilation problem before the refugee crisis even began.

There’s a fair bit of schadenfreude in Merkel’s struggles. For once, a politician is being held accountable for their own policies. If only by virtue of the fact that Merkel has had four terms in office over 12 years. Her policies are coming back to bite her personally instead of just her country.

The result of Merkel being stuck with Merkel’s problems is a constant series of policy U-turns in Germany. Merkel paints them as pragmatic. One of her own party officials explains what’s wrong with that: “We have seen these [issues] coming for years, but there is a lack of overarching political leadership. Instead it’s just day-to-day problem-solving.”

Germany’s business leaders have had enough of their chancellor, reports the Financial Times:

Gather together a clutch of Wirtschaftsbosse (business leaders) and it is not long before the whingeing begins. After 12 years in office, Angela Merkel has lost it; she chops and changes all the time, overturning policies on a whim, such as on energy and migration; there is no overall strategy — especially on the digital economy. And don’t get them started on topics such as the minimum wage, labour market laws, employer insurance costs and high energy costs.

At least on the issues confronting big business, it doesn’t appear to be costing the chancellor votes:

As one observer says, while few may choose the language deployed by Boris Johnson, many German voters share the British foreign secretary’s “f**k business” stance.

Germany’s elections have come and gone, delivering a grand coalition of all major parties. As the leading opposition party, the upstart Alternative für Deutschland is already chairing budget committees, just as wild populists do in Italy.

If the coalition breaks down, either between the Christian Democrat Union (CDU) and CSU, or CDU and the centre-left Social Democratic Party of Germany, Merkel is unlikely to survive. Either the major parties will learn from other Europeans’ political success with populist promises, or they’ll lose more seats.

If Germany goes populist, via policies or political parties, who will stop Europe from following?

For now, the crisis in Germany appears averted. Merkel managed to broker a deal that all three parties can support. The only problem is, it requires support from countries like Austria and Italy.

Good luck with that…

Reform always sounds good

Over in France, President Macron has discovered that actually governing a country is problematic in practice. So he turned his attention to loftier goals – reforming the EU. But his proposals went nowhere.

Macron’s disapproval rating is at a record high according to an Ifop Fiducial poll. Approval was at a record low in March.

The French think their president is launching too many reforms at the same time. The rest of Europe has the same problem with his proposed European policies.

Le Figaro reported on some interesting surveys:

According to the poll results, Macron’s policy is considered “unjust” by supporters of French left-wing parties (98 percent of France Insoumise supporters and 78 percent of Socialist Party supporters), as well as by supporters of right-wing parties (75 percent of The Republicans supporters and 85 percent of National Rally supporters).

If the cult of Macron weakens, the formerly dominant parties of France will be given an opportunity to return to power. Their path to government will be populist policies.

Do you see how quickly Europe could change?

Even leaving the EU is politically risky

Here in Britain, politics is reaching a climax. Remainer Theresa May is struggling to deliver the Brexit that makes everyone happy. Because it doesn’t exist, of course.

No single Brexit deal could even come close to pleasing a majority of voters. Not even a majority of Brexit voters. And many of those are Labour supporters. Whatever deal May proposes, she finds herself in an election losing position.

May may be Brexit’s sacrificial lamb.

Her weaknesses are an ambitious politician’s dream. The only thing stopping the likes of Boris Johnson and Michael Gove is the prospect of putting themselves in the same impossible position.

But May does have support coming from her former employer. Bank of England governor Mark Carney is playing his role well. Ever since vast new powers were given to the Bank of England, with huge cuts in political accountability, his Brexit bashing tune has changed.

The Express quotes him as telling a Newcastle audience “I was wrong” about Brexit. Even the recent downturn in UK economic activity is down to the weather, not Brexit negotiations, he said.

A change at the helm

Let’s imagine that the political positions of Merkel, Macron, May and others are untenable. Where would political upheaval leave us?

If governments in centrist nations fell, who would defend the status quo in Europe? Who would stand up for Europe’s values and laws? Who would negotiate a responsible Brexit?

Early next year, the EU itself is in for an electoral shock too. If Europe’s national elections are anything to go by, the EU Parliament will be full of eurosceptics.

These nationalistic populist movements have few policies and visions in common, except for curbing immigration. That’s fairly straightforward, just not politically correct yet.

My hope is that nations will decide to undermine the EU in favour of what you might call “state’s rights”, if you were ignorant of American history. If individual governments want to start governing themselves again, they should be allowed to. Or you’ll get a conflict worse than politics.

But the politicians who warn about this always seem to advocate strengthening the EU, even though the EU’s growing strength is the very cause of the problem.

I wonder how Brexit will be remembered. A lucky escape? A sabotage of the European project that brought about its downfall? A poorly timed departure just before common sense began to prevail at the EU? A missed opportunity to reform the EU legitimately, which left the likes of the Netherlands at the EU’s mercy.

And can the euro survive an EU in decline? It is both the centrepiece of the EU and cause of the eurozone’s struggles.

There are a dangerous amount of unanswered questions circling Europe. And none of the potential answers are good.

An Austrian Austrian on buying beer with gold

Have you ever wondered how much beer an ounce of gold would’ve bought you at different points in history? Probably not. But maybe you should.

Comparing historical Oktoberfest prices with gold prices will tell you whether to buy, hold, or sell your gold now. Is it over or undervalued relative to the most important and consistent consumer good out there? (German beer.)

This analysis sounds obscure. But it’s precisely the disconnect with reality that makes modern economic analysis so useless. Beer and gold, in contrast, are both very real.

Modern economic analysis assumes away crises. Reality delivers them with frightening regularity.

But one “school” of economics does explain crises. Without resorting to econometrics, maths or even financial data. Simple logical explanations explain why things go so wrong in our financial system. And the Austrian School of economics is your guide to those explanations.

The name Austrian was intended as an insult by the German School of economics. It isn’t taught in Austria and very few Austrian economists these days are in fact Austrian. But Boaz Shoshan interviewed an Austrian Austrian this week on The Gold Podcast.

Ronald-Peter Stöferle works at Incrementum, an asset management company based in Lichtenstein. He’s also the co-author of a book about how Austrian economics can make you a better investor, and writes the world renowned “In Gold we Trust” report.

To find out about the gold-to-beer ratio, and what stage three of the world’s central bank policies will look like, listen in here or subscribe here.

Until next time,

Nick Hubble
Capital & Conflict

Category: Uncategorised

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