Tag Archives: Brexit

EU Intransigence in Brexit Negotiation Echoes Trump: Putting EU First

In today’s US print edition of the Financial Times there was a Comment piece by Jean-Claude Piris, former director-general of the council of the European Union’s Legal Service. It is titled, The Myth and Delusion over Single Market Access. In the piece he argues that Britain does not understand what access to the “free market” means. As Britain seeks a unique relationship, he claims that Britain is ignoring facts and should drop such ideas and focus on what the EU offers. This Comment is political posturing and not in fact true.

His key point is this: “…[T]he single market is based on the free movement of goods, services, capital and people, and choosing among these freedoms is not permitted.” This maybe a rule enshrined in EU law but it is just that. Many other enshrined EU laws, created for its benefit, have been negotiated way – such as France and Germany both violating the budget deficits.

The free market can be whatever it needs to be. It can exist between the free movement of goods and services, and capital. It does not require the free movement of people. That adds a social-cost and social-layer of bureaucracy that is the main reason why Britain left in the first place. It is this argument, that the EU cannot separate the components of this “law”, that will undermine the Brexit negotiations and sits at the heart of the success of the EU.

Before the forerunner of the EU was founded, the EEC, Britain was closely involved in the original concept of the “United States of Europe”. While Churchill may have implied both an economic and political model, he did not imply political union – even though this had been offered in a desperate moment some years before in 1940 to France at the point of collapse under the weight of the German Army.

But just as the original ideas for a barrier-less trade framework was being explored, Britain exited the dialog and so the French and the Germans continued the work. It was still mostly an economic model – but Britain’s withdrawal from those early stages were fatal. The EEC formed up and without Britain to act as a counter weight, France and Germany – for different reasons – pushed forward with ever greater economic and creeping-political alignment.

So it’s disingenuous for EU leaders and others to say what the free market is and is not. All is possible. It is purely a negotiating ploy to try to trump an argument. It is no different than saying, “Put EU First” just as Trump says, “Put America First”. No different.

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The EU – Creaking at 60

The title of this blog is the title of the Economist Special Report last week. The title refers, of course, to the 60th anniversary of the Treaty of Rome, the founding of the EU at its source, being celebrated by EU members, less the U.K., last week. Oddly the U.K. is still a member but since she wants out, political correctness prevents Albion from upstaging proceedings.

The Economist special report is really good. It is well balanced and actually concludes that Europe needs a multi-speed system to respect all the differing political and economic challenges across the EU. What is irksome though is that while a two-speed or multi-speed approach has been proposed before, why is it now that the Economist has finally woken up to reporting it and making it the basis of its views regarding the success of the EU?

It is as if the Economist has woken up just in time to see the final deck chair arrangement on the titanic. Correctly the special report calls out the weakness and fallacy of the EU’s monetary policies for all members and now current monetary union is flawed. We all knew this a while ago. If this had been addressed perhaps the U.K. vote for Brexit might never have happened!

But ignoring my cryptic criticism, the article is very up to date and very down to earth. It’s just a shame that it took Brexit and the near break up of the EU, and continuing mess in Greece and Italy to come to the conclusion we needed four years ago.

US Government Sets Up Next Financial Crisis & Brexit Not the Risk at All

Two articles came accross my desk this week – one caused consternation on my part and the other seemed to offer a sanity check.  The former concerned the US economy and specifically how there are signs that consumers, and lenders, are returning to the same behavior that led to the financial crisis at the source or our current economic challenges.  The latter concerned the hype and over blown concern with Brexit and its impact on Britain’s economy.

In the US print editions of the Wall Stree Journal (Wednesday January 11th) there was an article titled, “New Loans, Same Old Dangers“.  This front page article described a government-led initiative (Property Assessed Clean Energy) that provides subsidies loans to encourage homeowners to buy energy saving devices.  The article gives an example of a homeowner who is not able to afford the loan is still encouraged to take it out.  As is common practice this loan is then sliced up with other loans and sold on as a bond – what is called securitization in the financial industry.  This is analogous to the risky mortgage loans offered, and taken up by people who should have known better, and sold on to governments in Iceland as “AAA” opportunities.

The market is very small – the article suggests around $3.4bn of loans have been made so far – but the model is just damning.  FIrst you have big government trying to force its policies on a free market.  With the housing issues that triggered the financial crisis this was Government demanding ever greater home ownership among poor people and those that could not afford it.  Second you have the lowering of standard for the setting up of loans.  This is identical to what happened with dubious sales efforts of mortgage brokers during the 1990’s and early 2000s.  Finally you have the build up of risky loans and owners of the loans not knowing where the real risk is.

The popular uprising that has brought Trump to the White House would do well to heed these stories.  After all people will be people and when offered a bad apple that looks and smells sweet, many will take it.  Perhaps we should not fault those that do – or should we expect a stronger moral aptitude?  Either way we need to get big government out of the way.  It should not seek to foist its social or political wants on you and me – we should be free to do what we want, how we want, when we want, as long as it does not harm our fellow citizen.  Innovation and opportunity will drive improvement in the energy sector.  And perhaps tax credits would be a safer way to encourage small changes in behavior that do not create risky loans.  

The other article, a commentary piece in the US print edition of the Financial Times (Thursday Janary 12th) was titled, “The City has nothing to fear from Brexit“.  It was penned by Stanislas Yassukovich who is a former chief executive officer of European Banking Group.  The article is a breath of fresh air since it refutes many of the risks and issues that most other “specialists” report in the press.  For example we have heard a lot about “passporting” – the idea that a financial institution authorized to trade in one country of the EU can freely trade in another country.  It turns out that non-member states can use this capability quite easily – so it’s not even needed as a negotiation.  The article goes further.

Passporting was a means to try to level set the complexities of rules across what was meant to be a single market.  It turns out that even with passporting there remains complex and different rules that still need to accommodated when trading across the member-states.  As such, “core retail financial activities – residential mortgages, deposit and savings products and so on – remain almost entirely national, and highly protected.”   This whole think stinks to me.  

The recent news that PM Thresa May fired her senior most civil servant who worke with the EU was greeted in the press as bad news.  It seems he kept repeating to the PM that it was not going to be possible to complete all negotiations in time before the two year window closed for leaving the EU.  Why is this?  He may have had a practical view on things but he certainly did not have a positive view on what is possible.  I think we need clean out the cupboard and get a fresh new look at everything.  Good for PM May to do so.  If the author of this article is right, there is little we should fear from Brexit.   

My Top 5 Biggest New Year Risks to the Global Economy

In order or scale, priority and impact, here are my picks for the five most critical trigger-points that may impact, negatively, a return to ‘old normal’. Currently we stand at the edifice of a new normal, the great stagflation, but the anti-establishment and populist changes taking place seem to suggest a knew-jerk reaction by nations fed up with socialist dressed-up-as-market politics that have led the West for 20 years.

  1. China’s economy stagnates or crashes. Debt levels are above EM levels and are now among the largest, approaching the incredulous Japanese levels. This dynamic is not sustainable for a nation whose currency is not a reserve currency. However the economy is the world second largest even without the development and emergence of whole swathes of other sectors such as healthcare and leisure, which may offset contracting first world growth over the next year or two. So the risk is there and there is no clear leaning one way or the other, yet. But debt is growing faster than these new sectors; exchange reserves at $3bn are limited (though huge), and currency value management is not market-bases. So greater risk is with the downside. China’s growth flags, currency sinks, counterbalancing US growth and confidence, creating a massive imbalance in the global economy. Europe watches on as global GDP sinks under its own debt weight. KPI’s to avoid/watch out for: China GDP falls to or below 4.5%; China’s debt load surpasses 300% of GDP.
  2. Trump quits after 18 months due to intractable political limitations that prevent policy changes he seeks related to healthcare, regulatory complexity, tax reform and trade. Trump’s political rhetoric is being replaced with solid business-based policy. However not all such policies have ever been tested at a national level and scale. Some efforts will fall foul to physical, social and political limitations. This may prove frustrating for Trump. As growth will return short term, such medium term frustration will lead Trump to claim, “My policies worked, see? But now the system has reached its limit and there is nothing I can do until the country agrees with me to shut down the whole government system! Since they are not ready, yet, I am ‘outa here’ until they are!” Markets crash, interest rates balloon, inflation rages all within a year. World economy sinks into the abyss. KPI’s to avoid/watch out for: US GDP 1H 2017 reaches 4.5% but Congressional conflict leads to policy deadlock ; vacancy in position at Whitehouse. 
  3. Emerging Marker currency crisis as massed capital investment is siphoned away towards a resurgent US economy and dominant dollar, as well as a stable and even growing China economy. This situation is already underway. The risk is that what is currently a reasonably ordered trend becomes a financial route. This is possible since the financial markets are starved of yield due to the collective policies of central banks to keep interest rates very low for too long and for the build up in their massive balance sheets. If the trend becomes a torrent, EM’s will have to yank up interest rates far beyond what their local economics can support and economic disaster will follow. This will ferment more political instability and drive increased destabilizing ebonies to ruin. Though the US may be growing well, compared to its peers, it’s the imbalance they tips the ship over. KPI’s to avoid/watch out for: dollar index, the weighted value against basket of currencies, surpasses 115. It is currently at 103.33, which is a 14 year high; EM interest rate differential balloons.
  4. Hard Brexit forced through by intransigent Europeans who think the EU experiment is more about political union than economic liberalism. A new trade deal, legal framework and social contract can be negotiated within a two year window. But only if politicians and civil servants want it too. Continental politicians however, under the strain from populist pressures, will equate intransigence over Brexit negotiations with an improved politicos standing with their electorates. Fool for them as this will actually create the opposite response for such behavior will simply worsen the economic climate. The lack of any sign of return to old normal will lead to political paralysis and the clock will time-out. Hard Brexit will be forced upon a supplicant Britian. Europe and UK economies will tank; currency wars will wage; global trade will collapse further. This will not sunk the global economy short term but will act as a dead weight slowing its resurgence down. KPI’s to avoid/watch out for: no agreement at end of two year period lost triggering of Article 50. 
  5. Latin or Indian debt or economic crisis. Much like with other EM’s, growing sectors of significant size around the world may blow up- India being the best example. India’s growth is different to China. It is more integrated socially and politically with the west, but it’s corruption levels are far greater than what one can see or observe in China. It is possible that local economic difficulties, hard to observe today, may trigger a collapse in confidence that leads to a destabilizing debt or currency crisis. Brazil’s economy is certainly in the dock currently; Argentina is struggling. India’s economy looks like paradise right now but the growth across the country is extremely uneven- you only have to look at public sector infrastructure investment. So should two such countries suffer local difficulties, the combination may result in significant risk to the global financial system. KPI’s to avoid/watch out for: two simultaneous financial/debt crisis afflicting EM or India.

These are my top 5 risks the global economy faces in 2017. I hope I am wide of the mark, in a positive way. I left Japan off the top 5 list yet their economy remains anathema to growth. The Japanese market invented the whole new normal cycle with a anaemic growth, massive debt, low inflation, and demographic contraction. And Japan has an amazing debt load that refuses to spook investors. Things may yet have a Japanese tinge before the year end. Does Japan, along with the US, lead the global economy back to the old normal!
What potential risks do you see?

Italy’s ‘No’ to Renzi is Not Like Brexit or Trump – They are all Different

It suits the press, a machinery that is benefited by the establishment, to associate Sunday’s referendum results in Italy as a rejection of establishment and so a similar vote as Brexit and then Trump. This is incorrect and a disservice to Italy.
Look at Renzi’s polices:

  • Less regulation
  • Increased labor flexibility
  • Lower taxes

As such he is as much Trump as he is Cameron or a May. And Renzi is pro-Italy and not so keen to follow along with rules set by Brussles designed to favor the Euro at one’s own expense. So on paper the result is akin to what happened in the UK and US. But let’s look at the data in more detail.

Brexit was not even a fair vote. Maybe none are but it really was an extreme case of bait and switch. The politics excelled over economics; and yet even if you looked at the facts, a vote for Brexit didn’t lead to the imminent disaster sworn by leaders at the time.  In fact, if one understands the situation of the euro, it was a smart move.  

But all the rhetoric concerning immigration turned the vote into a sham. Thus the UK voted for the right outcome but for the wrong reason.
Trump was, to that point, the first and real anti-disestablishment vote, pure and simple. It so happens that it seemed to look like Brexit which happened to appear as a vote against orthodoxy. But Trump’s victory was no fluke whereas Brexit was. The Trump underpinnings to victory were seeded long ago by a mutual debasement of the political class by left, and right, in the US.

Renzi’s referendum is a vote by Italy to remain Italian and avoid changing the political class system. The very constraints that lead to a stagnant economy and political system with uneven distribution of wealth was maintained. This was therefore not a vote against the establishment at all. It was a successful defense of it. Yes, the right-wing anti-EU Beppa Grillo party gains, but that is a by-product of the actual referendum structure due to Renzi foolishly linking his position to the result and is subsequent decision to resign. Even the Economist questioned the whole structure of the referendum last week.  

In today’s US print edition of the Wall Street Journal someone from an Italian lobby and public affairs group Pedesta is quoted as saying that “The antiestablishment feeling is stronger than the desire to reform.” This is classic Italian as it is jargon. Antiestablishment is about reform, massive reform. So establishment was thus assured! He goes on, “There is a reluctance to change, an innate conservatism in Italy.” Italy is not conservative; such policies have just been rejected.  

The other thing that happened was that Renzi was marginally pro-EU and he suggested that his polices would help Italy and so help the EU. He also foolishly tied his position to Sunday’s results, as if his own popularity was enough to sway the establishment. It was not. So his announced resignation opens the door for disruption and even the comedian-cum-politician. But it is not as if Italian’s were voting against Renzi. They were voting to protect the status-quo.

France’s and Germany’s elections are different. They either may undo the EU at a strike. If either in-office party looses to an extreme left or right, we might end up with a whole new ball game. 2016 may have been the unscrewing of Pandora’s lid. 2017 could well be the opening up of it.
And don’t think Greece is out of the picture. More loans are coming/needed yet some counties have already said no more. See Greece, Creditors Get Back on a Collison Course.

   

Should Britain Now Write Its Constitution?

This week’s read of the economist was not overly happy for me. See previous blog: Worst Week Reading The Economist. But the newspaper still shines when it avoids writing about Trump.

In Baghot: The Machine Splitters; Unsexy as it may seem, Britain needs a big constitutional debate, the paper argues convincingly for a real written constitution.

Britain of course has no written constitution. It has many laws and documents but over the years a series of conditions emerged that resulted in no expect need for it. The article highlights the three conditions:

  • Consensus among the country’s rulers about certain enduring traditions
  • A population willing to defer to the elite’s application and interpretation of those traditions
  • A steady, incremental evolution of those traditions rather than sudden, violent shocks

The country has been lucky in that is has not experienced such shocks for a long time. However Brexit is a big one. The paper argues it is big enough to warrant the debate. I agree.  

The problem is that there is no president to call on to guide how Britain extricates itself from Europe. It certainly got its way into Europe with creeping incrementalism, launching the whole affair itself after World War II. But the effort to join was not painless, and its efforts (twice foiled by de Galle) coincided with the demise of empire and decoupling of commonwealth. Such a long-winded process resulted in tight links without the need for a constitution. Getting out of it, inside 2 years, is a whole different ball game. At least we don’t have de Gaulle snooping around.

How Low Can Sterling Go – and How to Make Money on That!

In this weekend’s US print edition of the Financial Times, the FT Big Read was on “Brexit and Sterling“.  It was a great article.  More interesting was a commente from Mohamad El Erian (of whom I am a fan).  Here is the quote: “If the UK secures a comprehensive new free trade agreement for goods and services, current levels [dollars to Sterling of $1.29) will look very cheap.  If, however, such an arrangement lags behind or is not comprehensive enough, then currency levels would be seen as the new normal for sterling.”

There you have it – just what I called out with my “leave” vote.  Cool and rational heads need to prevail on both sides of the Channel.  Let’s see how European the EU team will really be…