Brexit and the Future of Europe
Over the
last few weeks the news media has been awash with discussion and debate over
the outcome of the upcoming UK
vote on European membership – or ‘Brexit’. With the two sides fighting an
increasingly hostile battle to convince voters ahead of the referendum
scheduled for June 23rd.
On the
one hand the Remain camp argues that leaving would be hugely damaging to the UK economy and
leave it as a fringe player in European and Global politics. Conversely, the
Leave camp counter that leaving would actually boost the British economy,
restrict the number of illegal immigrants entering the country and enable it to
self-govern, unfettered by European interference.
The
debate has been long on rhetoric and short on substance and it took the tragic
murder of the British pro Remain MP Jo Cox by a supposed Leave fanatic a few
days ago to force a rethink by both sides, and take some of the bitterness out
of the argument.
Unfortunately,
whilst both sides have been busy shouting at each other, it has been
increasingly hard for the voters to get any unbiased information in order to
make an informed decision, with the ‘facts’ put out by one side, quickly
refuted by the other.
It is incredibly hard to quantify the ‘benefit’
that the UK
has obtained from being in the EU. It will always be open to a large degree of interpretation
and the truth will be in the eye of the beholder. The answer probably lies
somewhere in the middle, not as bad as the ‘Leave’ camp claim, and not as good
as the ‘Remain’ camp counter. But in reality, there really is no point in
striving to answer that question. What’s done is done, and the most important
questions now are What does the future of the European Union look like? And is Britain better off
being a part of it?
I have
spoken in previous posts about the outlook for the European Union. Back in
April 2013 when Cyprus
was generously ‘bailed out’ by the Troika (the European Commission, the ECB and
the IMF) I wrote the following:
‘The bottom line in all this is that the Euro
project was flawed from the start. It was sold to the citizens of Europe as a
financial amalgamation that would enable all the countries that participated to
grow their economies and flourish, and although that certainly was a positive
by-product, the main reason was to cement relationships between the major
European countries (both financially and politically) so completely, that there
would never again be another European war.
Unfortunately, because it was
driven by politicians with an agenda rather than people that understand
financial markets, major mistakes were made, including the decision not to
amalgamate all the countries debts into one, creating a single Eurobond market.
These mistakes sowed the seed for
the disaster that we now face.
Because it is still politically
motivated, European authorities will continue on the same course, stating
categorically that something won’t happen, until of course it does, forced to
make harder and more unpalatable choices, as the process grinds on to its
inevitable conclusion.
The real tragedy in all this is
that as a result of the design flaws in the original concept, and the troika’s
rigid adherence to a political ideology, it will likely foster the exact
sentiments that the entire Euro project was designed to eradicate, with
harmonious relationships and a sense of unity, replaced by distrust, anger and
a move towards nationalism.'
As the
global economy has slowed and the European bloc fallen into recession, we have
indeed seen these predictions come true, with rising civil unrest, increasing
distrust of the political system and stronger nationalistic feelings
manifesting in many countries, even those thought of as being at the core of
Europe , France and Germany. These pressures will only increase as the process
unfolds.
Whilst
the fundamental picture is not good, it is always handy to see how the
financial markets are assessing things. The long term health of a country can
often be forecast by looking at the performance of its currency relative to
others. The currency rate is driven by global money flows moving across the
globe looking for relative advantage. For example, if global investors see the US prospects as looking bright relative to other
countries, they will sell their domestic currency in exchange for US dollars in
order to buy the US
denominated assets they think will perform, be they Real Estate, Stocks or
Bonds etc. As a result we see the US dollar rally in relation to other
currencies, and the greater the perceived relative opportunity the greater the
out-performance will be.
If we now
look at a long term chart of the Euro, the picture is sobering. I have used
this chart in previous posts but it doesn’t get any better the more you look at
it. In it we can see the entire history of the Euro from its inception in 1999,
falling to its low in 2000 followed by its rally through the boom years of the
mid 2000’s to peak in 2008 with the GFC, before trading lower and collapsing
through 2014. Since then it has been consolidating, but that is where the good
news ends. The chart is indicating a bearish price objective of 71.32 and
whilst there is no guarantee it will reach this level, P&F charts can be
uncannily accurate in their predictions. Either way, this chart is very bearish
and a close below 105.90 will open the euro up to a very big move.
The
implications of this chart are huge. Were the euro to collapse as this chart is
indicating it would be catastrophic for the Eurozone economies and have
profound affects around the globe. Unfortunately, in my opinion this ties in
with the fundamentals of how the Eurozone political powers have been operating.
Their adherence to a political dogma blinds them to the repercussions of their
actions. Whilst the people of Europe become less enamoured of the European project
and more nationalistic, less trustful of their elected representatives and less
tolerant of the systemic corruption within these entrenched political bodies.
The political bodies themselves are taking an increasingly hard line on
individuals or countries that refuse to fall in. The people and their elected
representatives are taking different paths and it can only end in tears.
It seems
that the future of the Eurozone is already set - there is pain on the horizon. Britain
has a choice, it can remain tethered to the fortunes of the Eurozone come what
may, or it can take its chances on its own. Whilst that may not be anyones idea
of a utopia, it is a damn sight better than the alternative.
I know
what I would do
