Brexit and the Future of Europe

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 23^rd.

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