Month: June 2016

And it’s a pretty dismal list…

• Apparently there is nothing of more economic or financial importance in the world than BREXIT.
• The 17.4m people who voted for an exit are either undereducated or racist bigots.
• The millennials and generation Y are all ageists when it comes to voting – opinions and concerns of pensioners don’t matter and should not be heard because they haven’t got long to live.
• A lot of people don’t think democracy should operate when it delivers the ‘wrong’ decision.
• The media are generally incapable of undertaking any rational and balanced analysis of why the majority vote was to exit.  
• It will still be the end of the economic and financial world as we know it.
• No it’s not so bad after all; the UK economy is strong and the fundamentals are good.
• A small number of extremely wealthy people have lost a lot of value in their investments.
• It’s not made a scrap of difference to those who don’t have two half pennies to rub together.
• UK markets went down and then back up again.
• Sterling is lower but that’s good for UK exports.
• European markets dropped down far more because the perceived economic impact will be much greater.
• The Italian banking system is on the point of collapse.
• A large number of people who own property and holiday regularly in Europe think that not being a member will disrupt future plans.
• Most people under the age of 40 think their future European job prospects will be impacted.  
• Our main political parties are a shambles and at war within themselves.
• The parliamentary parties in general would still prefer to stay in, despite the vote.
• Nobody had prepared a contingency exit plan.
• We have no idea whether or even if we will leave the EU.
• The EU has no intention of reforming itself and wants to use the vote as a method of driving through a United States of Europe.
• Eurocrats want to boot the UK out as soon as possible but senior EU member state politicians are far more sanguine.
• EU politicians want to change the rules so that it is legally impossible for a future member to leave the EU.
• No senior UK politician wants to press the Article 50 button.
• The commonwealth has a GDP of $10.4bn and 2.2bn people and the UK will be allowed to trade with them again.
• If Le Pen’s party wins the election next year it will call an EU referendum; if there is a majority to exit it will effectively shut down the EU.
• A majority of Italians would probably vote to leave the EU if allowed a referendum.
• Scotland may or may not have a legal right of veto.
• Donald Trump cares as much about international sensitivities as those at home in the U.S.
• Many North American financial analysts think the UK is deserting a sinking EU ship.  
• We may or may not have a general election later this year the result of which could culminate in a decision to veto/ignore the EU referendum.
• UKIP support could evaporate during the next general election as its main platform and purpose has been fulfilled.
• UKIP support could increase during the next general election because the two mainstream parties have become disconnected from their constituencies.
• Several million UK citizens think that enough has changed since June 23^rd to warrant a second referendum.
• Nearly 50,000 of the 800 citizens of The Vatican City and 24,000 North Koreans think we should have a second referendum…..

I think I’m barely scratching the surface. It’s no wonder people are angry, anxious, frustrated, and generally confused or bemused when there is such a demonstrable lack of leadership both in the UK and the EU.

I’ll give the political class and media 2 out of 10 for performance, integrity, lack of bias and professionalism at the moment.

Despite the protestations of many in the mainstream and social media, I think the really sad aspect of the referendum is not the result but the extreme intolerance demonstrated by people who disagree with a different perspective. I’m also very much of the view that the way to persuade people is not to patronise, disenfranchise or to alienate through insults and branding.

Most UK citizens are only heard through the ballot box. It is a right bequested by previous generations to ours, one that has been fought for through mass protest and sometimes behind the barrel of a gun. There always will be disagreements in democracies but the answer is not to trade insults but to listen to concerns, and if reasonable act on them.

You win votes by giving people something to believe in and vote for.         

Much of the material penned in the days following the EU Brexit referendum has naturally focused on the possible impacts to Britain. The ‘end of the world’ type article typically assumes that the UK will suffer and that the EU will remain intact as a politically stable economic block. This may or may not be the case. There are certainly calls for referenda in Denmark, The Netherlands and France and potentially others but with the British result now out I am sure they will be fiercely resisted. This will no doubt work for a time but if the EU fails to take significant steps to reform itself an existential threat will continue to hang over the whole project.

Like millions of others I like the idea of a European Union and its potential to peaceably knit together many different cultures. The travel and working benefits have been considerable for the general population but the institution has allowed itself to become monolithic, bureaucratic, remote and undemocratic. Politicians in member states, the UK included, have become far more interested in maintaining the status quo rather than addressing the concerns of the millions of people living in areas outside the big cities.

Over the next few months the EU has an opportunity to take a fundamental look at its own construction and purpose and take steps to address deficiencies before those other calls for an exit become overwhelming. A communication campaign explaining its positive aspects may be a start but unless the fundamental issues are resolved it will be no more than a cosmetic move. The institution needs to get back to basics and give British and other EU citizens something to vote for and enthuse about. With the right set of principles I don’t think it’s beyond a possibility that the 4% margin in favour of an exit could be swung into a 4% margin in favour of the EU. After all, if Scotland can table the possibility of another independence referendum why can’t the UK have another one on the basis of a reformed EU? But reform it must beforehand.

A reform agenda

Many of the core principles of the EU and its associate bodies are exactly what European citizens need. Despite the inconvenience of managing terrorist suspects the Human Rights Act should remain as a fundamental principle. The flaws of the working time directive and some of the more extreme ends of Health and Safety regulations may need to be addressed but the basic principles make sense and are broadly accepted across the Union. The depth and breadth of regulation is an issue but the basic concepts behind them are sound. It is not these that need changing. But there are elements that do need to change and some of them are fundamental to the way the institution works:

More democracy     

There is not much democracy in the EU. The commissioner appointment process is an opaque and highly political exercise that often appears more like a retirement project for former state politicians. There is little, if any, accountability which leaves the door wide open for criticism. While there is obviously voting associated with membership of the EU Parliament, the parliament itself appears little more than a debating shop for laws proposed by the unelected. This really needs to change if the EU is to appear as a credible governing body to the citizens of Europe.

‘Ever closer union’

No one seems to understand exactly what this means which is something of a problem given that it is not unreasonable to infer that it will eventually manifest itself as a ‘United States of Europe’. The people of Europe need a clear definition and clarity of purpose. If it is a ‘USE’ the citizens of Europe ought to be given the right to vote on it. After all the natural outcome will be a dissolution of state parliaments or at best a reduction of their purpose to local debating forums.

Unmonitored free movement of labour within the EU

The accession of ten Eastern European states to the EU in 2004 and the associated visa free movement of labour from these nations to the more developed economies has acted as a catalyst for anti-EU establishment thinking. During the referendum the UK political class focused on the benefits to big business and wider economy rather on the concerns of people affected by it. For years politicians of both UK parties exploited low impact forecasts to avoid addressing the funding and investment implications but were happy to blame the EU for its freedom of movement principle.

The EU either needs to amend the principle of freedom of movement or address its implications. It is one of those principles that seems reasonable and sensible in theory but when applied in practice unwittingly creates enormous problems. If a common market is to work then free movement of labour really ought to stay as a principle but its application requires some modification.

If we accept the principle then either some controls are needed or the effects of free movement should be addressed. Either way, labour movement needs to be tracked across Europe through social security or tax payment monitoring. If a control route is adopted we are in a wold of quotas and negotiation, perhaps agreed annually. If an ‘effects’ solution is preferred the EU needs to provide additional investment in the social infrastructure of the areas most affected. Perhaps a ‘per-head’ grant support in the health and other public services in those areas. It may not create many new jobs but it could help alleviate the pressures local authorities face when confronted with thousands of migrants in a short space of time.

An unfettered freedom of movement has become a major issue for some regions and really must be addressed.

EU accession

It is not difficult to make a case that one of the root causes for the Brexit vote was the premature accession of ten Eastern European nations into the EU back in 2004. In its thirst for expansion the EU made too many compromises and allowed in countries whose economic performance were many years away from any true alignment with those in the North of the Continent. These countries should have been allowed develop over decades rather than over a few years.

Current membership may well be fixed but there is no need to exacerbate an already challenging situation by opening the doors to other developing states. The EU needs to define its boundaries and limit its ambitions. Only then can its citizens be reassured that the socially disruptive waves of economic migrants can be limited and controlled. The accession of Turkey, Ukraine, Bosnia, Georgia and others needs to take place over many decades rather than on the accelerated timelines of the past.

Regulation

There is both good and bad regulation emanating from the EU although general opinion is that there is simply too much of it. On the whole it benefits big business by erecting cost barriers for smaller ones. Most businesses in the UK and other European countries are small but have to face the same regulatory challenges as larger ones. Thus from a business perspective the trading benefits of being a member of the EU are predominantly experienced by the far smaller group that actually exports across borders.

The EU needs to create more appeal for smaller businesses by introducing far more flexibility in its regulatory framework. Smaller businesses need to be provided with the chance to grow before facing the regulatory challenges more suited to pan-European and global organisations. Far more exemptions and tolerance is required.

The poorly publicised ‘bail-in’ rules introduced by the EU to help recapitalise the banking system when it fails is not a particularly appealing piece of legislation for EU citizens. The EU ought to re-think how banking system issues are resolved without resorting what would be effectively theft from its citizens. Should people unconnected to the problems of banks be forced to pay for issues entirely outside of their control or influence? This really needs to change. Cyprus should not be the template for resolving all future issues in the European financial system

Institutional controls and bureaucracy

The EU has received an audit report for the past twenty years but has not received a ‘clean’ one. In examining the reasons for the qualification it would appear that between 4% and 5% of the EU’s annual budget has not been spent according to its own rules. This does not necessarily translate into anything criminal but it does suggest that €6bn or €7bn a year has not been subject to proper controls. That is not an insignificant amount of money and equates to the net contribution for some EU member states. This must change. The EU cannot be credible without an unqualified audit report every year.

More control and openness on the subject of EU salaries and expenses would also improve confidence and reduce suspicion.

Complexity breeds bureaucracy and we seem to have this in spades within the EU. You can get a sense of how it all fits together on the EU website:

http://europa.eu/about-eu/institutions-bodies/

The EU cannot become tightly run efficient and effective machine with this level of complexity. Its entire structure requires an overhaul with a lot less ‘design by committee’ involved. This could be the hardest part for the politicians and bureaucrats who have a vested interest in maintaining the status quo but it has become one of the primary drivers of its decision sclerosis.

Trade agreements

There is an increasing perception that the EU has become a vassal of big business and that the Brussels lobbying industry has evolved in the image of Washington. A principle of EU trade agreements ought to be that they benefit the people of Europe and are not there just for the benefit of the large multinationals. The negotiators in Brussels need to ask themselves whether the EU/US trade agreement currently being negotiated will actually work in favour of member states. The implications of current leaks from these negotiations are not encouraging. Starting with the medical principle of ‘primum non nocere’ would not be a bad idea.

The Euro and the European economy

Some action from the EU, especially the Eurozone, in actually addressing the economic dysfunction in Europe. The ECB is rapidly running out of options; it’s time for the EU to do something even if it means splitting the currency area in two.  A partition between the developed and less developed regions of Europe would benefit both and might even start to help the UK change its mind about membership, not just of the EU but even the Euro.

Most of the European economy is the Eurozone and it’s a basket-case. The ECB is printing more money to inject into the EZ system. Having basically run out of sovereign bonds to buy it has now moved into ‘junk’. Poorly rated EU companies are now eligible for the ECB’s buying programme. Mario Draghi is the de-facto saviour of the EZ project and is simply following through on his promise to do ‘whatever it takes’ to save it. He really wants the EU institutions to establish a reform programme but for political reasons they have been reluctant to take the necessary steps.

Meanwhile 15% of Euro debt now has a negative yield, a situation which is set to get worse, and Greece, Spain, Italy and Portugal still see moribund economic activity and high unemployment. Average EU unemployment rates disguise the higher than 50% rates impacting certain age bands, especially the young. The ECB is running out of options and the EU bureaucracy reluctant to contribute towards a resolution is simply accelerating the prospect of a major economic challenge. Nothing is inevitable but the failure of one or more of these states, or the banking systems within them, looks like a highly probable outcome.

Another financial crisis in Europe is virtually a certainty unless the EU starts a process of reforming the economies of many of its member states. The ECB cannot act on its own; the EU has a political and economic part to play in this process.

British and other Northern European taxpayers need to feel that they will not be potential milch cows when the next financial crisis appears. It would be far better to reduce the potential for such a crisis by pursuing a reform agenda today rather than waiting for the worst to happen and then financially punishing its victims, EU citizens.

In summary….

I’m sure there is much I have missed but in my view this is the sort of reform agenda that might make the EU more appealing to both UK and other European citizens. There is much criticism at the moment of the people who voted to exit but the result was really a symptom of the problems caused and ignored by both Westminster and Brussels. I do think that most people would like to believe in the European Union idea but they need to feel that it works in their interests and not simply for the benefit of big business and the European political class. To achieve that it needs to reform, and quickly, or in a few years it might not even exist.

Get back to basics and give those British citizens who voted ‘Leave’ something to help them change their minds.

“The people have spoken, the bastards.”

(Dick Tuck, aspirant U.S. congressman and political prankster)

I’ve been looking for an opportunity to use that quote for years and now looks like as good a time as any. Yesterday’s vote caught me by surprise as it did many others. My expectation was that the margin would have been the same but in favour of ‘Remain’ campaign, especially after the supercharged fear campaign that has been waged over the last few weeks. But I guess that’s now history: we have to look forward and make the new paradigm work for us.

The mainstream media appeared to be predominantly in favour of staying in the EU with one or two notable exceptions. Most of the journalists and TV commentaries seemed to miss the mood of the people who actually voted ‘Out’ largely due to who they talk to and where they live. When I walk through the big cities in the UK I see a different economic condition than that in the rest of country. They have the feeling of vibrancy and wealth, largely untouched by the ravages of the 2008 banking crisis. It is pretty obvious that the journalists marching the streets of our capital city are not confronted by the economic realities of decline and indeed don’t really care about what is happening 50, 100 or 200 miles away. There is an apparent attitude of what’s good for London must be good for Britain. London has prospered through EU membership so a vote to stay-in must be good for the UK.

Well try that argument in some of the towns in the North West, Yorkshire and the North East. The big cities of Manchester, Leeds, Liverpool and Newcastle are fairly prosperous but travel a few miles into towns like Bolton, Blackburn and Burnley and the economic pain is evident. Valliant efforts continue to be made by local businesses to trade through the difficulties of the last few years but the reality is that whatever the average economic indices state these places are effectively in a form of recession. The sense of growth and renewal has been lost, replaced by struggle and more than a small amount of bitterness at the situation.

The EU has probably attracted more than its fair share of blame for this. When I analyse the reasons for the decline of these former giants of the Industrial Revolution I see the structural trends of globalisation and digital probably playing a greater part than the impacts of EU policies but these are often remote concepts to the average worker. Over the past couple of decades jobs have been outsourced to the lower cost manufacturing nations of the East. Add the impact of Amazon and the recent and rapid emergence of on-line and these towns are left with too many empty commercial premises and unused and derelict former manufacturing plants. The banks of course have not helped either. Loans are not as easily obtained as they once were with banks now far more cautious about risk and capital ratios than they were prior to 2008.

There is also the small matter of people not having the money they used to have. I have an interest in a small property company and we recently made a decision to sell about a dozen residential premises. We have already sold several and know exactly what the current market is prepared to pay for a terraced house in Lancashire. It certainly is not the London price paradigm that those national journalists love to write about. The sort of prices paid are at the levels seen nearly fifteen years ago. In other words at recessionary levels. Locals can’t afford higher prices and the prospective landlords from outside the area know that yields will continue to be a challenge.

So what exactly has this got to do with the EU?

My sense is that the average worker, or beneficiary of welfare, in Blackburn, Bolton or Burnley appears somewhat more tolerant of a multi-national’s decision to outsource its manufacturing plant than they are of the political class. Amazon is also a convenient consumer resource rather than a direct threat to local retail employment. These structural threats seem less tangible and more remote.

A worker displaced by redundancy has some choices to make. He or she can look for work elsewhere, perhaps retrain, become self-employed, or depending of circumstances, has to resort to seeking benefits. Herewith is the problem. Not only have these former workers have to seek work in a structurally declining circumstances but they now have to compete for work with hundreds of thousands of EU migrants. Now this is not a seemingly remote concept like globalisation or digitisation but is a visible impact seen on a daily basis. Eastern European workers are competing directly for local work with plumbers, builders, electricians and other skilled and semi-skilled indigenous labour.

It’s not a race issue; it’s a job and numbers issue. For several decades now the former immigrants from Asia have been absorbed into the local social and economic infrastructure. There is still some pushback from certain elements but on the whole the communities have settled in to working together. Many of these former immigrants are now second and third generation, own businesses and make tangible contributions to the local economies. Others are employed by local businesses and are as threatened by a rapid influx of migrant workers as those of us who are fifth or sixth generation immigrants. The more recent immigrants also don’t see why a Pole can simply walk into the UK with little or no entry requirements while an Indian or Pakistani relative faces the full weight of a Border Control checking process.

I know a lot more about the UK government’s migrant ‘asylum seeker’ dispersal policy than I am allowed to write about. However, the simple fact is the political force of councils in the London and the South East ten to fifteen years ago set the template for a dispersal policy which still sustains today. The pressure on local social and health infrastructure in London was recognised as a major problem so the then Labour government’s wheeze was to resettle these prospective UK citizens elsewhere in the UK. It solved the immediate political issue but obviously simply shifted the problem elsewhere. Very little financial support was provided to the recipient councils and I’m not aware of any planning or financial investment made in local infrastructure. Now this may have been primarily a UK government decision but the effect nonetheless was to inject thousands of people into Northern towns just at a time when these economies were starting to feel the effects of those structural trends referred to earlier.

Our local NHS has to provide a translation service for over sixty languages. The EU is hardly responsible for this but again its unrestricted migration policies have not helped. It is simply an illustration of the pressures faced by local councils and other public service organisations. On 10 June 2003 the Home Office published a report commissioned by the Immigration and Nationality Directorate (IND). It contained forecasts of net migration from the ten new East European members to the present member countries of the EU, particularly the UK and Germany. Estimates for the UK ranged from 5,000 to 13,000 net immigrants per year from the date of accession in May 2004. This estimate range was ruthlessly adopted by the government of the time and was still in use during in the Coalition era. It was politically expedient to use these numbers because it translated into little need for any meaningful incremental investment in social infrastructure attributable to EU expansion. As a point of fact between 2011 and the end of 2015 net EU migration into the UK exceeded 1m people and this has naturally manifested itself in enormous pressures on NHS and local public services. There has simply been no investment or planning for this injection of people and many of the economically challenged areas of the country have borne the brunt. Locals naturally feel resentful. Not only have their jobs and living standards been impacted but they now compete with new EU migrants for school places and hospital appointments.

The Labour party suggest that the answer is more investment in local public services, conveniently forgetting the fact that it was their policy to adopt unrealistically small planning guideline for far too many years. Meanwhile we continue to have ‘Austerity’ as the UK faces the realities of a £1.6 trillion national debt, near £100bn deficits and interest payments of £50bn a year – the net £8.5/£10bn EU payment is barely a fifth of that. The point here of course is that even if a more realistic forecast of migration have been predicted, could the UK have afforded that investment?

There are juniors in commercial and investment banks in London who may well feel threatened by the EU decision. From a London perspective it will no doubt be hard to understand why the rest of the country has voted for an exit. Alas, an unemployed worker in Lancashire, Yorkshire or South Wales for that matter will probably not have much sympathy. If you are unemployed and cannot find any local work are you likely to be less unemployed by voting out? There is also the reputation aspect of the London banking community. I don’t meet many people in the North who think they are a great bunch of people supporting regional economies. There is similar appreciation of the ‘expert’ economic and corporate opinion emanating from the corporate towers in the South East. When you make a decision to outsource a plant to Asia you can’t really threaten someone whose job has already been offshored.

So the issues become conflated and the EU takes the heat. It has not been the primary cause of the economic challenges of smaller Northern manufacturing towns but its open door migration policy has effectively been the straw that broke the camel’s back. The ordinary worker has not noticed the blue EU plaques that adorn some of the buildings littered around some of our towns and cities but certainly notices the labour competition and absolutely resents the falling living standards that it represents. By not recognising that it’s this more than anything else that has catalysed June 23^rd’s response, the EU and the London political elite has effectively been the architect of the genesis of what could be its demise. The response to calls for independence referenda in the Netherlands, Denmark and France in the last 24 hours will interesting to watch.

I’ll finish on a more optimistic note. At the moment uncertainty and apprehension has dominated the media, politics and the markets, but it could mark the start of a new EU. It will take a humungous effort from a predominantly sclerotic political infrastructure to change but the Brexit could just be the catalyst that it needs. A different EU, a democratic and flexible EU, and one which adopts far more sensible policies on economic migration may well appeal to a new generation of UK voters in five or ten years. I don’t dismiss the possibility of re-entry into the EU whatever the nonsense uttered by the Brussels elite. The UK represented about 20% of economic activity in the EU and has been the third largest net contributor. With this in mind you really have to ask yourself whether it is in the interests of the EU to favour a net dependent nation or a net contributor in the future. EU re-entry may be a far distant prospect today but with a reformed EU and only a 4% margin in favour of an exit today, it’s is not an impossibility. In the meantime it is now down to the EU to save itself through something more than a few political soundbites.

The jury may currently be out on EU survival but the UK will have its own challenges to face. Scotland and Wales may have some devolved political powers and economic capabilities but the ‘Northern Powerhouse’ concept is really little more than a concept at the moment. As a Northerner I see the EU as a bit of a sideshow in an ongoing economic battle. Perhaps an exit from the EU can be an opportunity for a little more attention from Westminster to its own regions rather than Brussels. I was once budget manager for the £1.3bn ‘North West Fundamental Plan’, the capital infrastructure plan that effectively created the UK’s alternative telecoms network in the North West. It alone created hundreds if not thousands of jobs for people in the region, many of which are still around today. We need something like this today only bigger, much bigger and focused on more than one sector. The current reset of the European political system could not only help change the EU but could perhaps help shape economic policy in the North.

We can but hope.

A recent poll by a Dutch newspaper suggested that 53% of Dutch voters would like to have an ‘in/out’ referendum similar to ours. On reading this it struck me that there has been too much emphasis on the impacts to the UK leaving the EU and not enough on the impacts to the other party. There will clearly be implications for both the EU as an institution and for the wider European economy.

All the economic arguments against Britain leaving the EU also apply to EU member countries access to the UK market, and perhaps more so given that the EU exports more to the UK than the UK exports to the EU. There is a counter-argument in that in the event of an exit vote there could be a flock of organisations leaving the UK to manufacture and provide services within the trading block itself. In other words the losses that Europe would face would be offset by the gains from organisations leaving the UK and moving to other locations on the Continent. It is impossible to make a forecast on the degree to which this position can be substantiated as all we seem to have are reports from various groups of economists and forecasters who, as a profession, are notorious for getting it wrong. It may well be that there will be some who could eventually make a decision to de-camp, but it is equally likely will be a very long period of ‘consideration’ as the politics and economics of an exit start to settle down. The negotiations on cross border tariffs will be more than interesting to watch given the current EU import/export situation and there is little doubt that there will be some furious lobbying in Brussels and Westminster.

Should there be a Brexit vote there will undoubtedly be volatility in the foreign exchange, debt and equity markets as traders and investors realign in accordance with where they think their interests will lie. Attention however could soon switch to Europe, possibly within days of the vote as the European political and economic worlds collide into uncertainty.

The Europe question really falls into two broad but linked areas: its economics and its politics.

I have to confess to being surprised by the ability of the ECB to hold the Eurozone area together. Back in 2011 I was convinced that within a couple of years the Greek debt problem would have torn the EZ apart. My mistake was to underestimate the political willpower in Brussels and Frankfurt to ‘do whatever it takes’ to maintain the integrity of the currency area. With an alphabet soup of ECB initiatives and some prodigious write-offs a bail-out deal was struck with Greek lenders and the debt substantially moved to the European taxpayer. All those French and German banks were helped out of their predicament and lived to lend another day. Greece then effectively voted to say in the EU via the rather convoluted political means of a referendum on whether to accept a ‘plan of agreement’ negotiated with the Troika. The deal done the Greeks now have a debt of over €353bn, a GDP of €168bn and nearly forty years of ‘austerity’ ahead of them, mostly driven by its onerous repayment schedule. What could possibly go wrong?

Meanwhile, over in Spain unemployment has edged up to 21% at the end of Q1 2016; not quite as high as the 24.1% in Greece but getting there. Italy sits at 11.7% and Portugal 12.4%. Overall the Euro are currently stands at 10.2%. Growth in the Euro area as a whole was 0.6% but this masked a negative performance in Greece of -0.5%, a barely measurable 0.3% in Italy and 0.2% in Portugal, and an improved outturn of 0.8% in Spain. Germany, Europe’s manufacturing powerhouse, managed 0.7% GDP on the back of a very respectable 4.2% unemployment metric. Two other useful indicators are the inflation rate and interest rates. For the EZ as a whole these were -0.1% and 0%. Blighty is not quite the land of economic wonders that some parts of the political ecosystem would have us believe but the United Kingdom did manage to deliver 0.4% GDP and recorded unemployment at 0.5%.

The Brexit referendum has naturally focused on the impacts to the British economy of an exit but what about the impacts on Europe and the EZ in particular? If we take April 2016 as a reference point, the UK’s exports to the EU were £12.0bn and EU imports were £19.1bn. Thus, as the HMRC states in its April report: ‘In EU trade the UK was a net importer this month, with imports exceeding exports by £7.1 billion.’ These figures obviously fluctuate but overall we import more from the EU than we export to it. In other words the EU would be taking a mighty big risk if it sought to exclude the UK from Europe via the imposition of tariffs. Let’s be more specific. The EZ is not in a healthy state. GDP is moribund and is arguably only above zero because of the largesse of the ECB and its current €80bn/month QE programme.

Which brings me over to the politics. The EU has an enormous challenge at the moment to assuage the feelings of millions of EU citizens on the state of their respective economies. There seems to be an increasing unwillingness from the citizens of Northern member states to continue funding Southern member nations. But it has more recently started to morph into the immigration minefield. Freedom of movement for EU citizens may be just about acceptable for Northern EZ voters but mass migration from outside the EU is entirely something else. Thus we have a conflation of issues all over the EU and the finger of blame is pointing at the institution itself. Southern states don’t want the austerity that the EU imposes and Northern states don’t want to continue to face the financial and social implications of a financially dysfunctional EZ area.

The results of an Ipsos Mori poll carried out earlier this year carried out in nine EU countries, suggested that 45% of those polled wanted an in/out vote like the British. This was led by 58% of Italians and 55% of the French contingent. In the same poll 33% of the 6,000 surveyed indicated they would actually vote to leave. This still suggests a majority still in favour of keeping the EU intact but it’s hardly an overwhelming endorsement.

There is some ‘domino theory’ type thinking associated with the Brexit vote. Britain leaving the EU could mark the start of a more member states leaving and this of course raises the question of whether the institution could remain intact. Since 2010 the EU/ECB has been able to ‘whatever it takes’, or perhaps it should be ‘whatever it wants’ to hold the EZ together. But the inconvenient intervention of voter dissatisfaction has now ascended the political agenda. In the absence of voters, the EU/ECB has had free rein to use diplomatic and financial levers, but in the immediate future they may well have to face challenge of millions of unhappy citizens and one or more in/out referendums. The odds may well be stacked against them this time.

The economics and politics of the EU and the EZ are inextricably linked. In the absence of any EU activity the ECB has used its full capability to try and kick-start the economy back into life. It hasn’t really worked. At best QE has prevented some disinflation and arguably deflation, but there have been costs to this. The European debt markets have entered the Alice in Wonderland world of negative interest rates with German bunds the latest casualty. In essence the ECB has bought up too much of the EU sovereign debt with the residual element now fought over by institutions desperate to park their short term money somewhere. The Italian banking system and more than a few of the French and German banks are undercapitalised, whatever the ‘stress tests’ suggest. One serious shock and the whole European banking system spins into a turmoil, a turmoil that raises the risk of a 2008 style panic. The whole European system looks less than stable.

So where does that leave the EU on a majority Brexit vote?

With a conundrum and a lot of economic and political risk. The conundrum is whether to play hard ball with Britain and risk the integrity of exports to the UK. In the face of a wave of political discontent would the EU want to undermine what is already a moribund economic performance? The political risk is of course all about those other anti-establishment political initiatives and their own drive for a membership plebiscite. However the EU might spin a UK exit, it will in effect establish a precedent, and a very dangerous one.

Betting against EU survival has been a losing position over the past few years but that was before the not-so-timorous Brits decided they wanted to make a decision. The rest of the EU are now watching and I have no doubt will be as glued to the TV set as the British in the early hours of June 24^th. If the British vote to stay my belief is that it will settle many voters in the rest of the EU; the cries for refere

ndums will fade. On the other hand if the Brexits are the majority my sense is that a wave of ‘we want one too’ will sweep across much of Europe. After a week or two of market volatility negatively affecting UK markets and the GBP, attention will soon turn to Europe, its markets and economy. While we in the UK may well have to deal

with another Scottish question the real action will be across Europe as the political implications and economic realities are evaluated. There appears to be little sense of panic or urgency in Europe at the moment but that is likely to change within hours of an exit vote. The first real cracks in the sclerotic EU infrastructure could start to appear before the year is out.

We shall see.

A few references:

http://www.nationaldebtclocks.org/

http://www.tradingeconomics.com/

https://www.uktradeinfo.com/Statistics/OverseasTradeStatistics/Pages/EU_and_Non-EU_Data.aspx

https://www.ipsos-mori.com/researchpublications/researcharchive/3731/Half-of-people-in-nine-European-countries-believe-UK-will-vote-to-leave-the-EU.aspx

https://www.noties.nl/v/get.php?a=peil.nl&s=weekpoll&f=2016-02-21.pdf