Trump and Brexit Strengthening EU

The international  media is constantly speculating about a possible impending break-up of the European Union (EU), due to the momentum of the Brexit and Trump populist victories. The opposite is true: Trump and Brexit are actually strengthening the EU.

Elections.
The media point to three ‘crucial’ elections in 2017 – that of the Netherlands, France and Germany – that may end up derailing the EU, because anti-EU parties are poised to gain power. Not really. In both the Netherlands and Germany, anti-EU parties could increase the number of their parliament seats, but that is all. In France,  Le Pen of the Front National (FN) may get the biggest vote in the first round of the French presidential election, where five main parties (and some minor ones) have candidates. But in the second round, with only the two top candidates left to fight it out,   Le Pen will lose, since the supporters of all the other parties will vote for whoever stands against her. This has happened once before, when Le Pen’s father (Jean Marie Le Pen) also won in the first round of the 2002 presidential elections, but got trounced in the second round.
There is very little chance that any country will opt to leave the EU, other than the UK.

Brexit
The people in EU countries are well aware of the economic and political mess Brexit is bringing to the UK. Even before the UK triggers Article 50 of the Lisbon Treaty (which will formally start the process of leaving the EU); the negative economic effects of Brexit have started to take effect: the British Pound devaluated by more than 10%, foreign companies are preparing to move their Europe headquarter offices out of London,  inflation is rising, etc. To add to the UK’s woes, Scotland will most likely leave it and join the EU.  Far from being an inspiration for other countries to also leave the EU, Brexit is showing everyone the horrors of leaving the EU. Recent opinion polls in the EU show a rise of pro-EU sentiment because of Brexit.

Brexit is the logical end result of years of UK government policies.  Various British Prime Ministers, with David Cameron as the last, had regularly threatened to take the UK out of the EU if its demands were not met. Just before the Brexit vote, the EU gave in to most of the UK’s demands for a special deal, including with regards to EU citizens working in the UK. Before that, the UK had succeeded in opting out of the Euro single currency and the Schengen Agreement (for free travel within most of the EU, plus Norway and Switzerland), and other EU-wide arrangements. The UK had long had one foot outside the EU;  Brexit is the natural continuation of this trend.
The UK was alone in this unique position; other EU countries, with both feet in EU, are not likely to follow the UK’s lead.

Trump
Ironically, the presidency of Donald Trump is having the effect of strengthening the EU. Trump’s open disdain for the EU, and his wish that it breaks apart, has mobilized latent anti-American feelings among many EU citizens which have been channeled into pro-EU sentiments.

Trump is widely perceived as being supportive of Europe’s far-right parties. These parties, e.g. France’s FN, have thrived on their anti-immigrant platform. Now, the Trump victory has pushed them to take a more pronounced anti-EU position. As a result, these parties have backed themselves into a corner. Being anti-EU is effectively being pro-Trump; and since Trump is unpopular in Europe, the far right parties are losing support.

Another thing about the Trump victory in the US is that it shows how wrong elections could go, and that it does matter that people vote. When before, many people (especially young people) would not vote, because “the result will be the same anyway”; now they know how bad a bad result could be. Not voting could result in a Trump or Brexit-like victory. Because of Trump and Brexit, younger voters are now more likely to vote in future elections; and most of them tend to be pro-EU.

While the EU faces all kinds of problems today e.g. the Greek debt crisis or the floodof migrants from Africa and elsewhere, these are far from existential. The EU will overcome them, just as it has done for the last 58 years.

 

Israel will Attack Iran Soon

The trend is unstoppable. Israel will attack Iran’s nuclear facilities in a few months. PM Netanyahu and President Obama have finished their ‘talks’ about the Iran issue; but their real positions regarding Iran have not changed.

Hysteria in Israel
Domestically, the Israeli press is whipping up the hype against Iran as an ‘existential threat’ against Israel.  A sober person could say that even if Iran did have a nuclear weapon, it would not be a threat to Israel. An Iranian nuclear weapon launched against Israel, killing thousands, will not only kill lots of Palestinians, it will make Iran an international pariah for a very long time. Despite this, most Israelis believe the threat from Iran is real.

Israeli Foreign Minister Lieberman recently brushed aside Western (especially US) misgivings about their plan to attack Iran. He is probably right in thinking that, for show, the US must publicly disapprove of ‘the plan’, but that it will support Israel in the event of war.

A war with Iran will probably have a limited effect on Israel itself. They do not share a border. Iran’s proxy Hezbollah will be too preoccupied with Syria to attack Israel. For Israelis, war would mean that the US will do most of the fighting, and absorb most of the damage.

Iran Leaders Want War
Iran is probably NOT developing a nuclear bomb. But the threat of a US attack is keeping it from conclusively closing that option. It knows that the US will attack it if it doesn’t have a nuclear bomb. The lesson of Iraq and North Korea is clear: Iraq didn’t have a bomb, it was attacked; North Korea has a bomb, it was not attacked.

So, Iran is now developing a capacity that will allow it to shift to producing a bomb at short notice. Since its access to bomb technology is limited, it may decide to make a bomb anyway by using lower technology and more uranium.

Iran is suffering economically. Soon, international sanctions will bite and cause massive protests against the government. The regime sees war as a possible uniting factor for its people, especially if the war is ‘imposed’ on Iran.

Ironically, economic sanctions make it more attractive militarily to have a war soon. Iran’s military is still quite strong; later, economic problems will sap its strength. Iran reckons that the US will enter the war on Israel’s side, but does not have the resources, nor the political will, to launch an all-out attack. The Iranian government thinks that a war held soon will have a minimal cost.

Iran will continue provoking Israel and the international community. It will make all kinds of destabilizing announcements, war exercises, etc. It will continue hardening potential targets of attack. It will hit Israel targets – mostly outside Israel.

Iran is preparing for war.

Obama Needs a War
The US has informed the Israelis that an attack on Iran now would be ‘ill advised’. This is diplomatic-speak which translates as: “Don’t attack now. Perhaps in the summer.” At the same time, the US says that sanctions need time to work. They are right – sanctions WILL work to stop the nuclear program, but much too slowly for the US.

The US has a big economic problem. It needs the world to concentrate on something other than the problems of the US economy. In 2011, the US hyped up the Euro crisis, exploiting it to the full, even stampeding Americans away from Euro holdings. But the Euro crisis has been solved in 2012. If the US did nothing, the dollar is poised to devalue, and interest rates will soon go up.

So now, the US plans to focus the world on Iran. The US knows that Iran will not do anything to block the Strait of Hormuz – Iran will be harming its own interests if it did so. In a sense, a war with Iran will be a limited one, with some attacks on nuclear installations and the Iranian military. So, the US really thinks that a war with Iran is one which it can afford to wage.

If a war with Iran is timed well, it may have the added advantage of increasing Obama’s chances of reelection.But only is the war is ‘forced’ on the US; a US first-strike will not be received favorably in the US.

Miscalculation
Another reason why a war is inevitable is that the party most likely to start it (Israel) stands to lose the least from this war. The other two parties (Iran and the US) will be the ones really at war. The ‘benefits’ of a war is disproportionately in favor of Israel.

Both the Iranian and US governments see a war as advantageous; but only if they are ‘forced’ into it. They will not do anything to prevent Israel from starting one.

At the same time, both Iran and the US may be underestimating the cost of a war. The Iranians want to unite their country, and maybe even ease sanctions. They would think that a war now will probably lessen chances of a more terrible and damaging war later. They may be wrong. Domestic opposition may still grow, even with a war. Economic sanctions will still bite, pushing people to overthrow the government. Or, the US may extend help to armed opponents of the regime.

The US may also have miscalculated. Even if the Strait of Hormuz doesn’t get blocked, a war will increase world oil prices, maybe even to $200/barrel. High oil prices will severely hurt the US, maybe even triggering a very deep recession.

The Day the Markets Crashed

(To fully understand this story, refer to 2012:The Other Prediction , where I explained why the US dollar would crash on 21 December 2012)

It was the morning of Friday, 21 December 2012, and the bell at the New York Stock Exchange was about to ring. Gloom and a sense of foreboding hung over the trading floor. Outside, there were hundreds of ‘Occupy Wall Street’ protesters rallying against the abuses of the 1%.

It was not only ‘triple witching’ day (the day when all kinds of option contracts expire), but also only three full days before the trading year ends; and many traders were still holding more US stocks than they wanted. The Dow Jones stocks that they still held no longer seem to be safe anymore, and they had to have ‘safe’ stocks in their portfolio by year-end. Thus, many traders were set to sell off the rest of their Dow Jones stock holdings that day.

2012 had been a disastrous year. Till February, the Dow Jones was above 12000 points, but by March the tide had turned and prices drifted downward the rest of the year. Nothing could cheer people enough to take prices higher. The reelection of Obama and the Democratic sweep of Congress had not helped. On the contrary, Wall Street was depressed after the elections. There are now bills pending in Congress that will force an increase of taxes on Chinese goods come the New Year. And this will surely cause a Chinese reaction and a trade war at the worst possible time. And to make things worse, oil prices had drifted upwards all year – Brent was now at $150/barrel (and WTI at $130).

Today, the Dow Jones was just above 10,000 points. For the first time in history, foreign traders have dumped their US stocks in their year-end ‘window dressing’ operations. Apparently, they no longer considered Dow Jones stocks as ‘good’ stocks to hold.

After the Bell
Right after the opening bell, share prices plummeted. Within the first hour, stock trading had to stop for 15 minutes because the Dow fell more than 10% below the average of the previous quarter (the trading curb, at approximately a 1000 points drop), triggering the automatic stop.  After trading resumed, the Dow reached 9000 points, and a whole series of stop-loss orders to sell stocks hit the exchange.  In contrast to previous crashes, investors were no longer rushing into Treasuries. They were in fact dumping US Treasuries almost as fast as they were dumping stocks. This meant that the effective interest rates on US debt rose from 3% to 5% in a couple of hours.

The US dollar suffered accordingly. It was at $1.60: 1 Euro by 1 pm. At 2 pm, there was concerted action by a number of Central Banks (most of them were limited in their response because their home markets were already closed by this time), which buoyed the dollar to $1.55: 1 Euro. It was the middle of the night in Asia, and the Fed was mainly alone in intervening to save the dollar.

The market dipped even lower by the close of trading, as a whole swath of put options were exercised (which involved the sale of a lot of stocks and currency); the Dow closed at ‘only’ 8500 points (it had gone below 8000 points during the day), and with the exchange rate at $1.60: 1 Euro. It was terrible, but everyone was sure that concerted Central Bank action scheduled for Monday will calm the markets.

It was not to be. Middle Eastern markets were opened on the 22nd and 23rd (Saturday and Sunday), and stocks and the US dollar continued their slide, reaching $1.70:1 Euro at the end of Sunday trading. In the morning of Monday, the Bank of Japan  intervened heavily to support the dollar; but by midday, it stopped. At the same time, the Peoples Bank of China started dumping dollars. This was followed by Russia, and then a host of Third World countries.

The ECB, the Bank of England, the US Fed and the Central Banks of Canada and Switzerland furiously bought dollars all day. Together they bought more than a trillion dollars on that day alone. It did not help. Middle Eastern, other Third World sovereign funds and many Third World Central Banks dumped their US$ bonds and stocks all day. The Euro remained at $1.70:1 Euro all day.

It was a gloomy Christmas in most US households, who saw their 401k balances evaporating, and who realized that the prices of goods will go up a lot in January.  On the 26th, ordinary Americans dumped their holdings in Dow Jones stocks, and bought Japanese and European mutual funds. Oil (WTI crude) hit $200/barrel, and gasoline rose to $6/gallon.  The US government announced that it was monitoring to see that no gas station will sell gasoline above that level. The government warned against price gouging by retailers, and issued an order that prices were to remain at the present levels for the meantime, unless explicit permission was given to raise an item. But this set off a stampede of people buying what they can while the prices were relatively cheap. By the end of the year, grocery stores reported that their stocks of food had been all sold out; panicky people were stocking up.

By the first trading days of the new year, the US dollar had gone to $1.90: 1 Euro, and it was steadily deteriorating. Interest rates on US treasuries hit 7%, and kept climbing. By 15 January, the US government formally called on the IMF for help. The US government could no longer finance its debt, with the interest rate on Treasuries at 9% and climbing. The IMF put together a rescue package of about 1 trillion SDRs. But this would only be given if the US reduces its deficit from $1.3 trillion yearly to only $100 billion in 2012. Obama then forwarded a budget proposal which specified: a 50% cut of defense spending, a tax on luxury houses, cars and yachts, a national Value Added Tax of 15% (and abolition of state sales taxes), etc.

The IMF declared that it was making the SDR the new international reserve currency, and that it would exchange dollars held by Central Banks at $2: 1 SDR. This provided a floor for the value of the US dollar, and stabilized the currency markets. For cash, people used the Euro or the Yen.  After the IMF action, the US dollar was removed as the reference currency for oil (which changed from dollars/barrel to Euros/hectoliter), gold (to Euros/gram) and other commodities.

(this is a depressing story, but it will actually end up well. In another blog, Two Years After the Fall    I show what would happen two years after the crash.)

Euro Zone Austerity is Correct

US and UK economists are quite vehement in opposing the Eurozone’s stress on austerity. They say that this would jeopardize economic growth, which is important for increasing employment and maintaining welfare. But they are just expressing conclusions which stem from the dominant Keynesian view of economics. We will see that this view needs to be amended or replaced.

Addicted to Growth
American economists are addicted to growth. Keynesian economics teaches that governments should use fiscal and monetary policy to maintain growth at all times. Now, at its extreme, the US Fed is the one mainly holding up the US economy by using monetary policy alone. This obsession with growth has led to the Fed and the Bank of England (BoE) to print money (aka ‘quantitative easing’) in order to stimulate growth. People in these two countries have been led to believe that this is a good thing. That the economy will be alright, if only people continued shopping.

Non-economists may find such a policy of ‘printing money and encouraging shopping’ problematic; but then they would be faced by Keynesian economists assuring them that it is right. What the Keynesians fail to realize is that the world  is in the middle of an international tug-of-war for resources. Printing money and shopping are, in effect, asserting the US’ position as ‘consumer of last resort’ at a time when other countries would rather use resources elsewhere. And that is the weakness of the policy: third world booming economies are  increasingly reluctant to prop up the US economy if this means that they would be deprived of resources they need for their own development. The US economy, instead of benefiting the world with its consumption, is more becoming an impediment to growth of other countries.

In this light, the Euro countries’ call for governments to live within their means is a good policy. This means, concretely, that governments should no longer stimulate their economies through excessive government spending (fiscal policy). And combined with the EU’s thrust to lessen its carbon dioxide emissions; it means that Europe’s resource footprint will grow slowly, if at all. It will also mean that Europe will be producing goods and services in an increasingly efficient and competitive manner.

Building Efficient Economies
Government austerity forces economies to be more efficient, and to utilize all their resources properly. Austerity could mean cutting hidden subsidies on fossil fuel, taxes on waste, more efficient production or promoting recycling. While a natural problem with austerity programs is that they may also reduce vital services like the social safety net or public transportation, this will be corrected in the course of the political process as other parties would restore these.

Efficiency includes the concept of a good social safety net, because when workers who are displaced by rapid market changes are well taken cared of, they would more readily accept those changes. Societies should avoid, most of all, the destruction of human capital in the form of forced idleness and de-skilling.

There are also specific policies which skew a particular country’s utilization of resources. Among these are: differences in retirement age (e.g. Greece used to allow retirement at 52 years); low corporate tax (Ireland); or, tax-exemption for mortgage interest payments (Netherlands). Different rules for the Value Added Tax, for social security contributions and benefits; rules for buying and building houses; and, specific taxes on oil, ‘sin’ products etc distort economic and fiscal balances between countries.

Bank of Last Resort?
The idea that the ECB should step in and buy hoards of Italian bonds is wrong. The problem of Italy is that the ‘market’ thinks that its bonds are risky, and thus asks for a higher interest rates for them. While this perception is particularly problematic now, but if the problem does not get out of hand in the medium term, it will eventually solve itself. Investors would eventually settle on buying Italian bonds that have only slightly higher interest rates than German Bunds.

Higher interest rates are important for keeping governments more disciplined when it comes to making their budgets. Making interest rates uniform now (by instituting ‘Eurobonds’ for example) would effectively reward those countries who are misbehaving.

Time is on the side of the EU and the Euro. The Eurozone has a trade and payments surplus. This is quite different from the US, which has budget, trade and payments deficits.  Eventually bond buyers will need to park their money somewhere, and where better than the EFSF and the ESM (which are less than 1 trillion Euros in total, and are as solid as German Bunds)? It will eventually turn out not to be a good idea to park their billions of (petro)dollars in US Treasuries – whose supply increases by at least $1.6 trillion/year.

No Theory Yet
This is not to say that the Eurozone leaders are following a coherent plan, based on a well thought-out theory. Euro leaders are mostly improvising on the run, after being pushed by market conditions to take certain steps; while at the same time also hindered by those same forces from solving the problems quickly.

Economists heckle the policy of austerity because of the Keynesian prediction of an economic downturn if governments cut spending. But austerity is a move that is forced on countries by the market – the market is in effect demanding lower budget deficits, and will punish any government that now does deficit spending. But saying that governments are forced to undertake austerity does not mean that austerity is bad either. Governments are now implementing austerity , which it never would have done without market pressures.

The EU’s decreasing carbon footprint is an independent development, but one which fits neatly into the new EU economic ‘model’. So are the social welfare systems in EU countries, which are only marginally affected by the crisis. Now, the EU is confronted with the need for austerity, together with lessening its carbon footprint and maintaining its social welfare systems.

The present high pressure atmosphere within the Euro zone is clearing out many economic cobwebs. Technocratic governments in Italy and Greece will now work within the parameters, and try to both economize and grow. This means among others: that corruption be lessened, tax compliance improved, and protected professions opened to competition.

A new economic theory will eventually emerge that will affirm the correctness of austerity and reducing the resource footprint under conditions of resource scarcity.

UK Leaving EU. Really?

On 24 October, the British parliament voted on a resolution calling for a referendum on Britain’s membership in the EU. It lost 111-483.  Nevertheless, it was an embarrassing  blow on PM Cameron’s efforts to participate in the Euro discussions (French president Sarkozy refused his entry to a Eurogroup meeting, he told Cameron not to intervene). As a result of the eurosceptic rebellion, the already low reputation of the UK in the EU went down a couple of notches.

It seems that almost half of the people in Britain favor leaving the EU. For them, the EU is the source of all kinds of regulations that only make their lives more miserable. And with the present crisis in the Eurozone, it seems that the British are just waiting for the rest of the EU to implode. So, better get out now, while they still can save Britain from economic collapse, and from a loss of its identity. Or so they think.

But can the UK really leave the EU? Of course it can. It can opt to leave the EU and just be like Norway, Switzerland and Iceland. These countries choose the areas where they would cooperate with the EU. But, if the question is whether the UK will thrive outside the EU? Then the answer will have to be: most certainly not.

Single Market
For the UK, leaving the EU will mean going out of the Single European Market. The consequences of this will not be immediate, since the UK’s present laws are still in harmony with those of the EU; trade will go on as usual for the time being.

But the EU is constantly revising the rules that govern the internal market. And when they change some rules, and the UK doesn’t, that specific area of trade will be affected. So, the UK will most likely keep its own economic rules in harmony with those of the EU, just to keep trade going as usual. But then, in contrast with the present, the UK will increasingly be following rules which it had not helped to formulate.

Many companies would have to reconsider decisions on having their offices and factories in the UK. After all, they had based these in the UK on the basis of the UK as part of the EU. Car manufacturers from Asia, the US, and even other parts of Europe had located their plants in the UK to benefit from its cheap labor AND its access to the EU market. Many of them will surely phase-out their factories and offices when the UK leaves the EU.

London’s role as a financial center will not necessarily suffer with an EU withdrawal. But, as in trade, the UK government will have to follow all EU regulations. Take for example the proposed Financial Transaction Tax now being discussed in the EU. If it is implemented, the UK will have to impose a similar tax, or it will create a barrier to the free flow of finances.

However, no matter how much the UK tries to harmonize its laws with that of the EU, it will still remain a foreign country to the EU. Government procurement, for example, is often open to all companies within the EU. The really big contracts may be open to bidders from the whole world; but the bulk of the contracts are restricted to EU companies. This means that EU companies will have a lot more contracts than UK companies.

UK, the ‘Great Exception’
If the UK leaves the EU, the EU will not only go on with business-as-usual; it will simplify and accelerate its process of integration. The UK has always been the EU’s great exception, opting out of many important agreements and forcing the others to find creative detours. Thus, the Schengen agreement on free travel of persons does not include the UK. The UK is not part of the Eurozone.

With the UK gone, EU decisions will increasingly be done by ‘qualified majority’ instead of ‘unanimity’. The EU will integrate more, and more intensively, with or without the UK. But if the UK were to leave the EU, the EU will just integrate much faster. For example, adoption of the Euro may be made a requirement for a country to fully participate in the EU. And the free travel of persons may also become standard.

If the UK were to decide that it wanted to return to the EU, after a number of disastrous years; it will be faced with a much different EU than it had left. No longer could the UK keep itself as the ‘great exception’. It would have to accept the Euro AND free travel for persons, as part of its EU accession negotiations.

Another function that the EU has, is that it serves as a useful bogeyman when national politicians want to push necessary but unpopular laws. They could always say that they were forced by ‘Brussels’ to do it. If the UK leaves the EU, its politicians could no longer blame Brussels.

To sum it up: stepping out of the EU will mean that there will be more (not less) EU rules that the UK needs to follow; but that the UK will have no say in formulating these rules. It will mean less access to the EU internal market, with international companies transferring to countries inside the EU. It will mean that British politicians have only themselves to blame for the UK’s problems. So, unless the British wish to damage their economy in the name of national pride, they should not leave the EU.