Mainstream Media Misses the Financial Causes Underlying Brexit

25.01.2017 • The Economy

Nick O’Connor – Capital and Conflict (Great Britain) –

Problems created by economists and financiers have a way of morphing into mortal threats to the political establishment.

Just look at Brexit.

Take much of the mainstream press at its word, and the only narrative that explains last June’s vote involves immigration. I think that’s wrong. The idea that people who voted for Brexit did so because they’re worried about immigrants threatening their jobs just doesn’t stack up.

Consider the numbers. 61% of over 65s voted to leave the European Union. 56% of people in the 50-64 bracket also voted to leave (according to a YouGov poll). These are people who are either retired or about to retire. Fear of people “taking their jobs” isn’t really a logical motivating factor.

A far more logical explanation for people in those demographics voting against the establishment in large numbers would be financial. As global strategist Jim Walker put it last week at our closed-door roundtable discussion with Alan Greenspan, these are people who have been hardest hit by low interest rates and quantitative easing (QE). Those policies have seen traditional sources of investment income dry up and annuity rates collapse.

Which is all a rather long-winded way of proving my point: financial crises can morph very quickly into political crises capable of overturning the established order.

Which, of course, brings us back to yesterday’s topic: Europe. Specifically, how financial problems within the European banking system create the perfect backdrop for a political crisis that could threaten the entire European political elite.

The EU Crisis Calendar

As I showed you yesterday, there are plenty of financial problems to contend with in Europe. A fundamentally unsound monetary-but-non-fiscal union. Bad debts within the banking system in Italy. Systemically important banks in Germany suffering. Capital shortfalls in French banks. Low growth all round. Negative rates on savings just to make doubly sure the saving populace know they’re being utterly shafted.

Well, get ready. Because 2017 will be the year those problems manifest themselves at the polls.

That’s because, this year more than any other, there are several clear-cut opportunities for the people of Europe to send a message – or a shockwave – through the heart of the European political establishment.

As former US Treasury secretary Lawrence Summers put it, “If [Marine] Le Pen comes to power in France, if an anti-euro party comes to power in Italy, this could be the beginning of the end of Europe and the eurozone”.

Our own Tim Price put it more bluntly in a recent letter on the topic:

The eurozone is on the precipice of a political collapse.

A series of elections will be held in 2017, with many to be fought on lines of “for” and “against” membership of the euro. For the first time since its inception in 1957, the European Union cannot afford to take its future for granted.

France – 23 April: the far-right Front National party is the second favourite to win the presidential election and is avowedly anti-EU. Even if it doesn’t win, it is still pulling France in an increasingly anti-EU direction.

Germany – by October: Angela Merkel’s Christian Democratic Union (CDU) party has been losing seats to the anti-EU Alternative For Germany (AfD). A Merkel defeat would be the biggest possible blow to the EU’s future. Germany is the continent’s biggest economy.

Italy – by April 2018: general election after pro-EU prime minister Matteo Renzi was comprehensively defeated on 4 December 2016 in a constitutional referendum. Italy’s three opposition parties are in favour of leaving the euro, which they believe is preventing the country’s economy from growing.

As we looked at yesterday, Italy is perhaps the country with the biggest financial problems. Its banking system is suffering with an eye-watering number of non-performing loans. It had to bail out its oldest bank, Monte dei Paschi di Siena, just before Christmas. And on top of that, the entire nation has already experienced a decade of virtually zero growth (on top of virtually zero interest rates!).

Tim quotes economist Roger Bootle, who agrees with that assessment. Here’s what Bootle had to say on an imminent Italian departure.

“My view is that Italy is more likely to leave the euro within the next year or two.

“The boost that this would give to Italian competitiveness would see Italian GDP recover and this would prompt other southern countries to leave. Before long, the euro would be in tatters.

“Could the EU itself survive the collapse of its greatest project, along with the consequent recriminations and financial wranglings between Germany and the southern members? I doubt it.”

Those three major threats to the European political establishment – votes in France, Germany and Italy (potentially) – aren’t the only opportunities for anti-establishment movements to take root in Europe. But they’re certainly the biggest.

Any major change to the political landscape in those “core” nations would vaporise the glue that holds the European project together. It would only take one unexpected negative result (from the perspective of the mainstream media and the political elite) to make 2017 the year of europocalypse.

But it’s not just a case of those three nations. There are more votes on the horizon in the “periphery” nations. Tim explains:

But the potential dangers do not end with France, Germany and Italy. Other eurozone members holding elections soon include:

Netherlands – 15 March: Geert Wilders has vowed to withdraw the Netherlands from the EU should his surging far-right Party for Freedom (PVV) win.

Hungary – by Spring 2018: the popular current prime minister Viktor Orban has incurred the wrath of the EU by erecting wire borders around the country – in defiance of the EU, which he openly disparages.

The economic failure of the euro is now starting to manifest itself politically. As deputy assistant secretary of the US Treasury, Dr Christopher Smart led the US response to the European debt crisis. In a paper for the Mossavar-Rahmani Center for Business at Harvard University’s Kennedy School of Government, published in January 2017, he writes, 

“The European Project looks in trouble once again. Mounting political extremism, feeble growth and the loss of its second largest economy shape a convincing case that the integration of Europe’s political and economic institutions has failed to deliver. Sharp and unexpected political developments—a populist election victory or a fresh immigration crisis—may well trigger events that lead to miscalculation and collapse.”

So what do you do, as a British saver and investor, to keep your wealth safe during such a time?

My first piece of advice is: don’t assume this won’t affect Britain – or you personally.

Let’s take the national level first. Britain is about to start negotiating on our exit from the European Union. The internal politics of the people we’re negotiating with matter greatly in those talks.

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