Brexit: What now? by Independent Trader

Since the end of Second World War the whole world could observe the process of unification of Europe. For several decades it was limited by existence of the USSR but Western Europe developed fast and significantly raised standard of living thanks to Europeans coming together. After the Soviet Union collapse the only logical way to expand was east.

The bigger European Union (and its predecessors) grew the more the bigger role politics played. The EU is no longer focused on furthering economic freedom of member states but now through bureaucratically overgrown apparatus it aims to govern areas originally at the exclusive discretion of nation states. This had to lead to discontent among members, especially that they always pursued their own particular interests. Ultimately, the UK decided to leave European structures first.

 

Fundamentals of Brexit

Events of the last decade can tell us why Brexit actually happened. The UK always boasted a big share of the Eurosceptic electorate of Europe but only recently this idea grew in popularity. Why? We have to talk about a few factors.

Firstly, the financial crisis pushed many EU countries into debt. Greece is a great example of a country pumped with EU funds to pay back its German, Italian, Spanish creditors. The results are far from encouraging:

Source: Self-made

Greek debt is beyond the level of repayment. The same goes to other countries in the chart above.

For British, saving Greece made less sense than to governors of the Eurozone. Greek debt crisis showed perfectly what mentality different nations have. People responded violently to any thought of public spending austerity even when faced with the bankruptcy of the whole administration. Other EU states probably asked themselves why they should pay for Greek politicians’ incompetence. Contrary to the Soviet Union where people shared culture here in the EU we are no far from the common feeling of unison.

Another important factor is the migration crisis. There has never been such blatant example of the EU’s total inability to cope with real problems. London had opportunity to listen tp EU’s narrative in which immigrants required special care and growing amounts of money. The only question was how to distribute refugees equally and fairly among member states. It did not take long for the news from Calais ‘jungle’ to provide details on immigrants’ lack of respect for private property or health and life of local communities.

We can conclude that last years the EU worked very hard to destabilise situation on the old continent. Brexit is just the first visible consequence because across Europe we see a surge of national and Eurosceptic parties.

Who’s leaving, who is staying?

Brexit started a debate on the possibility to leave the Union in many countries. I want to highlight those countries with a low debt-to-GDP ratio. Those countries seem to have authorities ready to face challenges that ___exit brings. Finland, Luxemburg, Austria, France and Hungary – you should pay attention to them too.

In the opposite corner we see states that undeniably have to stay in. Contrary to the UK they do not have their own currency, have high level of debt and are dependent on the ECB’s intervention. The poster-child here is Portugal. Let us take a look at how yield of 10-y bond performed recently:

Source: estrategiastendencias.blogspot.com

Since the beginning of 2010 we see that yield of Portuguese bonds climbed steadily, breaking 14% mark. This increased servicing cost of debt and in turn raise questions about solvency of Portugal. It was the moment for Mario Draghi to step in and tell the world that he will do “whatever it takes to save the euro”. After the intervention of the ECB, Portuguese bonds matched the yield of the UST 10-y. This is absurd because the US has their own currency under control and can print it anytime to devalue their debt and save themselves from bankruptcy. On the other hand, Portugal since inception of EUR is dependent on the European Central Bank.

I mentioned before that Portugal is not the only ECB-dependent country. For over a year now, the ECB is printing EUR (80 bn/month to be precise) and purchasing bonds of European countries. Up to March 2016 the ECB acquired:

Source: Self-made

It is no surprise that the biggest countries are ranking at the top. More helpful is the chart below which compares debt purchase to GDP of the respective country.

http://independenttrader.pl/fileman/Uploads/8_07.16%204.jpg

Source: Self-made

Portugal is gaining the most thanks to Draghi’s intervention but Spain and Italy are in similar spot – they are heavily indebted and require the ECB’s help. We can safely assume that in the case of any of these countries trying to leave the EU, their bankruptcy is going to follow.

The disintegration of the United Kingdom

In contrast to England or Wales, Scotland still wants to stay inside the EU. Two years ago Scots decided in their independence referendum to stay inside the UK, partly due to the concern about a requirement to leave the EU. Today this fear is gone and Scottish authorities speak openly of Scotland’s will to continue membership of the organisation ruled from Brussels.

JP Morgan sees Scotland proclaiming independence before the end of 2019 and having their own currency also by that time. The alternative assumes that Scotland would ‘inherit’ their EU membership. In this case, England and Wales also would have to become independent states. Although it is legally possible it doesn’t seem probable.

What has very high chances of happening is the disintegration of the United Kingdom itself. The EU referendum in June showed how different are opinions about the EU in Britain. Over 60% of Scots declared further membership of the EU while in England and Wales it was respectively 46.6% and 47.5%.

Other secession movements

Calls for secession are heard all around Europe. Catalonia is worth paying attention to because they already had an independence referendum where 80% of 2 million Catalans decided in favour of going their own way. Later the Constitutional Court of Spain did not attest the vote. Catalan secession has higher chances of happening the moment EU collapses and Spain goes bankrupt. This is also the moment for the Canary Islands, Baleares and Basque country to secede.

Belgium also has a conflict of its own. Dutch-speaking Flanders, French-speaking Valona and Brussels where the number of Belgians is dropping – all those regions may claim their independence.

We got used to the EU in its shape but secession movements have a lot to offer. Smaller countries are on principle more effective in governing themselves and fighting against corruption. We see examples of countries that became independent after the collapse of Soviet Union – to only name few: Estonia, Azerbaijan. In terms of economy, we have to remember you don’t need to be a part of a bigger bloc to trade with each other.

Summary

In reaction to Brexit, we saw a limitless stream of comments on how to reform the EU and what direction should this organisation take. The problem is that the EU itself is a place associated with a pointless discussion with no significant positive actions. Martin Schulz asserted that economic growth should be the answer to recent events. Looking back on the EU’s track record I doubt this plan will succeed.

Bigger chances has George

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