On the road from Madrid: will the UK avoid Guernseyfication?
On the day after both George Soros and David Beckham put their weight behind the “Remain camp” in the British referendum I am ready to say that I think that the UK will vote to stay in. In a previous analysis I suggested that the Leave camp was going to need a decent buffer going into the referendum due to the phenomenon of voters drifting back to the status quo at the 11th hour. Do not underestimate the subconscious impact of much of the propagandising. Remember "Leave" sounds like the unknown even though "Remain" is also a move in the unknown, with the precariousness of Europe's economic situation ultimately being unsustainable. For me to be confident that a Brexit was going to happen I suggested we needed a 10% or so buffer.
As I predicted in Dow Theory Letters last week, the tragic murder of Jo Cox MP took a lot of wind out of the momentum of the Leave camp. Sadly many politicised her death.
George Osborne, for example, used her death to demand that Brexit supporters use more “facts” and less “divisive political debate” and then seconds later compared UKIP to the Nazis and went on to make more dire predictions about the economy!
Now there are even conspiracy theories flying around about the timing and circumstances of Jo Fox’s death. Martin Armstrong comments on them here : https://www.armstrongeconomics.com/international-news/europes-current-economy/assassination-conspiracy-theory-to-prevent-brexit-vote/. I am not going to go down that road as its too unthinkable.
The overall Remain rhetoric has intensified. I think the fear is that the domino effect in the EU would be incredibly powerful (this Sunday the Spanish are also holding elections) so the EU and Cameron have marshalled everything they have. In fact, this referendum seems like Scotland on steroids! The IMF issued their most dire predictions thus far saying a Brexit would be “negative and substantial” and could reduce economic growth by up to 5.6% over the next 3 years. Others have gone even further.
The French Finance Minister , Mr Macron told Le Monde: "Leaving the EU would mean the 'Guernseyfication' of the UK, which would then be a little country on the world scale. It would isolate itself and become a trading post and arbitration place at Europe's border."
Some people might find the analogy rather unfortunate. According to the CIA World Factbook, Guernsey’s GDP at PPP is actually significantly higher than France.
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html#gk
It seems like the rhetoric in Norway was very similar when they had their referendum many years ago. This youtube clip is absolutely fascinating. Its only 2 minutes and well worth watching as it is scary reminiscent of “Project Fear”.
https://www.youtube.com/watch?v=i-UbT0g9A8c
George Soros, I must admit, made good points about why a Brexit would cause a heavy sell off in the British pound; worse even than Black Monday, when Soros himself “broke the Bank of England”. He emphasised the large current account deficit, which is indeed at historic levels here. So a 10-15% move in sterling outdent surprise me.
I think that the damage would be short-lived. Besides, some countries are actually TRYING to depreciate their currency that much as a matter of economic policy (Bank of Japan?)
Has London, one of the most creative cities in the world with some of the smartest minds, got nothing more to contribute to the world than being an access point to the EU? Quite frankly I am amazed about how pessimistic people are around the ingenuity of British people and those foreigners who are attracted to work in the UK. All the same people who told us that not participating in the Euro would be a disaster, are saying the same thing about the EU now. Then London went on to become the biggest market for trading the Euro! London might also end up being a hub for the trading of the renminbi. For someone that travels the world like myself, its interesting that everyone has a higher regard for the UK than the British themselves! In many international surveys, the brand value of UK Plc. is considered extraordinarily high. In the last couple of years Portland Consulting has ranked the UK no 1 or no 2 globally in terms of “Soft Power”.
Peter Hargreaves, the British billionaire, said it best this week in Bloomberg briefs:
“You can't move the City of London to anywhere else in Europe. It's madness to suggest it. Frankfurt, the place everybody keeps talking about, only has a population of 700,000, it could not accommodate anything like the City of London. The City of London is absolutely guaranteed, it is bound to survive. The only center that could take over would be Zurich and that's not in the EU either. It's absolute drivel that the City of London will be affected. The City of London will go out and it will deal with these emerging economies in the Pacific Basin, Southeast Asia, Africa — they're all going to want finance for different things. You can't set up the City of London anywhere else. It takes years, and during that time the City of London will have grown stronger. Any attempt at usurping it will fail.”
He has more money invested in the UK stock market than anyone and he is in the Leave camp. Its well worth reading his entire interview.
And of course, the UK is much more than financial services and the City. If there is a Brexit (much less likely now) I will endeavour to write more about the UK’s positive prospects outside the EU.
Democracy and Sovereignty
Some readers have criticised my comments on the the EU’s lack of democracy (the only part of the EU that is directly elected is the European Parliament: and only the non-elected commission proposes law). Many of these people are very well-intentioned and wrote to me in the spirit of wanting a multi-cultural and thriving Europe. But many other patriots have also spoken on this important constitutional issue such as Jacob Rees Mogg MP, son of Lord Rees Mogg of the Times:
https://www.jacobreesmogg.com/the-powers-of-a-state/
And of course perhaps the UK’s best economics journalist Ambrose Evans Pritchard has said he will be voting Out, speaking of sovereignty issues:
“Stripped of distractions, it comes down to an elemental choice: whether to restore the full self-government of this nation, or to continue living under a higher supranational regime, ruled by a European Council that we do not elect in any meaningful sense, and that the British people can never remove, even when it persists in error.”
The full article can be read for free here and is well worth the read: https://davidstockmanscontracorner.com/ambrose-evans-pritchard-why-i-am-voting-for-brexit/. [In fact I think it was Evans Pritchard that first broke the story about the CIA being behind the founding of the EU the declassified information came out (I might be wrong).]
It is also interesting to read what a group of Greek politicians wrote in an open letter to the British people, citing the EU's track record of totally ignoring the results of referenda:
https://www.zerohedge.com/news/2016-06-19/greeks-send-open-letter-uk-citizens-about-brexit
I bring all of this up because if we stay in the EU, as I now expect we might, I would say that constitutional reform of the EU is an imperative. I hope all of these Remainers pick up EU reform with the same fervour that they have in this referendum.
What does this all mean now?
To make our views clear: a “Leave” vote is much less likely at this stage although it is still a meaningful possibility. This means that risk assets will bounce further on Friday and beyond, until the bigger financial crisis that threatens to embroil the globe. Question marks will be left behind about the EU - it will be important to monitor the reaction in other countries as many Italians, Greeks, French etc have expressed a strong interest in having their own referenda. The Spanish elections here in Madrid will also be interesting to watch.
In the event of a “Leave” the UK stock market and pound will probably crash quite hard - sterling could easily see a 10-20% move. Longer term this will not be seen as something that negative. Markets can rebound quickly. My general recommendation to clients has not changed in recent weeks : do not bet on a Brexit but be prepared (i.e. have sufficient cash) to invest in the UK if a Brexit causes a large fall in asset prices. That is - have a defensive portfolio but don't short. That still holds. Sophisticated clients, of course, might be involved in other trades.
Long term views
Some geopolitical experts think that this is all part of the UK trying to balance its relationships with the US and Europe. Stratfor’s view of the UK’s “Grand Strategy” is that:
“Britain has positioned itself superbly for a strategy of waiting, watching and retaining options regardless of what happens. If the European Union fails and the European nation-states re-emerge as primary institutions,
Britain’s position would allow it to exploit the fragmentation of Europe to its own economic and political advantage and have the United States available to support its strategy. If the United States stumbles and Europe emerges more prominent, Britain can modulate its relationship with Europe at will and serve as the Europeans' inter- face with a weakened United States. If both Europe and the United States weaken, Britain is in a position to chart whatever independent course it must.”
I guess this is the positive interpretation for the UK. If the UK remains, it might still chart a course that balances those strategic priorities. And perhaps with the impetus of a close referendum behind us, some heroic statesmen and women might be able to drive some reform in the EU. This would also be good for my European friends.
Furthermore, I guess I will still get to come to beautiful cities like Madrid without a visa.
Tomorrow is going to be fascinating.
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Benjamin J Butler is an English Futurist and Founder of the Emerging Future Institute. He writes the weekly International Investor Column at Dow Theory Letters and consults for financial institutions, companies, sovereign wealth funds and individuals who seek a unique independent perspective on the world.