Brexit

Like a patron of the local pub no doubt financial markets would have much preferred to pass around the hat to come up with the money to buy another round but wiser heads have prevailed and someone has called a cab (or is it Uber) to bring a situation that has already lasted much too long to its inevitable end.

Capitalism hasn’t enjoyed a particularly good decade reputationally but it has resulted in a historically unprecedented level of global wealth and if you are an average citizen on planet Earth the odds are significant that you’ve never had it so good. Thus it is passingly ironic that a system that ultimately depends upon the liberty of those who operate within it should be critical of a people who have arguably done more than any other to create an environment conducive to the exercise human freedom to have voted in pursuit of it. While in the short term, perhaps a week or so, the markets are possibly going to assume the worst they will, as markets always do, come to celebrate what they will come to view as a provider of solutions to long standing economic problems.

Pursuing brevity while also attempting to shed light on a widely misunderstood issue can be challenging but here we go. The Economic Union (EU) has always been like the suitor asking for the first date while slipping a wedding ring into their side pocket. Always asking for little it has ended up with quite a lot but unfortunately without the permission of those whom it seeks to govern. While possessing an elected parliament the EU is essentially a bureaucratic state but unlike our own nation unconstrained by an electorate possessing the right to vote upon the rules which it is required to live under. Interestingly the EU was relatively popular in the United Kingdom (England, Wales, Scotland and Northern Island. Britain is incorrect as it excludes Northern Ireland which also voted) enjoying “only” a four point popularity deficit (44/48). In France it’s 38/61 and even in Germany, arguably the greatest beneficiary of its membership in the EU, it’s only 50/48.

The European Union has 28 members and in terms of its global economic footprint it does matter and actually a great deal with an economy of $18.4 trillion versus the US’s $17.4 trillion (2014 #’s). 19 of the 28 countries share the Euro as their currency with 6 of the other 9 committed to its future adoption and with the UK, Sweden and Denmark having been the permanent holdouts. In Europe as a whole only Norway, Switzerland, Iceland and Russia along with various remnant states of the former Yugoslovia precede the UK as non-members of the EU.

An uncomfortable fact underlying the birth of the Euro on January 1, 1999 is that those countries who have been permitted to vote upon its adoption, Denmark, Sweden and the United Kingdom, have chosen to reject it resulting in the rather undemocratic phenomenon of the only countries actually using the Euro exactly mirroring the same universe of countries whose citizens have not been permitted to vote on whether to adopt it with its accompanying dubious privilege of surrendering the use of their own domestic currencies.
It is the Euro which has done more than anything else to give the EU a major “hair cut” to its popularity.
Those countries adopting the Euro found their economies locked into a monetary relationship with a variety of countries with economies possessing very different characteristics from their own and.
without the ability to address those imbalances through adjustments in the relative values of their respective currencies. Germany was able to surrender its D Mark at terms very favorable to its ability to price its exports at relatively low prices. For Spain with its Pesetas, Italy with its Lira and many other countries the terms would result in their being sentenced to years of economic purgatory. As Europe’s largest economy much of Germany’s growth resulted from very large foreign trade surpluses. The problem for much of the rest of the Eurozone was that Germany’s surpluses were required to be their deficits. To sustain the growth rate of their economies they were required to take on increasing amounts of debt until at the time of the Global Financial crisis of 2008-2009 they hit the outer bound of their debt limits and the credit markets were closed to them resulting in a deep economic recession and very high levels of unemployment.

The criticism of Greece and other predominantly southern European countries has been often couched in moral terms; thrifty Germans and spend thrift Italians, Greeks, Spaniards etc. when in reality it is nothing of the sort. Germany cannot necessarily be blamed for pursuing its own national economic interests but the bill has been paid more often than not by the other members of the Eurozone. It is the pursuit of its interests without a willingness to assume an appropriate share of its responsibilities that has led Germany and other surplus countries to be primarily responsible for the extraordinarily dysfunctional system that the Eurozone has become.

By voting to leave the Eurozone the UK has turned on the lights at the end of a very bad movie while reminding other countries that democracy and freedom must be the principals upon which any political system that hopes to endure must be based. The UK will be better off on the outside than in. Its tradition and its destiny of being an economy based upon freedom with its facing the Atlantic Ocean and open to the world will lead in the not too far distant future the 48% of its citizens who voted to remain thanking the 52% who voted to leave. The EU will shrink further and become both more democratic and prosperous. The world will be a better and more prosperous place and this shall be an outcome which the financial markets will celebrate.

 

Mark H. Tekamp