Brexit – It’s not Over

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By 2025 there will be a vast new firm, valued at an astronomical sum and run by people who look like teenagers from a futuristic building in . . . well, where will it be? Can you imagine it being in Europe? Me neither.

Matt Ridley

Never let the perfect plan be the enemy of the good plan.

Various Luminaries

The Brexit referendum is not legally binding on the UK government or the EU. It will take two years to execute at best. Expect further surprises and changes. Despite what their politicians say, the British government could choose to ignore it.  A petition for a new referendum is gathering steam. The British voters are already suffering voters’ regret.  The global financial markets are in shambles.

In my opinion, Brexit is on balance a mistake. Yes, in the longer term Brexit may bring about a better, more innovative world.  But the cost of disrupting the current EU is too high. Rather, reform of the EU and reduction of the power of its unelected socialist and protectionist bureaucrats is what is needed. At the end of the day, Brexit is too disruptive. Who knows? The final outcome might not be a nirvana of innovation but rather a prolonged recession and the balkanization of Europe. Throw in some new China slowdown problems and the world would really be in bad shape.

Perhaps the person we can blame for all this is the Supreme Allied Commander General Dwight D Eisenhower. Western Europe was in ruins after WWII. Ike could have ordered the surviving countries to form a United States of Europe, adopt  American-like constitution and speak American English. Problem solved. Instead Ike went home to play golf and become President of the United States. (Yes I’m joking. Mostly.)

But the British people (Scots excepted) voted for Brexit. The UK was always only half-in the Eurozone project. The British people themselves, living on their seldom invaded island and with their special relationship with the US, have never quite figured out whether they were really one hundred percent European or not. “The wogs begin at Calais”, the Brits used to say before political correctness silenced such impertinent talk. The British voters didn’t want Angela Merkel’s million plus Middle Eastern refugees heading for the UK. They didn’t want Brussel’s dogmatic green bureaucrats telling them they couldn’t cook their tea on their traditional electric teapots. OK, I get it. But you don’t pull the whole house down to fix the roof. This is one big tempest over a teapot.

According to all reports, Brexit voters included a heavy blue collar component. Like blue collar types in the US, they feel left behind and blame this on foreigners and globalization and the “elites”, whoever they are. (Robots so far have avoided UK voters’ attention.) Ironically most of the recent immigrants to the UK are white Christians from Eastern Europe who don’t blow up things or shoot people. Like all the major Western countries, the UK suffers from birth rates below reproduction. Most economists would argue that the UK has been lucky to get these Eastern European immigrants. But as I argued in a previous Dismal Optimist, voters are not always rational or far-sighted. Who cares what economists think.

Matt Ridley’s Argument

In a Wall Street Journal article, noted journalist Matt Ridley, aka 5th Viscount Ridley, has argued that “the EU’s obsession with harmonization (of currency and rules) frustrates innovation. Using as an excuse the precautionary principle or the need to get 28 countries to agree, the EU gets in the way of the new.” Consequently, “Europe has been left behind in digital technology: There are no digital giants in Europe to rival Amazon, Google, Apple and Facebook.” Ridley argues in another essay that the so-called General Data Protection Regulation (GDPR), promulgated by Brussels and scheduled for enactment in 2018, will squash innovation and harm not only the American companies like Google, but totally inhibit European innovation.

He’s one hundred percent right. Continental Europe is the home of bureaucrats, the precautionary principle, an unhappy low birth rate, and wrong-immigrant demographics. When it comes to high tech and innovation, the UK ranks a distant but still respectable number three behind the US and Israel. Overall continental Europe could be viewed as a giant museum that looks backward. But Europe is the UK’s hinterland and it’s still a huge market.

This is a strategy issue. In my opinion, the UK should use this Brexit vote to negotiate a better deal than David Cameron got in his recent EU negotiations. And then the UK should stay in the EU.

Investors Have Poor Choices

Near term the odds favor further declines in the global stock markets thanks to the Brexit mess. The ascent of the dollar and an inevitable slowdown in European economies means lowered earnings estimates for American global corporations. The possibilities of a European bank crisis or political leaders doing something stupid cannot be ruled out. And gold will move further up.

All this is a big deal.

Ironically the worse things get near term the greater likelihood that Brexit could be reversed. Then a huge global stock market rally would ensue, gold will decline and so will the dollar. Lots of action for traders, misery for everyone else. It’s not often that optimists are those rooting for a stock market crash.

We can hope that the British and EU politicians come to see this as an opportunity to renegotiate the UK’s remaining in the EU. The UK never signed on to be absorbed into a socialist, undemocratic state run by bureaucrats. A common market of the free movement of goods, services, capital information and, yes, people is what the UK needs.

Brexit – It’s not Over