Monday 13 June 2016

Brexit and the EU programme

I think the reason the macro community has misjudged the major developments in Europe so badly over the last 5 years is due to their viewing of Europe primarily through the financial dimension.

Its clear that ruling the social-democratic political elite and their Brussels-based administrators, which are at the heart of the European project, see the EU primarily as a social and political progamme of integration. That's why Grexit has never happened and why Cameron was offered little in terms of renegotiation and the EU seems to be losing little sleep over the prospect of a peripheral member like the UK leaving, while Greece has been treated as a wayward adolescent that needs to be brought to heel via reforms before any debt forgiveness takes place, the slow process of which has crashed the Greek economy up to now.

However younger people don't see the benefits of an EU superstate but have to face many of the social and economic problems that its poorly coordinated implementation has brought. In part, as a consequence alternative political parties are taking or gaining power. It seems the only thing that will stop the EU becoming a centralised, administrative super-state, is political reform driven by a core member and at the moment Marine Le Pen seems to be the only potential candidate, although she may opt to leave over reform as well.

It seems that the UK will chose Brexit for a great many reasons. I think its unlikely Brexit will have much impact on anything outside of short term sentiment trades and that the economic benefits of being 'out' will only be felt over multiple-years, for instance it will take two years to negotiate an exit.

As regards the Euro(dollar), apart from the common dire macro predictions not coming true and the above comments, I think the reason the 'Euro at parity' calls have failed is the Euro is cheap by REER and the 'Deutschemark' is almost as cheap as its ever been, even lower than post-reunification.

As a reserve currency with not much inflation, some overall political stability and upwards BoP pressure on the FX rate, Draghi has struggled to get the Euro lower. 

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