By Alasdair Macleod for Gold Money
In this article, we look at the implications of the new Johnson government: its strategy, the likely outcome of EU negotiations, and the golden opportunities to reform trade, tax and monetary policies to secure a better future based on free trade.
It should have been no surprise that Boris Johnson is now Prime Minister. It should also be no surprise he will implement Brexit on 31 October, the last date agreed between Mrs May’s government and the EU. Johnson was elected by Conservative constituency members to do just that. His cabinet appointees are fully supportive, including ex-Remainers (that’s politics!) and he has appointed an aggressive rottweiler, Dominic Cummings, as his Brexit enforcer. Already, his influence over Brexit strategy can be detected. There are no compromises to be had, a point which slower minds in the commentariat find difficult to comprehend and accept.
It is likely there will be an agreement on the way forward after Brexit, which could involve a transition period, but nothing like that agreed with Mrs May. If, as seems unlikely, the EU digs its heels in, the UK will walk away. That is the message being given by the new administration.
There is likely to be an important consequence, and that is a Johnson Brexit could trigger a mounting financial and ultimately political crisis in the European Union.
A study last year by Germany’s Halle Institute estimated a no-deal Brexit would cost 12,000 jobs in the UK, and 422,000 jobs in the other 27 EU members, of which 100,000 are in Germany and 50,000 in France.[i] Yesterday, Ireland’s central bank forecast a loss of up to 100,000 jobs in the medium term in Ireland alone, on a no-deal. Clearly, the EU’s negotiators risk losing the wholehearted support of its two largest post-Brexit paymasters and others. But for Brussels, giving in on Brexit encourages rebellion from disaffected populations in other member states. Rather like the Soviets ruling Eastern Europe in the late eighties, the Brussels establishment finds itself struggling to keep its non-democratic political model intact.
It is increasingly likely Brussels will find events are spinning out of its control. For the UK, this introduces collateral damage, necessitating even more urgent separation from the EU.
In a paper published at end-June, Bob Lyddon points out that a Eurozone financial crisis (which is becoming increasingly likely, as argued below) could cause the UK’s contingent liability as an EU member to be as much as €441bn. “This derives from the near-criminal irresponsibility by the UK’s negotiators”.[ii]
Whatever the numbers, there can be no doubt that this is an extremely serious issue.
Furthermore, in the event of a financial and systemic crisis in the Eurozone, the UK will face its own crisis, if only because of cross-liabilities through the two banking systems. And the cyclical economic downturn that always follows the failure of a period of credit expansion is coming up on the inside rail very rapidly.
The EU economy is left badly unbalanced, with Germany dominating production and exports. Other populous member states, notably in the Club Med and France, are in a financial mess. They have relied on Germany’s production to provide for their unproductive profligacy. Her production output is now contracting.
Germany has been hit by three adverse developments at the same time. There is President Trump’s tariff war against China, which has undermined Germany’s largest growing markets at the eastern end of the Silk Road, and the threat he will deploy similar tactics against Germany. There is EU environmental legislation, which is making Germany’s motor production obsolete and forcing manufacturers to put a time-limit on existing production while investing enormous sums in electric technology. The damage this has done extends down the whole production chain, undermining the Mittelstand.
Then there is the crisis in Germany’s major banks, most publicly seen in Deutsche Bank because of longtail liabilities from its investment banking division. But all German banks, as well as those throughout the EU, face a lethal combination of margin compression from negative interest rates and a legacy of an expensive branch network when customers are migrating to online banking. The slump in German production now provides an additional threat to their loan books.
The point is No Deal is not the disaster promised by the May establishment and its business lobbyists. It is a disaster for the remaining EU. Exiting the EU offers the Johnson government a good start, a clean sheet. Any compromise with the EU on trade and money detracts from this benefit.
Brexit is an opportunity to reset economic, monetary and trade policies. The implications of getting rid of the EU millstone go far beyond the leaving date of 31 October. Assuming a Johnson government has a good grasp of why free trade benefits the economy and why trade imbalances exist, combined with the courage to steer Britain towards the long-term prosperity offered by free markets, it will derive its future power from a strong economy instead of merely claiming it based on the past.
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