Given the context of his negotiations with French President Emmanuel Macron in October which secured the current Withdrawal Treaty, I think the way forward is clearer now.
The Macron Gambit
The key to understanding what’s happening is the ever-shifting dynamic between France, Germany and the U.K. in relation to their relationship with the United States.
Macron is pushing France to unseat Germany as the de facto rule-setter for the EU. He wants more integration at every level, but most importantly fiscally.
Macron understands that the euro is flawed because of a lack of fiscal integration. For the euro to survive at least three major things need to happen.
- There needs to be a single entity capable of issuing and retiring Euro-zone sovereign debt. The ECB and the EU fiscal authorities need to have a relationship similar to that of the Federal Reserve and the U.S. Treasury Dept.
- The euro has to weaken considerably to remove the garrote around the necks of countries like Spain, Portugal, Italy, Greece and even France.
- Much of the existing sovereign debt needs to be converted into a Eurobond, doing away with much of the stock of debt as liabilities for member states like Italy and Spain. The ECB can lead the way with its $3 trillion it’s holding on its balance sheet.
In my podcast with Yra Harris from a few weeks ago, Yra made the point that the ECB has an enormous pile of gold it can use to back its new Eurobonds to sell this plan to skeptical markets.
So all the pieces are in place. But opposition to Brexit was actually undermining it.
Macron realized that the Brits would never accept betraying Brexit the way it had been planned. He saw the opportunity to cut the Gordian knot of Brexit and screw Germany at the same time.
Germany is dead set against any of these things occurring. It wants to continue with using the euro to underwrite its mercantilism to leverage its industrial prowess. It has benefited handsomely at the hollowing out of member states economies through internal trade advantages. And then, once they were broke used debt restructuring as a bludgeon to buy up their assets at pennies on the euro, c.f. Greece.
Italy was to be next on the block.
This is fundamentally why the euro is designed the way it currently is. It wasn’t a mistake, rather it was the plan. I know that sentiment will rankle my German readers, but that’s my take on the history.
They may have had their reasons for this, but this is classic colonialism.
But, what does this have to do with Brexit?
Everything.
The Double Cross
Macron installed Christine Lagarde as head of the ECB to push for fiscal integration and to politically blackmail the Germans into going along with it.
How? By threatening to write down or allowing default on the massive $850 billion in TARGET 2 liabilities German banks have in euro-zone sovereign debt on their balance sheets.
But there’s no way City of London and the crown would survive the British people’s anger at underwriting the costs of this shakedown and subsequent debt crisis.
Nigel Farage and the other hard Brexiteers understood that this was a key issue, but one that didn’t resonate with voters. Fishing rights and immigration get people to the polls, not bailing out German banks.
But, make no mistake, Farage, the old commodities trader, knows that breaking the British banking system free from the EU’s and put up a hard border, as it were, between them is the key to a successful Brexit.
And I suspect, after it was clear they couldn’t convince the British people otherwise, that City of London and the Crown saw this as well.
So, Macron and Johnson looked at the landscape clearly and with the blessing of the British political class negotiated a settlement.
By allowing Johnson and the U.K. to get clear of the fiscal and political storm, Macron gets even more leverage over Germany whose economy is the one hurt most by a hard Brexit.
The Germans run a huge trade surplus with the U.K. Cutting that down weakens the euro and Germany at the same time.
Germany will insist on bail-ins of depositors versus bailing out the Italian government. But Macron realizes the only way for the EU to survive the coming debt crisis is to over-ride Germany’s deflationary attitudes. They are going to have to print euros like no tomorrow.
He may throw Merkel a bone in the negotiations but it won’t be much. She lost the power struggle over the new European Commission.
Macron is many things, but he’s not stupid. He knows the Euroskeptic populists will eventually rise to power in Italy, Spain, Portugal and potentially even Germany. He knows he’s in trouble in France.
The miserable polling data is a reflection of the economic misery of German austerity taken too far.
The only way to placate them and keep them in the euro-zone and, ultimately, the EU is to give them debt relief and a bigger seat at the monetary policy table.
Matteo Salvini understands this. Viktor Orban understands this.
So the deal is pretty simple in the end. The collapse of Project Fear to dissuade the British people against Brexit forced a reconsideration on the ruling elite who finally felt a real threat to their power. Because if they betrayed Brexit one of either Farage or Jeremy Corbyn could have entered 10 Downing St. giving real voice to political change in the U.K.
This forced Macron and Johnson to make a deal which gave Johnson just enough room to win the election and blame the Remainers. This ends the stalling and Macron can use Brexit to his advantage within the EU to get what he wants.
Brexit, in the end, may be more about the return of the special relationship between the U.S. and the U.K. while Europe splits itself off as an independent beast.
But with the euro being systemically destroyed by the ECB’s poisonous negative interest rates, I still don’t see a path forward even if Macron gets what he wants.
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