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Blain’s Morning Porridge “Governments crack and systems fall, cause unity is powerful, lights go out...”

The Macro View

In the headlines this morning:

There is little point commenting on yesterday’s Brexit shenanigans – except to note the degree of parliamentary indiscipline across the Conservative Party was even greater than even Rees-Mogg expected.

I avoided the whole thing by spending yesterday at the Euromoney CEE conference in Vienna – very interesting discussions and a phenomenal number of attendees. A real buzz to meeting – even more so than a similar event in London last year. There was a real sense of things happening.

I was asked to oppose the motion on an Oxford Union style debate: “This House believes Trade Wars will kill economic growth in the CEE”. The proposer of the motion, the excellent Marcus Svedberg, of the Swedish State Pension fund, did a great job running through how much damage trade wars will certainly do to the developed European supply changes across the diverse range of Central and Eastern European economies. If there are tariffs slapped on European goods by Donald Trump, then the successes of the last 30 years in creating a number of vibrant European economies will be dented. Marcus is absolutely right.

I opposed that motion, arguing: “If its trade wars you are worried about, then you are worrying about the wrong things”.

The first issue is I still consider it unlikely we will actually get a trade war. We will get lots of market and confidence driven doom, gloom and angst – which will be damaging to sentiment, planning and investment. However, Donald Trump is angling for concessions from Europe because that’s what his electorate want. They have bought his story they’ve been legged over by Europe and China for years, with the US treated badly – and, to be fair, he’s got a point. The US has supported Europe, back-stopping its pathetic defence spending, and has been abused for its efforts. European leaders know they have to pay up. But, it’s far more likely trade negotiators will find a compromise to avoid trade crisis – both Europe and the US know there is much to lose if it were to happen.

Meanwhile, markets are doing their usual thing – overreacting and over-over-estimating the chances of a trade war. Investors get paid to assume the worst. And because the market has no memory, it reacts as if the worst-case scenario – allout trade war – is nailed on. Trade wars don’t happen because smart civil servants craft compromise agreements.. It would be a racing certainty, if it wasn’t for one thing.…

The fly in the ointment will likely be France, which will insist French Agriculture is protected from American imports – after all the primary reason for the European Union has and always will be to protect French farmers. Upset them, and there will 60 mm revolting yellow vests back on the street. Macron faces an impossible dilemma – he’s already effectively surrendered much to the protestors, and now he’s trying to unravel any discussion of Agriculture from any US vs Europe trade agreement. Trump won’t let it happen. Europe will have to open up, and not just to Soyabeans.

Which leads us to the second issue – France is not the only European economy under the populist cosh. Right across Europe we’re looking at European elections electing populist candidates right at the time the ECB and EU leadership changes. It’s going to have a significant effect on tripping the European dream. There is a nightmare scenario of an essentially ungovernable European and domestic parliament.

Unfortunately, I had to utter the B-word at the conference – how the UK’s decision to exit Europe has triggered an absolute breakdown of parliamentary party discipline and leaves the UK caught in an unresolvable voting vacuum. It’s a classic example of populism – MPs saving their own political skins over the priorities of the country. As I’ve said before – the optimal electoral position for a UK politician looking to keep their job is to support remain: on the basis 48% of the electorate will support you while the 52% Brexiteers are hopelessly split between deal and no deal!

Similar risks exist across Europe, fuelled by real and imagined social injustices. Since the global financial crisis in 2008 we’ve seen increasing income inequality as the policy responses of keeping the banks open and zero interest rates made the rich richer, while austerity made the poor poorer and cut back of the social welfare net. Other resentments range from the perception CEE is just a dumping ground for Europe’s immigrant problem, to the “one-rule for France and Germany, tougher rules for everyone else” so infuriating Italy, Greece and others. (I suspect even the EU huggers in Ireland will leave when Brussels stops building them new motorways and asks Eire to become a net contributor to the budget.)

Which leads us the third issue – Europe is not a single polity of shared and common purpose. Unity is on the backburner as it becomes clear Germany and France are both mired in primary domestic strife.  Each country still follows its own independent path – which suits them best. There is no unity of purpose across the Union – clearly seen by the hostility in parts of Extended Europe to EU “interference”.

The Macro View

About Bill Blain

Bill Blain

Bill Blain is Strategist for Shard Capital, a leading investment firm. Bill is a well known broadcaster and commentator, with over 30-years experience working for leading investment banks and brokerages at senior levels. He's been closely involved in the growth and development of the global fixed income markets, and pioneered complex financial products including capital, asset-backed securities and private placements. Increasingly, he's involved in the Real and Alternative Assets sector seeking to explain their complexity, how to generate decorrelated returns, and create liquidity in non-listed assets. Bill is a passionate sailor, talentless painter, plays guitar badly, is learning the bagpipes, and built a train-set in his attic.

Articles by Bill Blain

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