Brexit: Playing the Blame Game - on Immigration

Let’s be honest. Would the UK be having a referendum today on its future participation in the EU if it had not been the leading protagonist within the EU in promoting the membership of eight Eastern European states (EU8) in 2004, and then Romania and Bulgaria (EU2) in 2007. Further, did David Cameron initially intend to call a referendum (as Mr. Blair should have in 2005), or had he assumed that the suggestion would be nixed by his expected coalition partner, the Lib Dems in last year’s election? Once again, the UK sees itself as a victim of uncontrollable events whereby much of the blame rests with itself.

In the wake of the fall of the Berlin Wall and then Maastricht in 1992, the UK saw the potential achievement of twin objectives; providing a check to French and German influence within the EU and fulfilling Churchill’s dream of finally liberating and embracing Eastern Europe.

The French, under Mitterrand and later Sarkozy, had tried to offer alternatives to EU membership (privileged trade arrangements or quasi-membership) because they feared dilution of their influence   with the Benelux and Southern European countries, in going beyond the EU 15. They were even more explicit under President Chirac, who in February 2003, criticized the 13 future and potential EU Eastern European members for signing a letter of support for the US position on Iraq, as being irresponsible.  Romania and Bulgaria, in particular, not yet officially accepted into the EU, were given a particularly strong reprimand, with Chirac saying, “ If they wanted to diminish their chances of joining Europe they could not have found a better way,"

France feared a loss of hegemony as Eastern members would probably be more closely aligned with Germany, and that this would change the union from a federation to a looser ‘liberal economic zone’. The British, on the other hand, looked at the EU expansion as an opportunity to expand their sphere of influence. So when the European Council declared its intention to eventually enlarge the EU eastward at the 1993 meeting in Copenhagen, and later at the EU Summit in 1997; it was the UK who stood as the leading advocate.

The UK’s Home Office had assumed as few as 13,000 migrants a year from EU 8 would come to Britain, but not near the 700,000 that entered (and stayed) in the 5 years to 2009. As such, the UK was only one of three countries; Britain, Ireland and Sweden, to open its labour markets to workers from the new member countries when they joined in 2004. Similarly, initial restrictions on EU2 (Romania and Bulgaria) were later lifted as the natural flow of migrants was expected to go to Italy and Spain. 

It was also not until 2013, that the UK toned down its aggressive lobbying on behalf of Turkey. As recently as July 2010, on visiting Ankara, David Cameron was characterized as being ‘mad’ at the EU’s delaying tactics on Turkey, saying,   "I'm here to make the case for Turkey's membership of the EU. And to fight for it."  …"So I will remain your strongest possible advocate for EU membership and greater influence at the top table of European diplomacy." 

No country has been a more vocal proponent of EU expansion than the UK, perhaps because they felt that they would be sacrificing fewer subsidies from the Common Agricultural Policy (CAP), but more likely because they assumed that it would dilute French and German hegemony over the EU. The UK also relished the double-digit export growth that would come from 100 million new EU members.

It is unlikely that any of the existing members went into the negotiations with any delusions as to the costs, as numerous studies had forecast that the new members would add as much as 60% to the 2004 budget of €100bn. Simulations in 1995 (based on 1991 data) showed that the Visegrad countries (Czech Republic, Poland, Hungary and Slovakia) would require ‘structural spending’ transfers for 2 to 3 decades until they were able to catch up to the cut-off of 75% of average EU income.  Custom Products estimates that it could take Poland 26 years, Romania 38 years and Bulgaria 46 years, to achieve this threshold (assuming 5% per capita GDP growth vs 2% for the EU on average). This should come as no surprise to anyone , as Ireland was a net recipient of EU funds for 32 years, until 2008; Spain for 23 years,  and  Portugal and Greece have continued to receive large net transfers since accession.

It is hard to blame UK citizens for being upset at what they perceive to be as rampant immigration. But it would also be disingenuous to put the blame entirely on the EU or Chancellor Merkel, rather than their leadership (both Labour and Tory). In fact, few have been as vehemently opposed to Turkey’s Accession to the EU as Merkel. Immigration, however, has generally been positive for the UK economy since the EU enlargement in 2004. Almost half of the Poles, who formed the majority in the initial wave of EU immigrants, have gone back as conditions in their home countries have improved.

No doubt, the UK and other member countries deferred too much to the European Commission when it came to accession negotiations for the new member states. Perhaps the UK should have been more vigilant, in foreseeing the loopholes that allowed immigrants to claim child benefits for their distant offspring, which were six times what they could receive at home. Nevertheless, it would still seem that overall, the UK has been a net beneficiary from its membership. And if Britons want to play the blame game, maybe they should start at home.

Dire Straits for central bankers - Money for nothing brothers in arms are out of ammunition

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Executive Summary

Better to sit down. We will be entering some pretty bleak conclusions in this report. The world’s central banks have hit stall speed. They have lost control and do not have enough altitude to recover. How bad can things get? There are two things at play here. One is economic (explicitly monetary) policy. The other is social reality (explicitly hardship). Both have become dysfunctional. Reckless central bank monetary expansion sold behind the banner of ‘nothing to see here’ has backfired. Money velocity (or the power of money) across the globe is plummeting to record lows. While the GFC was easily avoidable the post disaster mop up operation consists of printing our way out of the disastrous debt pile by inflating it away. Even negative interest rates leave inflation well below targets. Deflation still prevails. Poverty and post-GFC destitution has reached boiling point. When people feel robbed of their identity and increasingly their democracy we should not be surprised to see the rise of nationalism and non mainstream candidates and sadly violence, especially in Europe. This social disruption should not be ignored because the experimental financial engineering that was supposed to wiggle us from the bondage of moral hazard has had the complete opposite effect.

Here are 7 things to ponder;

  1. A recent US Federal Reserve survey found that 47% of Americans couldn’t raise $400 in emergency cash were the need to arise. 5% unemployment rate belies financial difficulties.
  2. A bank survey in Australia showed 50% of people wouldn’t be able to meet their financial obligations if unemployed for more than 3 months. Housing price to income ratio almost twice the level pre-GFC. Private debt: GDP ratio at 160%.Credit rating downgrade imminent.
  3. c.60% of ETF purchases in Japan and c. 100% of sovereign bond purchases are bought by the Bank of Japan which now owns 38% of outstanding government debt. 15 year Japanese government bonds now yield -0.004%. Japan’s move to negative rates  has caused a run on sales of mini-vaults as people look to store their own cash.
  4. M2/M3 money velocity has hit all time lows in the US, ECB, Australia, China & Japan.
  5. Italian banks non performing loans (NPLs) are approaching 20% and as high as 50% in the south of the country. The ECB is breaching their own covenants to hide the mess. Belgian Optima Bank has just been shut down for not being able to meet obligations. Many more?
  6. Over 25% of those in the EU live below the poverty line and youth unemployment is c.25% with long term unemployment now 50%. In Greece those numbers are 36%, 58% and 72%.
  7. China’s industrial sector among others shows clear signs of recording sales without much hope of being paid with receivables ballooning in some cases leaping to over 5 years of reported revenue pointing to a sharp uptick in corporate debt insolvency & NPLs to follow

I wish I could be optimistic about the future but I’m afraid there isn’t anything that shows much promise.

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