Is Brexit Inevitable?

| About: CurrencyShares Euro (FXE)

Summary

Monetary union without fiscal union is a recipe for disaster.

Angst from conservative countries to big government countries is bound to tear the EU apart regardless of the benefits.

Nationalistic opposition and leaders are utilizing the EU as an easy target to blame for global demographic issues and poorly planned social programs.

Brexit is a poor outcome for the world, however it is likely an inevitability regardless of the current vote as growth stagnates and citizens look for someone to blame.

The European Union (NYSEARCA:FXE) is one of the strongest economic powers in the world. The region generates nearly a quarter of the world's GDP, and it hosts a large percentage of the world's middle class. By removing barriers to migration and trade, the European Union has benefited much over the last decades. Furthermore, EU membership has been a powerful carrot for drawing eastern European countries away from Russian influence. However much the benefits of the union, there remains frustration and uncertainty regarding its future. I have always had the view that monetary union without fiscal union would lead to frustration, anger, and act as a wedge between left and right wing countries.

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Eurozone Boom And Bust Bailouts

One of the most prescient examples of this frustration comes from Greece. A state that had no issues 'massaging' its deficit numbers to gain access to the Euro, only to utilize cheap German-backed bonds to fund its extravagant social program and public graft. Ending in the inevitable catastrophe that we all saw over the last ten years, the rest of the eurozone was left to pay for the outsized public spending of Greece. To be sure, the UK is not liable for future bailouts. Nonetheless, the frustration built on the back of the crisis is powerful.

Migration and Distribution Of Wealth

As a whole, the EU works to distribute wealth. By reducing tariffs and freeing movement, citizens from low-income areas can move to areas of high income. This should do two things. First, it should increase the income of the EU as a whole as average wages rise. Second, it should help to move money from the west to the south and east as workers send money home. None of these are bad things, increased wages across the EU should result in a positive feedback loop as consumption grows. Certainly, we can expect salaries in the richest countries to stagnate or drop as migrant workers increase the number of people vying for the same jobs, but increasing the middle class across the EU should also lead to rising consumption. Increasing consumption should then result in economic growth.

Aging Demographics And Stagnating Growth.

The crux of the matter is that aging demographics have led to struggling growth across nearly every European country. Aging populations have crippled pension plans in virtually every country, and cheap debt has caused many EU countries to binge at the expense of its future.

As a result of stagnation, frustration levels rise from the far west to the far east. People look for someone to blame. In Greece, the average civil servant can make nearly three times as much as in a public sector job. Tax receivables are laughable, and everyone else is blamed by everyone else. Rich country nationalists point to the poorest as why the EU has failed, without recognizing the benefits experienced by the richest countries as citizens used their Euro's to purchase goods. The EU has increased growth from what would have existed without it. It is evident from studying Japan, and the United States, that the economic stagnation is not isolated to Europe.

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Someone To Blame

Most of all, people in the richest countries that have experienced over a half century of constant growth are frustrated. Stagnating wages and falling median household income mean that people today are worse off than people ten years ago. The expectation that tomorrow will always be better than today is both absurd and unfair. As stagnation continues, many countries are focusing inward and looking toward nationalistic leaders. Nationalistic leaders have always made a villain of some outside force; the nationalistic leaders in Europe use the EU, Trump uses immigration from Mexico and the Middle East.

It is always easier to blame someone else for your issues. And, the grass will always be greener on the other side for many of the general electorate. At any rate, it is clear that growth of the world economy is set to slow for the foreseeable future. Slowing growth is certain to create angst for citizens everywhere. Where there are frustration and anger, there will be political parties willing to utilize that frustration and anger to gain power and prominence. Britain may remain in the EU for now, but opposition parties will continue to blame the EU and foreigners for global issues; it is much easier to blame outwardly than accept that slow economic growth is the new normal. A vote for Brexit would merely hasten the deterioration of economic growth, not stop it.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.