BrexMyth 2: Geopolitical Pivot

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Includes: DBUK, DRR, DXPS, ERO, EUFX, EUO, EWU, FKU, FXB, FXE, GBB, HEWU, QGBR, ULE, URR
by: Evans Osemwegie

Summary

Erroneous facts are fueling Brexit myths.

The EU lacks democratic legitimacy in the eyes of most Europeans.

We are seeing significant shifts in global geopolitics.

My previous article "BrexMyth: The Red Herring" has proven to be controversial, so I have decided to publish a follow-up article and take the analysis even further and put it into its broader geopolitical context.

In my opinion, the central problem that the EU faces is that it lacks legitimacy according to our perception of how power should be acquired and utilized.

People need to feel that their rulers are close by and are taking their concerns into account; if not, they will rather be ruled by an authority that feels closer to them even at the cost of weakening themselves in the short, medium, and long term.

A very good example was in the ancient kingdom of Israel. The reign of King Solomon was the most prosperous season for the nation of Israel. The center of power was in the South which encompasses Jerusalem the capital and at its core were the tribes of Judah and Benjamin.

The other 10 tribes were located towards the North but these 10 tribes felt that under the reign of King Solomon, the taxation on them were excessive and they did not feel that they were part of the decision-making of the nation.

After the death of King Solomon, the Northern tribes went to his successor who was King Rehoboam and appealed to him for lesser taxes and greater representation, these requests were eventually turned down and the 10 tribes decided to leave the union and start an autonomous government but in the end, neither kingdom survived with the Northern Kingdom succumbing to the Assyrian empire while the Southern Kingdom were destroyed by the Babylonians in 587 BC.

While unity was no guarantee that they would have survived, it is very clear that the break-up led to various conditions that culminated in the destruction of both kingdoms because they were surrounded by very aggressive and ambitious nations on all sides including the Assyrians, Egyptians, and Babylonians.

This ancient story is important because from it we can draw out a number of lessons to apply to the contemporary challenges we are now confronting particularly with this Brexit challenge.

There is a disingenuous conflation of challenges by the media that has misinformed well-meaning people to come to erroneous conclusions.

While I believe that the biggest challenge that the EU faces is this democratic deficit, I also understand that there are challenges and questions that need to be answered.

These challenges stem primarily from economic difficulties in the UK at the moment whether it is lack of jobs, public sector cuts, higher taxation, lack of social housing, immigration and so on.

These problems are not particularly due to the UK's membership of the EU but are firstly a result of Britain's colonial past whereby the overwhelming majority of immigrants have come from former British colonies. Furthermore, the amount of EU immigrants claiming benefits from the UK are extremely small and make up about 1.5%-1.9% of the total welfare budget and when compared to their net contribution to the UK exchequer, it really pales into insignificance because migrants from the EU contributes far more than they take from the UK.

Nevertheless, these problems are more due to convulsions and changes in the global economy than they are from a grand scheme of the EU to impoverish the British people, the inability of the media to do this has mischaracterized and demonized the EU in the eyes of the British people to the point that it has become easy for members of the British political class to blame the EU for their failure to govern with wisdom and fairness.

When one looks beyond the headline and looks at the underlying philosophical underpinnings of the different authorities, one will find that rather than trying to make Britain poorer, the EU is far more inclined to protect its citizens from exploitation by big business and globalization and this includes having a strong welfare state, strong employment rights, strong antitrust regulations and strong social bonds. Paradoxically, as an investor, this is what I do not like about the EU.

On the other hand, the British government are very neoliberal and place more emphasis on efficiency which somehow seems to involve privatizing functions of the state to corporations, an example of this at work is to see how the UK are vehemently opposed to the financial transactions tax which after studying the details will reduce the emphasis on the European economy especially London on financial transactions and channel it into more permanent GDP producing activities.

It is not my goal to assert that the EU is better than the UK government or vice versa but simply to submit that they need each other because the UK tempers the EU's socialist tendencies while the EU tempers the UK's neoliberal tendencies.

Without each other, we will see a serious imbalance in Europe as a whole because the two factions have continued to denigrate the difference of the other rather than see it as a strength. This is the big problem of perception that the EU suffers because everyone thinks that the diversity is a weakness rather than seeing it as a strength that can actually help the EU to weather global storms in a way that no other region on earth can because its economies are diverse with strengths in financial services, innovation, creative industries, manufacturing and production, agriculture, education and many more.

What the EU needs to do is work much more directly at the grassroots level because up to now, it tends to work through national agencies and while this model is more efficient, it does not pay off in political capital because for many Europeans, Brussels, and Strasbourg remain distant lands for which there is no affinity in the same way that Ancient Rome was perceived by the nations it conquered.

Unfortunately, it is unlikely this will happen because the political will is not there and there is a deep distrust of the EU institutions and going forward, this distance between the politicians will only get wider as a fundamental split within the EU itself begins to manifest.

The result will be that going forward, there will be two factions within the EU, with the UK with a George Osborne premiership and others like the smaller nations like Hungary and Latvia will pivot more towards what I believe will be a Hilary Clinton presidency while the other faction that includes Germany, France, Belgium, Italy and so on will pivot more towards Russia and the emerging markets like Africa, parts of South America and South East Asia with China as the power broker between these two factions.

As this happens, this alliance between Russia and the Eurasian union, France and Germany will become the new dominant force in the world and will draw in Turkey and the other Islamic nations like Iran and Indonesia. When coupled with the support of China and their investment in Central Asian infrastructure and transportation, then we are seeing the completion of Halford John MacKinder's 'Heartland Theory' where he suggested that the political power that controls the land mass of Asia, Europe and leading into Africa will control the world.

So while it may seem that this is about Britain in the EU, it is more than that, Britain is in the middle of a global battle between political alliances for global domination.

Whether Britain stays in the EU or goes out is not as important as how they position themselves between the two factions vying for global domination. The position that they take will be critical if the US is to maintain its position in the world, I believe that Britain will move more towards the US especially under a Hilary Clinton presidency but it will then be up to President Hilary Clinton and the Fed to press home that advantage particularly within institutions like the IMF, World Bank, UN, WTO, and BIS.

I fear that even this will not be enough and over the course of the next Presidency, we will see a gradual decline in the USA's global influence and for investors, this presents a once in a lifetime opportunity to also gradually pivot away from US and dollar based assets into more locally denominated fixed income instruments and infrastructure investments particularly in Asia.

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.