The Brexit And The European Embrace Of Populism

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Includes: EWU, FXB, FXE, IEV
by: Adam Whitehead

Summary

The UK referendum vote rather than just its outcome are the catalysts for European political and economic reform.

Core Europe wishes to halt deeper integration whilst focusing on finishing projects already started.

Populism is becoming mainstream as the existing mainstream status quo embraces it.

The rise of populism reflects an aversion to real economic reform.

The Eurozone embrace of populism threatens protectionism and trade wars.

In the last report the UK EU referendum was suggested as being the catalyst for Eurozone reform despite the outcome. Further support for this thesis was provided by Austrian Chancellor Christian Kern, when he opined that "Whatever the outcome of the British referendum, afterwards Europe will not be able to shy away from a few much-needed debates."

Wolfgang Schaeuble also believes that the EU must change, whether Britain remains or not. In a last minute bid to encourage British voters to stay in and also to reach out to Eurozone populists, he opined: "Even if a majority decide to stay we cannot continue as before otherwise people will say: 'You've not understood'."

(Source: Seeking Alpha)

Eurogroup Chief Dijsselbloem, drew a line in the sand on the European Project in light of the circumstances. He does not envisage any deeper integration initiatives, before and unless the current sub-projects have been completed. Potential Brexit voters may have challenged their beliefs based on his words about deeper integration, especially as he had previously left the door open for Britain to re-join a reformed EU in the future post-Brexit.

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Source: Spiegel Online

The last report ended with an introduction of the Trans-Atlantic interest in the Eurozone's political reformation, in the light of Jean-Claude Juncker's pivot towards Moscow. Further evidence of this hostility towards Russia was evinced in a recent Spiegel expose; which alleged that Islamic State's European hacking apparatus is a sock puppet for Russian intelligence.

The invisible hand of the Kremlin was also found in the off-field activities of Russian spectators, attached to the official national football party, at the European football championship. The appearance of Trans-Atlantic interest was curiously coincident with these Russian highlights of the European lowlights of Islamic Terror and related Eurozone breakup. It was also coincident with the growing split between Merkel's party and its coalition SPD allies, as the German elections approach.

The SPD is taking a more traditional conciliatory attitude towards Russia, when faced with the other imminent challenges to Germany from within Europe. Evidently the SPD has not seen the strange coincidence of some of these other challenges and Russian influences.

Apparently the French Socialist government hasn't seen these Russian influences either; and is now actively seeking a debate that will overturn sanctions against Russia. To drive the wedge between NATO and its weaker European partners further, on the 75th anniversary of the Nazi attack on Russia, President Putin berated the West for its strategic failure to build "a modern, non-bloc collective security system" with Russia.

The good work done by President Putin's foot soldiers, on the streets and terraces in France, of punching rather than nudging Britons towards the Brexit was swiftly undone by one of Lenin's eponymous useful idiots on the streets in Yorkshire. The profane risk on rally, in response to the martyring of UK Stay In campaigner Jo Cox, however failed to hide the widening cracks appearing in continental Europe itself or the resolve of the leave voters.

(Source: Bloomberg)

The upcoming Spanish re-run election will be widely unaffected by the British murder tragedy; and still seems set to deliver yet another indecisive outcome. In order to avoid the continuation of the current political vacuum, all parties involved are quietly negotiating configurations for a new coalition.

The incumbent party may have to drop Prime Minister Rajoy and his strong EU-centric line, if it wishes to retain its position; and presumably its name as the Popular Party. Interior Minister Diaz may also become a casualty, since he was recently caught on tape trying to create compromising material on Catalan politicians. As the incumbents embrace populism, the populists reach out to the traditional incumbent voters. Populism has also become mainstream in Spain as the two sides coalesce.

As was concluded in the previous report, political incumbents are now having to embrace populism in order to retain their grip on political control. It now remains to be seen if the incumbents will genuinely embrace populism; or try and subvert it to the centralized European doctrine of old, once the threat has been neutralized. The new European Project is therefore to integrate populism into a broad church and then gradually kill it.

In Italy, Five Star has a new face; that is far more electable and hence credible than that of Beppe Grillo and his mascot V.

Virginia Raggi romped home to win the Rome mayoral election and her colleague Chiara Appendino took Turin. The party is no longer one of comedic protest. It has become a credible alternative to Matteo Renzi and his European bona fides. On the back of its domestic victory and the British referendum catalyst, the party wasted little time calling for a referendum of its own on EU membership. It joins France and the Netherlands where the populist parties have also demanded a referendum. Populism is now mainstream in Italy, just as it has become in a host of other European nations.

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(Source: Business Insider)

The European reformation thesis presented in the last report was recently given support by analysts from Morgan Stanley. In their opinion: "A UK vote to leave the EU would clearly cause protracted political uncertainty for the UK and for Europe more broadly. But a vote to remain - which remains our base case - might still leave us with a deeply divided nation, divisive UK politics, and a hesitant European Union. What's more, in our view, the political discontent that is being displayed around the public debate about Brexit is deep-rooted and likely to be echoed elsewhere. The political fragmentation that currently manifests itself in an increasingly populist debate about the UK's EU membership is neither limited to the UK or Europe nor it is likely to dissipate quickly, we think." The report failed to highlight the response of the entrenched political orthodoxy in all nations to embrace, subsume and then bury populism under layers of fiscal and monetary policy expansion.

As was said in a previous report, the voters of the Eurozone have no real stomach for structural reform, which is why they want to hide behind a protectionist wall that excludes immigrants and industrial competition. The populist promise to deliver this solution is seductive yet impractical. Worst of all, it may lead to reciprocal protectionist action from other nations that creates trade wars and worse.

Populism thus brings with it a new set of problems, which are insoluble at the global level without the existing global framework and institutions. Said existing global framework and institutions are now under invasion by the populists. The populists therefore need the hated political incumbents as much as the incumbents need them. Since the voters do not sincerely wish to embrace reform, they will therefore have to accept the inevitable political compromise that sells them short on populism's promise. If fiscal and monetary policy expansion create the semblance of economic growth and rising equity prices, said voters will be easily bought off.

The German Constitutional Court signaled that it is fully prepared to subsume itself to Brussels when it reluctantly ruled favorably on the legality of the ECB's OMT operation. The precedent set by the European Constitutional Court was sighted as forming the basis for the German ruling. Whilst accelerating the process of fiscal and political union further, this ruling will have created an equal and opposite force from Germans who feel abandoned from protection by their own legal system.

As the UK referendum dawned, the full force of the coordinated attempt of the status quo to bully the British voters into making the stay in decision was apparent throughout the global media channels. Having said that they were preparing to provide emergency liquidity in the event of a Brexit vote, global central banks then jumped the gun by trying to price in a stay in vote prematurely. The respective central bank plunge protection teams all did their bit, starting with the BOJ leaning on the Yen in the early hours of June 23rd. Price action in capital markets had therefore already discounted the remain outcome, even though this needed a 60/40 margin for success and the polls were showing closer to 50/50. Markets were already fully discounting stay in, so that the precipitous drop when the leave vote became the reality as the count results came in was a formality rather than the unprecedented move broadcast in the media. The real unprecedented move that sets the precedent for the expansive monetary policy reaction has yet to occur.

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.