The EU's Long-Term Immigration Problem
Everyone seems to agree the Brexit vote means something, but there are many versions of what the exact consequences will be. We can probably safely say three things:
- The future of the EU is uncertain.
- The future of the EU's currency is uncertain.
- This is a long-term problem.
One of the main reasons for the British vote is anxiety over EU immigration rules. This is a hot button topic all over Europe, and it seems to have no easy solution, most especially in the near term.
Even before the 2015 terror attack in the UK, more than three-quarters of the UK wanted to reduce immigration:
Prime Minister David Cameron had been promising to curb immigration, and the "Leave" crowd was touting Brexit as a way to do just that. Most British citizens felt Brexit would lower immigration, and the official Leave EU twitter account left no doubt about what a vote to leave meant:
But problems around European immigration are not so easy to solve.
One important pro-immigration force is the long-term population problem that pervades Europe. Look at the population pyramids for large EU members Germany, Spain, and Italy. Note that these are not healthy pyramids - there are not more workers and consumers coming along to replace the retiring generation. This problem is in every European country.
Europe needs immigration, and it is a long-term problem.
There is also the humanitarian justification for immigration - many of the immigrants come from war-torn countries. War is a constant on Earth, and humanitarian justification for immigration is also a long-term trend.
So there are two important long-term pro-immigration trends in Europe: population problems and humanitarian concerns. But there are also two important long-term anti-immigration trends in Europe: Islamic extremism and the shrinking middle class.
There have been seven EU countries hit by Islamic extremist terrorism in the last five years. The pace is quickening - there have been seven attacks since January 2015, with one coming in the UK (three in France). On Tuesday, Turkey's airport was targeted - Turkey is trying to become a member of the EU.
Islamic extremism goes back to the seventh century, and the Quran and the way some people interpret it has not changed. There is also the fact that Islam is the fastest growing religion in the world (the number of Muslims in the world will nearly double from 2010 to 2050). So all things being equal, the number of Islamic extremists is likely to grow along with the mainstream religion.
There is also the power of technology and social media for Islamic extremists to spread their message and recruit, as well as spread panic through EU citizens.
Do Europeans really relate terror to immigration? It seems so. Mujtaba Rahman from the political risk and consulting company Eurasia Group gave this quote to the New York Times after March's terror attack in Brussels:
There is a growing perception among European public opinion that E.U. leaders are not in control of the Continent's terrorist threat. Combined, these attacks will increase xenophobic and anti-immigration sentiment across the E.U., which has already been rising in light of the E.U.'s ongoing refugee crisis... have and will continue to conflate refugees with terrorism. This will in turn put more pressure on incumbent governments and limit their space for policy action to address Europe's multiple crises.
Do Europeans really fear Islamic immigration to the point that they would leave the EU and its immigration rules, potentially damaging the European economy and ruining the euro currency? It is a real possibility.
Germany and France have the largest Muslim populations in Europe (but are about average by percentage), and about half of their citizens are not very welcoming of Islamic immigration. As of May, polls showed that:
- 63% of French and 48% of Germans regard Islam as too visible and too influential in their society.
- 52% of French and 49% of Germans oppose the building of mosques.
- 47% of French and 43% of Germans view Islam as a threat.
- 67% of French and 60% of Germans blame a perceived failure by Muslims to integrate into society on a refusal to adapt to local customs and values.
The trends of Islamic extremism and European aversion to Islamic immigration are unlikely to abate any time soon, and all things being equal may only grow as Islam grows.
Another long-term reason for European consternation over immigration is the shrinking middle class. Automation and inequality have imperiled Europe's "American Dream." The last thing workers who feel forgotten want is more competition for jobs.
Automation, AI, and robotics are only getting started, while inequality is only getting worse. These are long-term problems for Europe's middle class.
The trends of European population problems, humanitarian concerns, Islamic extremism, and the shrinking middle class are all long-term trends. Europe's immigration anxiety will not be resolved in the near future, and the EU will not have certainty in its economic future (the good kind of certainty) for a long time, if ever.
There is also the matter of the perimeter countries like Spain, Portugal, Italy, and Greece. Their problems have only been kicked down the road, and the real solution seems to remain going back to their own currencies. This will put even more pressure on the EU to fracture.
All of this should promote weakness in the euro, both incidental and intentional.
The fracturing of the EU, and the fear of it, will likely engender economic weakness from things like lack of investment and trade inefficiencies. Weak economies tend to have weak currencies, so this is a long-term headwind for the euro.
In reaction to the weakness, the European Central Bank will be under even more pressure to take steps to prop up the economy, like charging negative interest rates to increase spending and weaken the currency to promote trade.
In addition, the euro was seen as something of a safe haven currency - based on more than two dozen modern European economies, its safety seemed second only to the dollar. Now the euro may not exist in the future, and its safe haven status is over forever. There is a lot of money that would otherwise be in euros that will now be in dollars, gold, yen, or some other currency. Demand for euros looks permanently stunted, and the currency should be weak for a long time.
The EU's uncertain future will likely mean weakness in the euro for a long time to come.
Trickle Down to World Currencies
When a currency weakens, it does so in relation to other currencies. So when one currency weakens, every other currency is relatively strengthened.
It will matter a great deal to exporters like China, Japan, and the emerging market countries if a major world currency like the euro weakens. Chinese exports will suddenly be more expensive and less in demand than European exports, and this is not acceptable. Places like China, Japan, and the emerging markets will almost assuredly weaken their currencies to stay competitive.
Bottom Line for Retirees
We have repeatedly promoted the idea that currency risk is an unnecessary risk for US investors, and that staying domestic and over-weighting the world's number 1 economy is a moderate risk worth taking.
With the Brexit, it now seems that world currencies are at a great risk for long-term weakness versus the dollar, and there is more reason than ever to stay American.
Elsewhere in Retirement
While staying American, where should retirees stay in America?
Bankrate.com did a recent survey to find which US cities are the best and worst places to retire. The results are based on cost of living, climate, healthcare cost and quality, taxes, crime, well-being, walkability and cultural vitality.
There was not much of a pattern to the winners, but the losers were mostly in the Northeast.
Top 5 Cities for Retirement
1. Arlington, Virginia
2. Franklin, Tennessee
3. West Des Moines, Iowa
4. Sarasota, Florida
5. Scottsdale, Arizona
Worst 5 Cities for Retirement
1. Niagara Falls, New York
2. Milford, Connecticut
3. San Bernardino, California
4. Troy, New York
5. Worcester, Massachusetts
As far as best states for retirement, Caring.com recently ranked the best states on quality of services available and the cost of those services.
1. South Dakota
8. South Carolina
1. West Virginia
2. New Jersey
3. New York
6. Rhode Island
8./9. Pennsylvania and Ohio (tied)
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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.