“Demands for further escape referendums.”
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
You know that things are bad when even the firmest believers begin questioning their faith. That’s what’s starting to happen in Europe, where the EU faces a dizzying constellation of threats and challenges and even the staunchest of eurocrats are beginning to express doubts.
Many people have lost trust in “entire institutions, whether national or European,” laments European Parliament Chief Martin Schulz. In an interview with the Frankfurter Allgemeine, he warned over a possible “implosion of the EU” due to the blossoming Euroskeptic movements in member states.
The main reason for Schulz’s gloomy disposition is the Dutch referendum vote last week against an EU-Ukraine trade agreement. It was the third referendum in a row that has gone against the EU’s interests, following Greece’s rejection last summer of the Troika’s latest plan and Denmark’s decision earlier this year not to seek closer security cooperation with Brussels.
In time-honored fashion, the EU’s response was to carry on regardless, announcing that it will shortly propose granting visa-free travel to Ukrainians despite the outcome of the Dutch referendum. In January, European Commission President Jean-Claude Juncker warned that if the Dutch voted NO, it could spark a “big constitutional crisis”; now, it’s as if it never happened.
“It may look as if we’re ignoring the Dutch voters, but we have to keep our word to Ukraine, which has met the conditions (for visa-free travel),” a Commission source said. It’s a risky strategy:
Large ranks of Dutch people are already deeply frustrated with the EU and their numbers are growing as fears about high immigration, slow growth and economic insecurity have risen. This is the second time in a decade that Brussels has ridden roughshod over the wishes of a majority of Dutch voters, who will have the perfect opportunity to express their dissatisfaction in national elections next year.
By ignoring the concerns of Dutch voters, the Commission has done itself no favors in the next European referendum, which is the most important of all.
On June, 23, the people of Britain will be granted the choice whether to stay in the EU or go its own way. If they follow in the footsteps of the Greeks, Danes, and Dutch before them, and vote against the EU’s interests, things could begin to unravel. As Schulz warned: “If the British leave the EU, there will be [other] demands for further escape referendums.”
It would certainly be the biggest political threat the European project had ever faced. The economic consequences could also be huge. In its latest outlook the IMF warns that a British exit “could do severe regional and global damage by disrupting established trading relationships.” The referendum has already created uncertainty for investors and a vote to exit would only heighten this, the Fund says.
One group of investors that is particularly concerned: big international banks. According to Chris Bates, a partner at law firm Clifford Chance, who has advised several banks on their Brexit plans, it is they who “have the most to lose.”
In the last two decades, the U.K. has established itself as the leading European hub for derivatives and foreign-exchange trading, particularly in euros. Around half of the country’s £6.9 trillion ($9.8 trillion) in banking assets are held by non-British institutions, according to Fitch Ratings. They include Goldman Sachs, arguably the most influential financial institution in Europe, which is leading the charge against Brexit by donating around $700,000 to a group lobbying for the UK to remain in the EU.
Goldman is helping to fund Project Fear, the massive PR campaign aimed at sowing and watering the seeds of dread about the potential consequences of a British exit from the EU. Yet the project doesn’t appear to be achieving its objective. If anything, it is fueling support for Brexit, as recent polls have shown.
The one thing about fear is that it’s hard to sustain for any great length of time, especially if the doom-and-gloom consequences foretold do not materialise. As the eurosceptic MEP Daniel Hannan puts it, “there comes a time when threats become so overblown that they serve to irk rather than to frighten.”
Unless the EU can find something with which to energize voters and make them feel good about being part of the most ambitious political project of the last 50 years — rather than just fretting about the potentially dire consequences of not being part of it — Brussels risks losing its grip, not only over the UK but over Europe as a whole. But how do you make people feel good about a project that appears to be unraveling?
Greece, for example, is no less bankrupt now than it was last summer, as last week’s leak of a private conversation between two IMF economists served to remind us. Many of the intractable economic problems facing Spain and Portugal, including out-of-control public debt, have not gone away; they have merely been put on hold until majority governments emerge that are more amenable to the Troika way of doing things.
As if that were not enough, France, the one European country that still knows how to party like it was 1789, or at least 1968, has taken to the streets en masse in protest against the government’s new labor reforms, all of which portends a rather hot summer in the Eurozone’s second biggest economy.
Meanwhile, in Italy the government and central bank are working day and night to find a rug big enough to hide the staggering pile of bad debt that has formed on the banks’ books. At last count Italian non-performing loans (NPLs) were estimated to be worth €360 billion, which is 18% of total loans and equal to one-sixth of Italian GDP. To try to address — or at least temporarily mask — the problem, the government has created a bail-out fund with a €5 billion backstop, in which larger, stronger banks are supposed to support smaller, weaker banks. Time will tell whether this contains or spreads the problem.
The “populist” governments of Poland and Hungary are digging their heels in on just about everything Brussels tries to throw at them, from immigration policy to media laws. Germany’s government, Europe’s ring master, has enough on its plate trying to placate voters’ fears about immigration while striving to put a leash on an out-of-control ECB.
One fears it’s already too late, especially with Europe’s biggest banks, from Deutsche to Santander, to HSBC and Credit Suisse, looking more and more unsteady. All the while, the clock keeps ticking down to June 23. On that day, fear may well be the deciding emotion in a vote that could change the world. By Don Quijones, Raging Bull-Shit.
Project Fear is in full bloom. In the event of a wrong answer in the Brexit vote, all manner of biblical disasters will befall the British. National income will shrink. Millions of jobs will vanish. The City of London’s core industry, financial engineering, will migrate across the channel. The currency will collapse. House prices will plummet. European firms will stop selling products to Brits. The US government will impose massive tariffs on British imports. Even Britain’s dismal climate will get worse. And now the Bank of England weighed in. Read… Brexit Meltdown at the Bank of England
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.