With Boris Johnson’s landslide victory in last week’s U.K. general elections, the path to Brexit is now clear. I believe that the Prime Minister will have Parliamentary approval for his Brexit plan by Christmas and that the U.K. will, once and for all, leave the European Union by the end of January 2020. It’s been quite a journey, but now the E.U. will have to deal with a gut-punch in the form of the U.K.’s exit.
The numbers, as always are key.
The U.K., with a population of 67 million, represented about 13% of the E.U.-28’s population as of the U.N.’s population report in mid-2018. The “E.U.-27” will have a population of about 450 million, still the third-largest entity in the world after China and India, but with less impact and less of an advantage over the U.S. and its 327 million populace.
The demographics of the “E.U.-27 “ are decidedly elderly, with an average median age of 42.9 years, according to the CIA World Factbook. Among the world’s “oldest major countries,” Germany, Italy and Greece occupy the #3, #4 and #5 spots on the list.
According to the World Bank, the E.U.-28’s GDP was $18.8 trillion in 2018. Subtracting the U.K.’s $2.8 trillion figure gives the E.U.-27 a value of only $16 trillion, well behind the U.S.’ figure of $20.5 trillion. Thus, Europe is at risk of being overwhelmed by China’s still relatively fast-growing economy, which totaled $13.6 trillion as of the most recent data.
So, the decline of the EU’s importance on a global scale may be a blow to the egos of the incompetent technocrats who run the European Parliament in Brussels, but the real impact on the average European is destined to be felt in the worst of places, the wallet.
The Euro is structurally overvalued, and I believe this applies to exchange rates versus the Dollar, Pound and, increasingly importantly, the Chinese Yuan.
It is the other European technocrats, the leaders of the ECB—currently headed by former IMF Chief Chrisitne Lagarde—that have exacerbated this situation with negative interest rates. The EU’s benchmark rate, for its deposit facility, has been below zero since June 11, 2014.
An older population is likely to form households, meaning less likely to buy big ticket items such as houses and cars, and more likely to save. So, let’s reward Heinrich and Hannah’s lifetime of frugality (Germany has one of the highest savings rates on the planet) with negative interest rates. That will teach them!
Lagarde famously said on October 30th “We should be happier to have a job than to have our savings protected.” Nonsense. Absolute poppycock. If U.K. voters were voting for the arrogance of such a statement versus the pragmatism of the Bank of England’s Mark Carney, they would have voted to leave the E.U. in 2016 and to give a huge majority to a P.M. that would ensure that exit will finally happen in 2020. Well, I guess they did.
So, the Euro is, in my opinion, a structural short. I mentioned Germany Inc., as one of the first casualties of the declining prosperity in the EU-27 in my Forbes column last week, and I think Germany’s economic cold will cause a much more serious prognosis for the structurally-weaker Southern European economies.
I was working in the U.K. when the Euro was launched in 1999 and when it became a real currency with the introduction of Euro notes and coins in 2002. Both events were greeted with much skepticism by my British co-workers, and in those days one pound routinely bought more than 1.60 euros. Today that figure is 1.20, a strong recovery from August’s low of 1.06 on the back of BoJo’s crushing victory, but still light-years away from its level 20 years ago.
Why is that? Is Continental Europe really growing more quickly than the U.K.? And can Continental Europe maintain even its meager pace of growth without the contribution of the U.K.?
I believe the answer is “no” on both counts, and I am setting up long GBP/short Euro trades for my trading venture, Excelsior Capital Partners.