Brexit: The beginning of the end for EU
On 23 June, the UK will hold a referendum on membership of the European Union. Donald Tusk, president of the European Council recently said that a UK vote to leave the European Union could threaten “western political civilisation”.
This is perhaps a far-fetched comment, however, there is no question that the UK referendum is one of the most important political/market events to take place in the last 30 or 40 years, on a par with the fall of the Berlin Wall in the late 80’s or the introduction on the single currency in the 2000’s.
And I say this, not because the future of “western political civilisation” is at risk in case of a leave vote. However, the future of the European Union as we know it will be at risk and, if indeed a Brexit vote materialises, I foresee an end to the EU starting in about three years time, in 2019, which is the year Mario Draghi’s mandate at the ECB ends.
There is clearly a growing sentiment of frustration with the whole European project, and even countries with historically strong support for the project, are now beginning to doubt the merits of keeping the Union. The lacklustre economic recovery post 2008, the immigration crises and the lack of a clear, strong leadership have all contributed to the sense of frustration.
A leave vote in the UK will certainly open the door for voters of other countries to demand a similar consultation. The migration crisis is certainly no going to get better and a return to better economic conditions that could fuel a broad based recovery is highly unlikely.
One of the consequences of the single currency has been a massive debt binge of the peripheral countries that are only being momentarily saved by the non-standard policies of the ECB. This will not last beyond 2019 as the Germans will not allow another ECB president that departs so wildly from their strict doctrines.
The confluence of a stricter ECB and the demands of voters across Europe, will certainly mean the end of the European Union in its current firm. The easiest and less dramatic way forward, would probably be the unilateral exit of Germany, since I predict that they will not accept a lax ECB post 2019.
If this scenario materialises, the peripheral states will certainly need to default or, if the keep a Germany-less Euro, it will have to devalue dramatically, possibly by more than 30%.
Europe needs two currencies, one for the “saving countries” and a different one for the “spending countries”, let’s say a Euromark and a Eurofranc. Currently, like Donal Tusk’s comments, this is perhaps too far-fetched but I think the referendum on the 23th has the potential to start rolling the ball in that direction.
David Levy is CEO at Spain’s DiverInvest Asesoramiento EAFI