Brexit?

brexitJune 23rd is a big day.  Brits, including all members of the Commonwealth, will be voting on leaving or remaining in the European Union (“EU”).  It’s a big deal.  And, it’s only the tip of the iceberg regarding the future of the UK and Europe.  At this point, the expected result of the possible British exit from the EU (called Brexit) is too close to call.  Here are some of the key points:

The Ayes.  Those who favor leaving argue that the EU has changed substantially since the UK joined it in 1973 with regard to size, reach of bureaucracy, diminishing influence and sovereignty.  They also point to the failure of the euro as a common currency and recent migration debacle across Europe.   Vocal supporters of the Brexit movement are the U.K. Independence Party, half the Conservative members of Parliament, Boris Johnson, former mayor of London, a group of “Economists for Brexit” and even Marine Le Pen, president of France’s National Front party.

The Nays.  Those who favor staying believe there would be huge economic losses, particularly in London’s financial sector, as well as the need to be part of larger block of like-minded companies to have real influence and security in the world.  British Prime Minister David Cameron leads the “remain” camp; his Labour Party, the Liberal Democrats and the Scottish National Party are all on board.  President Obama, Angela Merkel and President Xi Jinping of China also want Britain to stay in.

History.  In 1957, the Treaty of Rome created the European Economic Community or Common Market.  Britain tried to join in the 60s, but its applications were vetoed by Charles De Gaulle.  De Gaulle died in 1970 and Britain finally joined in 1973.

The debate is more than Brexit.  It really is a question of more European unity or less.  While some see “more Europe” as the solution to all of Europe’s problems, others see “less Europe” as the answer. Back in 1992, Margaret Thatcher proposed an “a la carte” system which would allow governments to be able to select the quality and degree of their participation in the EU as the best strategy for the future. Many EU member countries support that view today.

The EU institutions have failed in a number of key areas. First, the euro, established without a solid program of discipline or transfer payments, has led to stagnation, high unemployment and political instability in much of Europe. Second, migrants surged across Europe last year because the EU had abolished internal borders before strengthening external ones.  Creditor nations like Germany want “more Europe” and more discipline.  Mediterrean Europe would like “Europe lite” with more help on bailouts, sharing of debt, etc.

Potential Economic Impact of Brexit.  Two weeks ago, “Economists for Brexit” published a report that Brexit would be good for Britain– estimating in 10 to 15 years that its economy would be 4% larger than if it had remained. This group of academics likened the EU to a “walled garden” that imposes punitive tariffs and regulatory barriers on goods and services produced outside its 28 member state and that leaving the EU would enable the UK to unilaterally lower trade barriers.

On the other hand, last week the Bank of England warned that a vote for Brexit would be likely to cost jobs, raise prices and see the pound sterling plummet. The financial services industry centered in London could be one of the biggest losers.   On April 30th, the Economist opined that the EU would suffer from Brexit and therefore would not be kind to Britain afterwards during the ensuing two-year period of “divorce” negotiations.

Conclusion.  There’s a lot at stake in the June 23rd referendum for both Britain and Europe.  And, for many, it’s not just economics. It’s a part of a broader movement we’re seeing across the world- the election to president last week of a brash non-establishment politician in the Philippines, the huge popularity of “Hamilton” based on the centuries old, but still omnipresent, conflict of federalism vs. states’ rights, and, certainly, the presidential primaries here in America.  Angry voters across the world are not happy with the status quo and want a change to bring their country back to the “good old days.”  Anti-Europe parties across the continent are supporting and campaigning for Brexit.  Three days after the Brexit vote, Spain will be holding its general election.  In 2017, France and Germany and likely Italy will hold national elections. No wonder this referendum is too close to call and a potential harbinger of things to come in Europe and, perhaps, the world.

European Update: Secession, Tax Evasion, Downgrades, Bailouts

fee-only financial planners, investment managementThe Eurozone continues to struggle. Slow growth, lots of debt and millions of unhappy people. I thought it might be informative and interesting to look at recent anecdotal evidence from four countries. 

Secession is in the air in Spain. Catalonia, the Basque country and other regions are ready to become autonomous nations. The primary issue is… (drum roll)… money. These northern areas don’t want their tax dollars funding poorer regions in southern Spain. Catalonia, the home to Barcelona and millions of Catalans with their own language and culture, held elections Sunday. The results were inconclusive. The pro-independence parties won a majority of seats in Parliament, yet, Catalan President Mas, who has supported independence but also further austerity programs, saw his party lose some power. According to the Wall Street Journal on Monday, Catalans want independence and they don’t want austerity. Sounds like a group of teenagers to me.

Tax evasion has been rampant in Italy, Greece and some other countries for decades. It is estimated that Italy’s underground economy, excluding criminal ones such as drug rings, accounts for $350 billion per year. This is roughly 18% of the GDP. Taxes on that income, estimated at $150 billion, never make it to Rome. Roughly 50% of Italians report an annual income below $25,000, yet hundreds of thousands of these folks have large boats, luxury cars or helicopters. Now, the Italian government is fighting back. They are distributing a “tax-cheat self-test.” This allows people to gauge whether their declared income is in line with what they spend annually. The Italian tax authorities hope people will use this self-assessment tool to voluntarily file correctly in the future. In addition, the government is sponsoring TV ads comparing tax evaders to various animal, fish, wood and intestinal parasites. Two questions: Is it any surprise that Italy has troubles balancing its budget? And, do you think the self-test or calling someone a “tapeworm” in Italian will change their behavior?

France received a bond downgrade last week. Moody’s stripped it of its AAA rating; citing France’s sustained loss of competitiveness, deteriorating economic prospects and its large financial exposure to peripheral Europe. The Economist noted last week, in a special report on France, that the business climate has worsened. French employers pay 30% of labor costs to fund social security. No fewer than 34 laws and regulations start to apply once an enterprise reaches 50 employees. It’s not surprising that researchers are finding that a significant number of French companies have exactly 49 employees. There is now a 75% top income tax rate, unemployment is 10% and over 25% of the young are jobless. Is it any wonder that so many entrepreneurs are leaving the country and/or sending their children somewhere else in the world for a brighter future?

Greece received a bailout on Tuesday. European finance ministers eased the terms on emergency aid for Greece. In fact, Bloomberg reported that the ministers declared that after three years of false starts that “Europe has found the formula for nursing the debt-stricken country back to health.” The ministers cut rates on bailout loans, suspended interest payments for ten years and gave Greece more time to repay the loans. Quite a formula. Greece will get the December loan installment of $45 billion despite the fact that its economy continues to shrink. It is good to see they will make it through 2012 as part of the euro. January will be the next test. Greece needs $12 billion. They will get it only if the EU, ECB and IMF certify that they have implemented a tax reform by that time. Perhaps they can get the Italian tax self-test and the tape worm commercials translated into Greek.