By Christian Takushi, Macro Economist – Zurich & Geneva on 14 March 2017: Elections in the Netherlands, France and Germany (this is an adapted version of the original)
The EU could shift further to a liberal-left course in 2018
“Continental Europe is not the USA“
Tomorrow Dutch voters elect the new parliament and this will subsequently form the government. The similarities to the UK and US shocks are there indeed: the experts and the polls predict the outsider has no chance. But then, Western Europeans are not as risk-friendly as Americans. There could be a surprise tomorrow with the Freedom Party of Mr. Wilders winning the elections. But barring a landslide, he will be unable to form a government. Putting emotions aside, we feel the Dutch vote is not critical for the survival of the EU. It is elections in France and Germany that really matter. The Dutch vote is simply not a foretaste of the French nor German votes; despite the wave of discontent against the liberal pro-immigration & pro-globalization establishment of left, center and right parties, all of these nations are distinctly different cases.
I stick to my assessment from earlier this year: The Voter Revolt we saw in Britain and the USA in 2016 is unlikely to be repeated in the EU in 2017. I am expecting either the SPD or CDU to form the new German coalition government. To some extent a missed opportunity to set Europe on a better course. The European Union actually needs to rethink the policies it has been using for 4 decades – it is time for a reflection and pause of strategic dimensions. The EU is flawed at its core. A future European Federation should have a more democratic and efficient foundation to compete and thrive. But the power of the state & state media and the reliance of EU citizens on the state are simply too big, at least for now.
Based on our current analysis, I expect the remainder of the EU to become even more left-leaning and liberal from Q4 2017 onwards. Without the U.K. the EU will veer further left into deficit spending, without reducing regulation and state controls. With consensus currently obsessed with the political risks, EU markets and the EURO could experience a temporary upward move in 2017. One that will not last for too long, though.
My assessment is unchanged: Most experts are negative, because this year they are overemphasising the geopolitical risks and underestimating the growing likelihood of a Revitalisation of the US Economy, and the fragile but steady recovery of the European economy. Economic and political experts see geopolitical changes damaging the world economy. I disagree: there are winners and losers. This doesn’t mean those risks cannot materialise. Economists are negative on the world economy, because they see two key drivers of GDP of recent decades (their favourites) threatened by the new US administration: Mass Immigration and Free Trade. But they may be wrong with their obsession on massive migration flows to keep our industrialised economies growing: The old “Policy Mix” boosted GDP and corporate profits, but at the expense of millions of lost jobs, salary stagnation and extreme political polarisation. The spillover costs of uncontrolled and illegal migration are overshadowing the benefits of legal migration in Europe.
What many economists are silent about: Mass Migration is not an indispensable “must” to boost growth. There are other drivers of economic development: deregulation, tax reduction, increased competition (i.e. breaking down oligopolies), technology, managed migration etc.. After three decades of escalating regulation, the proposed massive De-Regulation Bill by the new US Administration could spark a powerful economic revitalisation process. It could help the rebuilding of local economies and local supply chains.
GDP has disconnected itself from the median Incomes of 90% of households in many Western economies. We need to be open for new policy targets; especially aiming at qualitative factors, not simply quantitative ones. GDP per capita should replace GDP in order to have a more objective and migration-neutral assessment. If we expect to have 10% less people over several decades, we should be able to contemplate having a GDP that is 10% smaller too. Keeping our GDP per capita (or household income) stable over that period could be a basic scenario or minimum requirement for policy setting. The current Policy Mix aiming at ever bigger GDPs is leading to ever bigger consumption of goods, ever bigger generation of garbage, ever more pollution and ever more shipping of low added-value (i.e. cheap) goods. All of this is unsustainable for our eco-system and destroying local and rural economies. The shocks in the UK and USA in 2016 could be an opportunity to rethink our strategic economic and political goals.
Our Geopolitical Macro Research shows the new UK and US Administrations will not send the world economy into total protectionism and utter isolationism; they will rather result in a course correction. A much needed one after three decades of an ever more liberal Policy Mix of Money Printing (ultra low interest rates), Free Trade (de facto protectionism, managed trade & ever bigger oligopolies = erosion of capitalistic competition), uncontrolled & illegal Mass Immigration and Open Borders (disintegration of national states). I expect the USA and Britain to continue to need and to welcome migrants in the future, but in a legal and controlled way. Focusing on skills that are needed. The smaller burden on taxpayers via lower social security and law enforcement costs will subsequently allow for the de-politicisation of “immigration” and allow Americans and British to welcome migrants again.
While Religion is the most underestimated Geopolitical Factor of our decade, .. Regulation is probably the most underestimated Economic Factor. Given the state of the global economy, deregulation can be more effective than illegal and uncontrolled Mass Immigration going forward, because it doesn’t have the negative longterm side-effects that weigh on security, trust and the very fibre of our societies. But illegal uncontrolled mass migration is what Western leaders in Europe and North America have been silently pursuing in order to boost GDP growth and to lower wages to regain cost competitiveness versus Emerging Markets. Parties from the Left to the Right supported these liberal policies: Leftist parties welcomed their new voters, the big businesses behind the political Right welcomed the downward pressure on wages and the opportunity to shift millions of jobs to cheaper economies. The biggest problem being the tolerance for illegality, which erodes the acceptance of the Rule of Law by law abiding citizens & immigrants, builds resistance against the government; and polarises the electorate. All of it making Western nations less governable and predictable. But let us not omit this fact: Our governments’ tolerance of illegal and criminal immigrants out of excessive political correctness and economic interests has hurt law-abiding immigrants and genuine refugees the most. Our analysis is clear on this: Legal & controlled migration is necessary for the prosperity of advanced economies.
It would be wise for the West to look at the example of Japan in this context. Not every modern economy has to sacrifice its identity, culture and religion to simply be able to grow GDP a little bit more and at any cost. Over the past decade the EU took millions of immigrants, while Japan only a few – Japan has the strictest immigration policy of any major industrialised nation. Did the EU do so much better than Japan since the Financial Crisis? With so much immigration by the EU and Japan’s traumatic triple catastrophe of 2011, one would expect that it did, but the growth happened only at the surface. Japan’s GDP per capita grew actually marginally faster than the EU – currency moves included. That is astonishing, because the EU did not only take in millions of migrants, it also aggressively devalued her currency (EURO) against other major currencies to support her export industries. During the same time Japan had to face a sharp appreciation of the currency, followed by a correction.
Interestingly, just this week, Bloomberg, announced that Japanese households had reached a record high in their financial wealth. The best part of it is the steadiness of the wealth buildup, keeping in mind that for most of the past two decades the YEN has increased its global purchasing power. Most of it is invested in cash, cash equivalents and bonds. This shows that Japan’s “conservative approach to migration and investing” may have seem a “bad idea” during the boom years preceding the Great Financial Crisis, but over the long term, they are bearing fruit. While Japan faces big challenges, it seems to be in a somewhat better position than the EU to face them. The nation is not utterly divided and polarised, and it is not facing a serious internal security threat. Japan’s debt to GDP may be higher than the EU’s, but that debt/GDP ratio is not as crucial as financial media makes it to be. Macro economists would rather compare flows with flows and stock with stock. Looking at Japan’s assets vs debt, as well as interest income and GDP vs interest on debt service, the situation seems less critical. Japanese firms (along their German, US, Dutch, British and Swiss counterparts) have learnt to grow and diversify income and interest generation from overseas investments. To be fair, we’d like to add, that if we isolate Germany out of the EU, Germany has performed much better than the EU average. The comparison Germany vs Japan is almost impossible, since Germany was able to change its hard currency (D-Mark) against the EURO. The EURO has been a much softer and weaker currency by default than the D-Mark as it reflects the weighted economic performance of all EURO-Zone economies. Japan did not have this luxury – it has had to deal with a strong currency and bouts of overshooting for most of the past three decades.
The mayor of London recently implied that radical Islamic terror was a ‘normality’ in every major city of an advanced society: but he erred, the biggest city in the world, Tokyo, doesn’t have that problem. I am sure there can be an open-minded but controlled “middle way” between the two opposite extremes of the EU and Japan of recent decades.
Daring to look out into the Future of Europe
While our research points to a slow-motion deterioration of the EU and its eventual implosion, we see ultimately the rise of a European Super State or Federation in the long run. What the experts won’t tell you: The best friend of Berlin-Paris-Brussels is ongoing crises. EU leaders need unending crises to weaken the national states and to induce (force) them to freely hand over their sovereignties to Brussels in exchange for bail-outs and protection. The migrant crisis is a good example of this strategy of Integration through the back door. This is straightforward geopolitical-macroeconomic reasoning (I reject to work with conspiracy theories).
Just like the United Nations, the European Union is not as unprofessional or incapable as many critics say. The EU simply allows crises to rise and simmer, because this helps them achieve their undeclared goal: Total Power Concentration for the good of Europe. What I criticise as an independent analyst is that they don’t openly talk about it, nor would they let citizens vote over it. The EU and UN are making good progress towards their respective goals of Power Concentration. Those who want the EU to fail often oppose a Federal EU State and think it will never happen. But I humbly believe the demise of ‘this’ EU will only accelerate the process of a newly reinvigorated and more structured European Federation. That is inevitable: European history and global geopolitical trends make it more likely than not.
After promoting millions of immigrants to move countries, removing borders, weakening the Rule of Law and allowing big firms to become gigantic Oligopolies, the EU now can make the case that individual nation states can no longer cope with today’s challenges. And they have a point. Thus, overwhelmed nation states have to come together into Super States, of which the EU (or its successor, the European Federation) is the first one. In a not too distant future, individual nation states may exist only on paper.
Christian Takushi MA UZH,Macro Economist & Strategist, 14 Mar 2017, Zurich-Geneva, Switzerland. Text adapted for the public on 15 Mar 2017.
General Disclaimer: Global Macro and Geopolitical Analysis are highly complex and subject to sudden changes. No analytical method is without certain disadvantages. We may change our 3-pronged outlook within less than 3-6 hours following an event or data release. Global geopolitical macro analysis can be extremely time-sensitive and the first 24 hours after an event are critical for the response of a government, corporation, pension or portfolio. Only qualified investors and seasoned decision makers should make use of our geopolitical macro reports and treat them as an additional independent perspective. Every investor should weigh different perspectives as well as “opportunities & risks” before making any investment decision. Not all our reports, research and intelligence is published here. What we release here is delayed and adapted. The research & views we post here for public access are aimed at fostering research exchange (to improve our assessment) and helping decision makers adapt their long term & strategic planning to changing realities, not for short term decisions. If you are not a qualified or professional investor, you should get professional advice before taking any investment decisions.