Geopolitical Update: Brussels fears a No Deal – Market Impact of No Deal

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Christian Takushi, Macro Economist & Geopolitical Strategist. Switzerland – 18 Nov 2018 (Reduced public release 20 Nov 2018)

Consensus is currently focusing on the political drama in London around BREXIT. Not everything is negative though: As the deadline for the exit draws near and tensions rise, the set of probable outcomes is shrinking. We have our own analysis of the  BREXIT process since 2015 and we do currently disagree with some widely shared views out there.

Our three main deviations from consensus: Growing fears in Brussels, Betrayal of Brexit?, Is No Deal a disaster? 

We also look at four impacts: Central banks role, more European Integration, EU & USA on collision course, How a No Deal may impact Markets 

Most investors have aligned themselves with a Soft BREXIT deal. Reason why we have analysed the impact of a No Deal on Geopolitics, Budgets, Military and Markets.

1) Growing fears in Brussels

Consensus is overlooking the growing stress in Brussels and a number of EU capitals. The reason? Brussels may have miscalculated. EU officials are increasingly worried that the UK will steer to a No Deal. This won’t be only due to London politics, but EU strategy. Consensus is so far overlooking the tremendous possible cost of a No Deal on the EU. This might not be the only negative long term consequence of the “Punish Britain” strategy.

Brussels’ retaliation against London (a mix of punish, threat, frustrate, delay and even humiliate) was aimed at forcing the United Kingdom to give up Brexit or to steer it towards a late Soft Brexit deal. An interesting factor is underestimated by markets: at the beginning of negotiations with Brussels, the British Prime Minister was close to his cabinet & party, and defiant of Brussels. But as Mr. Cameron and Mrs. May have both shown in recent years, after months of negotiations with the EU, the British Prime Minister ended up much more aligned with Brussels and distant from his or her own support base. This can produce a backlash.

Financial media has so far focused on trade & budget flows, but overlooked the complex geopolitical side-effects. Let me mention just two of them.

a) BREXIT is shifting the political balance of power within the EU – away from the conservative fiscal discipline upheld by Germany & Britain .. towards a more liberal deficit spending course. Deficit tolerance will rise just as a top-3 money contributor pulls away. And the budget view dramatically understates the UK’s contribution to the EU. The UK’s Military & Security shield over the EU cannot be replaced in the foreseeable future. 

Germany and the small Nordic nations cannot enforce fiscal discipline on the EU like Germany-Britain did. And without its key ally Britain, Poland is likely to clash more with Germany and the EU. Furthermore, the more Brussels alienates Warsaw, the more the latter will embrace Washington and their growing bilateral military alliance.

While Italy and other austerity-chocked economies may be the immediate political beneficiaries of BREXIT, it is France that is likely to be the strategic geopolitical beneficiary as main stabilising power. Can Paris seize the moment? Yes, and we have maintained for over a year that President Macron is currently the most charismatic & visionary leader in Europe. Also the only EU leader who can be both friendly and tough with President Trump. While BREXIT will make EU nations struggle for money, a No Deal BREXIT will make them fight for money (much less money at that).

b) BREXIT has unleashed the Rearming of Europe. A “No Deal” Exit of Britain would accelerate that Rearming Process across Europe. Rushing to rebuild strategic and core Armed Forces would require huge amounts of money just at a time when EU member states will spend more, but receive less. More importantly, the coming “rush” will lead to many flaws and errors in Europe’s new military. A No Deal will brutally expose the embarrassing strategic error by the EU to dismantle her Armed Forces. President Macron’s smart call for a European Army helps cover up the extent of this EU’s U-turn. For decades European academic & political elites told the public there is no need for Military Forces in the future. Thus, the dismantling down to small brigades. 

2) Betrayal of BREXIT? No 

Conservative leaders in London are accusing Mrs. Theresa May of “betraying” BREXIT and UK interests. Although we agree that the deal is a “half in-half out” compromise that could still give Brussels significant influence on Britain for years to come, I personally don’t think that Mrs. May has intentionally misled anyone. Not beyond standard political maneuvering. Mrs. May has long been a committed pro-European liberal politician and Remain campaigner – a  leader of the liberal wing within the Tories. It is actually the conservative Brexit campaign leaders that refused to (or failed to) lead the nation after the referendum. Their inability and unwillingness to take charge after the downfall of Mr. Cameron shocked countless conservative voters and Brexit supporters in 2016. Mrs. Theresa May seized this vacuum – She may have done so to secure a Soft Brexit, but this would be in line with her deep political convictions.

I am saying that conservative Brexiteers can’t be too surprised about their current predicament. If I were Mrs. May or Brussels, I would have also delayed and reached the SOFTEST POSSIBLE DEAL at the latest possible time.

Did Mrs. May and Brussels stage a prolonged drama on purpose? We may never know, but politicians in London should have eyed that possibility when they gave the government to a liberal pro-European Remain campaigner. This late deal makes it near impossible to any critics to oppose it without major perils for themselves and their party. It also makes the reached deal the best negotiable option given that there is no more time to negotiate.

3) No Deal – A disaster? No

Most analysts are saying that the UK crashing out of the EU without a Deal would be a disaster. I don’t agree with this “alarmist” scenario. While initially this would unleash some chaos, our analysis has shown since 2016 that Britain may benefit more from a No Deal than a Soft Brexit over the long run. Prominent UK business circles have solid objections to a No Deal, but …

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Christian Takushi MA UZH, Macro Economist & Geopolitical Strategist. Switzerland – 18 Nov 2018.

Disclaimer: None of our comments should be interpreted or construed as an investment recommendation

Our broad approach to geopolitical research is distinct & independent

(a) All nations & groups advance their geostrategic interests with all the means at their disposal

(b) A balance between Western linear-logical and Oriental circular-historical-religious thinking is crucial given the rise of Oriental powers

(c) As a geopolitical analyst with an economic mindset Takushi does research with little regard for political ideology and conspiracy theories

(d) Independent time series data aggregation & propriety risk models

(e) We only issue a report when our analysis deviates from Consensus

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