I am a businessman with investments in the European Union (EU). I am a big fan of a free-trade zone, an aspect of the EU that works well. I am, however, deeply concerned by the EU’s declared agenda of moving to full federalism. This is badly thought out, yet every time the strategy shows signs of faltering, the reaction of the unelected bosses in Brussels is to push for even further integration.
The sensible move would be a pause to allow the EU’s institutions to consolidate and develop. One model might have been the 50-year twin-track absorption of Hong Kong into China, which has worked fairly well so far. In contrast, the EU’s 28 nations, with highly disparate cultures and income levels, simply cannot integrate at the pace that the likes of Jean-Claude Juncker, the European Commission president, feel is possible. So the fractures are becoming increasingly evident – and dangerous.
The pending euro crisis
In fact, the most prominent example of that attempt at over-rapid integration – the currency union – is in deep trouble. With or without a referendum, and with or without Prime Minister David Cameron’s timid renegotiations, I feel that brutal but necessary reforms – up to and including disintegration – will be forced on the eurozone. These will likely force it back to the model of a free-trade bloc, with different currencies. We don’t want to be a full member of the EU when these events take place, because the cost to us would be huge. Despite the sclerotic influence of the EU on growth and entrepreneurial dynamism, the UK is still growing – and at nearly three times the average rate of our continental neighbours. If we stay in the EU, that growth will come to a shuddering halt – and it’s all because of a looming disaster facing two of Europe’s largest nations. That might sound extreme, but my forecast is based on a dispassionate analysis of national debts. France and Italy are respectively the second and third-largest eurozone economies. They cannot repay their debts while they remain participants in the euro.
They are unable to grow their nominal GNPs fast enough to escape the debt traps they are in. Meanwhile, the maturities of their sovereign debt, at about seven years on average, are short, and the proportion owned by potentially skittish foreign investors, at over 50%, is high. France and Italy have not reformed sufficiently to avoid the simple fact that, one day, markets will take fright at their situation and mark down their bonds. The European Central Bank (ECB) can buy up their bonds for a while, and more quantitative easing (QE) from ECB boss Mario Draghi (assuming the Bundesbank – Germany’s central bank – allows it) could stave off the evil day a bit longer.
But that day is certainly coming. When it arrives, interest rates on French and Italian bonds will rise sharply as risk premia reassert themselves,and we’ll see a crisis that will make Greece look like a picnic. At that point, the most likely outcome is a division of the eurozone into two or more blocs, with Germany heading up the “hard block” zone, and France and Italy either adopting their old national currencies or forming a “soft” southern block. There is no way that Germany either wants to or is able to prevent this, short of allowing a full-scale monetisation of French and Italian debt. That won’t happen because of the inflationary consequences. An “extend and pretend” approach won’t work within a single currency, and France and Italy are about 20 times bigger than Greece in terms of aggregate GNP.
Brexit fears are nonsense
Plenty of other arguments can be made for “Brexit” (and, to be fair, there are some good ones for staying too). But the best reason for leaving is that the eurozone will implode sooner rather than later, and it is better to be in a comfortably-appointed lifeboat in the Channel, than to be dragged under by the wake of the doomed eurozone vessel. All the nonsense spoken about Brexit putting jobs at risk, or of the City’s position being under threat, is, in my view, just that – nonsense. I believe the UK’s capacity to grow will be enhanced by Brexit, and very little will change in terms of trade. We can sit out the carnage that is coming in financial markets. And the City, away from the grasping jealousy of Frankfurt and of Paris, will thrive.
So how will it unfold? As follows: first, Greece and Portugal will suffer another bout of financial crisis. But then the real debt implosion – the one involving the really big boys – will arrive. This time, the eurozone will be floored – and unable to rise from the mat. A new EU – a customs union with regulatory agencies supervising trading standards – will probably emerge from the wreckage. My own support for that type of union would be strong.
• Jim Mellon is an international investor, and founder of Burnbrae Capital. He backs the Leave.EU campaign.