10th July 2016 – The Face of Monetary Impotence

BoE in Ruins

BoE in Ruins (Wikipedia)

 … it [negative interest rates] is clearly not productive… the big argument about excessively low interest rates for very long periods of time is that it warps investment pattern on real investments.

Alan Greenspan – ex-Federal Reserve Chairman (1987 – 2006). Check this vid out (it’s only 2 minutes).

I woke up this morning and found the front page of the FT staring me in the face – which is something I feel one ought to have interest in, given how I ended my last post. So let me just send a couple of excerpts from my readings.

Firstly, let me introduce you to John Mauldin. Recommended reading because he does a weekly e-letter which is: (a) completely free (b) explains economic issues in a tone which everyone can understand. I really recommend subscribing (click the link below).
Great article a couple of months ago called “Hot Summer Weirdness” about how messed up the financial markets are. Let me give you a few enjoyable quotes from the, normally sanguine, Mr Mauldin:

The ECB wants to create inflation by making borrowers an offer they can’t refuse. European public companies have been issuing new debt at a record pace this year. I can see why, too: interest rates were at record lows. The ECB intends to drive them even lower and possibly negative.

Tumbling Borrowing Costs

Tumbling Borrowing Costs (Mauldin-Bloomberg-BoAML)

If you are the board of a Eurozone company and your central bank offers you free or better-than-free cash, of course you take it. Japan already proved that this can work back in January, when it first bought corporate bonds at a below-zero interest rate. And this new tactic of the ECB is going to affect more than just corporate bonds in Europe. US multinationals with European subsidiaries (and most have them) are going to be lining up to take advantage of a central bank that will buy up to 70% of anything the corporations issue, at rates that can’t be matched in the US. At least for now. You think that’s not going to bring European-style central banking to the United States?
If you’re a corporation in Europe, the harder question is what to do with your free cash. The ECB wants you to buy stuff and drive up prices. That would leave you owning stuff, which isn’t rational if you think deflation will continue. So the ECB has a chicken-egg problem. They can’t have inflation unless businesses and individuals spend their cash, but everyone will hoard their cash until they’re convinced inflation is back.
Liquidity is another problem. Bloomberg calculates that the universe of corporate debt eligible for ECB purchase totals about €620 billion. To produce the desired effect, the ECB will have to own a significant chunk of that market. At some point it then stops being a “market” by any normal definition.

German Banks Hoarding Cash
Speaking of cash-hoarding behavior – which is one side effect of negative rates – one of Germany’s largest banks is seriously considering it. Sources within Commerzbank have told Reuters they are “examining the possibility” of hoarding physical euros by the billions in secure vaults. This would let them avoid the -0.4% NIRP penalty for parking cash with the ECB.
This is truly bizarre. Under normal conditions, holding cash is anathema to commercial bankers. They keep as little as possible on hand and certainly don’t go out of their way to hold more. Yet here we see a major bank considering doing just that. The only way that tactic makes sense is if the bank can’t profitably lend the cash to its customers, which, given the rules for lending in Europe, actually happens to be the case.
Nonbank financial institutions are also storing cash. Munich Re said back in March it would store both physical cash and gold to avoid paying negative interest rates. Management framed the move as a minor test at the time. It may well have been – but you don’t conduct such a test unless you see some chance that you will need to hold cash on a larger scale.

As a sidebar, I thought I would throw in the following rate chart from Europe and Japan, showing just how far out the yield curve negative rates extend. Given that the ECB intends to absorb investment-grade corporate bonds, it is going to push corporate bonds into negative rates when they’re sold on the open market and will push the negative rates out on the yield curve for sovereign bonds. How in the Wide Wide World of Sports does anybody think that pensions and insurance companies can survive in such a market? Remember, they are required to hold a certain amount of government bonds, and their investment return targets are north of 5%. I could do a whole letter on the coming debacle in European insurance companies. It is way beyond the crisis point now.

Negative Rates Grid

Negative Rates Grid (Mauldin-Pension Partners)


Lot of red on that table, huh? Now let us pause a moment to think about what Greenspan (the Original Sinner) said about the effects of negative interest rates and their distortion on the market. Let us think about what Mauldin said about both liquidity and the survival of Pension Funds and Insurance Companies in a market like this. I’m going to end with the front page of the FT. Here is a photograph from my desk:

BoE Impotence (FT)

BoE Impotence (FT)

Headline: BoE runs into trouble on second day of post-Brexit bond buying. It appears pension funds are simply refusing to sell their Gilts to the Bank of England. Despite being offered the chance to lock-in returns on their bonds that they could not have even dreamt of at the time of buying these securities, they’re simply refusing to sell them to the Bank of England. Is this obstinate face of a Balance Sheet Recession or is there simply no liquidity in even the most liquid instruments? I’m not sure I like the answer to either of those questions.


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7th August 2016 – How Debt Sunk The World

Great Depression - Poverty (flickr)

Great Depression – Poverty (Wikipedia)


If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.

J. Paul Getty – Industrial and Oil Tycoon (ex-richest man in the World)

Great Depression - Unemployment (Wikipedia)

Great Depression – Unemployment (flickr)

I love that Getty quote. This is one of my longer pieces (sorry), but if you could sum it up in one sentence, that would be it. But we’re getting ahead of ourselves here. Our historic meanderings have lead us to the edge of an economic precipice in Europe. The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy. Those aren’t my words, those are the words of Milton Friedman, the Nobel Prize-winning economist. Seems like this is a period worth giving some attention to. Let’s start with a quote from last post:

What we are interested in is that, from an economic perspective, two things are clear:

  • How utterly intertwined monetary policy is with political policy to the point, at times, it is hard to decipher when one ends and the other begins.
  • How startlingly effective a supply standard (be it Gold or not Gold) was in bringing to heel even the most parabolic inflation of an out-of-control currency supply.

We begin with the European Union. No, I’m not about to get into another Brexit diatribe – I’ve had enough of reading about that, never mind writing about it. But, as I mentioned in my last post, monetary policy and political policy are so closely interwoven it’s actually impossible to sail a course though monetary policy events without occasionally tacking back into the headwind of international politics.


Dreams of a Multilateral EUtopia

The European Union (EU) was officially formed with the Maastricht Treaty of 1992, but before this, the union of Europe already existed in a different form – as the European Economic Community via the 1958 Treaty of Rome (signed in 1957). But some people have an idea that the birth of the European Union came directly after the Second World War, perhaps with the significant signatures on the Treaty of Brussels in 1948 (don’t you just love looking at government articles with the words TOP SECRET written at the top – makes me feel like James Bond). Some even believe that the founding fathers may have started the discussion before the Second World War, but few realise that actually the European Union was a product of the First World War. It may surprise some to learn that the idea of a Europe united in trade owes it conception, at least in part, to thoughts emanating from British soils.

A British civil servant called Arthur Salter was working with another chap, a Frenchman called Jean Monnet to organise shipping of war supplies from America to Europe at the outbreak of the First World War in 1914. But they grew so sick and tired of all the red tape and protectionist bureaucracy surrounding national interests within Europe, they began contemplating ways of streamlining trade transportation and circumventing the tedium. With time, they shared the international political stage as senior officials in the League of Nations (equivalent of the UN) and had now fleshed out extensive plans for economic cohesion between European states. By then, Salter was in charge of German repatriations in the League of Nations and Monnet, whose political authority and influence was growing rapidly, was the Deputy Secretary General.

They recognised the League of Nations’ fundamental flaws, such as structural impediments and politicisation of veto authority. Never-the-less, inspired by the supra-national structure and the philosophy of international cooperativeness they had witnessed in League of Nations, they wondered if such a model could be tailored for Europe. In their minds, great gains could be made by rising above national unilateralism to pursue interests of a higher, multinational, multilateral cause. But, while Monnet was, arguably, the engineer of the European Union idea, Salter was studious in thought and diligently documenting. Much later, in 1931, Salter assembled his papers into a book with an interesting title: The United States of Europe. It’s worth noting that some of this text dates back to 1919 and so some of his ideas were from before the end of the First World War.

What started out as just a “thought experiment” in the 1910’s began gathering momentum by the 1920’s and early in that gap between the First World War and the Second World War Monnet’s influence would expand and with it his theories of European integration. Monnet would go on to set the tone to a gradualist approach to integration, a evolutionary rhythm still very much the heartbeat of policy progression in Brussels today.

Weighing in on the pro-Union argument was Prime Minister of France, a chap called Aristide Briand. By the late 1920’s political traction on the idea of European integration had a global recognition and even the then British Chancellor of the Exchequer, a certain Winston Churchill, was making encouraging noises about the unification of (continental) Europe. In fact, as early as 1925 he told the House of Commons:

…the aim of ending the thousand-year strife between France and Germany seemed a supreme object. If only we could weave Gaul and Teuton so closely together economically, socially and morally as to prevent the occasion of new quarrels and make old antagonisms die in the realisation of mutual prosperity and interdependence, Europe would rise again.

Meanwhile in Germany, as described in my last post, the Schacht reforms had re-built Germany’s economy in the late 1920’s. Things were looking up for Europe… … …

… … … but in other parts of the continent a perfect storm was brewing. We shall assemble the main factors and then reconstruct this storm, then, piece, by piece…


Piecing the Puzzle


  • Firstly remember last post we spoke about the powerful liberal German politician who appointed the German Economic “Magician”, Schact, in the first place…

Chancellor Gustav Stresemann, an extremely influential liberal politician who subsequently won a Nobel Peace Prize after brokering a peace deal between France and Germany following the Occupation of Ruhr (a herculean healing effort) and subsequently seeing Germany’s re-admission to the equivalent of the UN, or the League of Nations, as it was then called.


  • Secondly, remember how in this piece when talking about the disintegration of the Prussian empire…

As an interesting sidebar, keeping our Austrian angle here for a minute, a heavy majority in both Austria and Weimar Germany wished for Austria and Germany to be reunited as a single state, but, of course, this was strictly forbidden by the other European states in one of the key articles under the Treaty of Versailles.

Now, on the surface, things were looking excitingly positive on the political stage. Ideas on the United States of Europe were flooding in thick and fast. A well-known construct was Briand’s Memorandum on the Organization of a System of Federal European Union which you can see on the World Digital Library here. Excerpt:

At the annual meeting of the Assembly of the League of Nations in September 1929, Foreign Minister Aristide Briand of France proposed the establishment of a federal European union to coordinate economic and political policies. Briand believed that the proposed union should be created within the framework of the League, and promised to submit a detailed plan for a federal union to the 27 European states that were League members…

Briand and Stresemann (Wikipedia)

Briand [left] and Stresemann [right] (Wikipedia)


Europe’s Cracks of Instability

But a direct hit from two political torpedoes in 1929 would derail everything.

Firstly, relating to puzzle piece #1, the key behind the European integration idea was represented by two colossal figureheads in European politics at the time: our friend the French Prime Minister, Aristide Briand, and our friend the German liberal, Gustav Stresemann (who had appointed Schacht to dig Germany out of its hyperinflation). You see, there was a deeply intimate collaboration between Briand and Stresemann on the fabric of the union of Europe and its implementation. Pushing through an objective of this complexity and ambition required Herculean leadership, massive political will and respected kudos: Stresemann had this in abundance. Alas, German politicians seemed to make a disgusting habit of dying at the wrong time. Like his comrade President Hindenburg, Stresemann’s death was exquisitely badly timed – when Europe needed him most. It is regarded as one of the major factors which contributed to Europe’s precipitous capitulation. From this point, the foundations of the Europe’s Great Experiment seemed to crack and crumble.

Secondly, relating to puzzle piece #2, Germany and Austria sought to engage in a “Customs Union” – basically a bilateral common market arrangement. But this meant taking a head-on collision course with the Treaty of Versailles, which drew strict lines (literally) on European boundaries and co-operations between segments of the old Prussian Empire after the devastation of WW1. British Foreign Minister, Arthur Henderson, and Aristide Briand deflected responsibility for a final decision on this to the League of Nations. But this only incensed more outrage, particularly in France, for what was regarded as a blatant breach of the peace treaties, here is a quote from CQ Press

Meanwhile violent denunciation of the Austro-German action had broken out in France, where the trade pact was regarded as a first step toward Anschluss (political union of Germany and Austria), a tearing up of the peace treaties, and the ultimate execution of the Mittel-Europa project, which was to have been for Germany the result of a victorious outcome of the World War. Briand’s policy of reconciliation with Germany, his consent to a scaling down of the reparation burden and to withdrawal of the forces of occupation from the Rhineland, and his project for a “United States of Europe” were condemned throughout the length and breadth of France. Henderson was criticised for not having immediately pronounced the customs-union project a violation of treaty obligations and it was pointed out in the French press that prior to his appointment as foreign secretary in June, 1929, he had written articles in support of the Anschluss.

The European project was falling apart at the seams before it had even begun. But Briand may have had his reasons for pondering over the Austro-German customs union. This was, in part, because the first step of his strategy towards European union was indeed a trade pact based on equal multilateral trade duties or, in effect, a customs union. Just the sort that Germany and Austria had tried to arrange. So, in the back of his mind, he may well have thought that the Austro-German deal could be the first symbolic step to this new European dream. Convincing the Germans of this was easy, if only he could convince his own countrymen… Again from CQ Press

The Customs Union and the United States of Europe

In Germany the proposed customs union is represented, not as a first step toward political union with Austria, but as a first step in the execution of Briand’s project for a United States of Europe. It is worthy of note in this connection that when the United States of Europe project was advanced by Briand at the Tenth Assembly of the League of Nations, in September, 1929, he envisaged a European customs union as a necessary prelude to European political union. “Where you have a group of peoples, grouped together economically as in Europe,” he said, “there ought to be some federal link between them. …It is this connecting link which I desire to establish, and obviously the most important component of this connecting link will be economic agreement, and I believe that in the economic sphere agreement can be reached.”


Briand, Monnet, Salter and the rest of the powerful pro-Union activists were talking about economic and trade union and a “Zollverein” – common market. There was talk of preserving sovereignty for member states with a supra-national “common political authority”. All the stuff we talk about today – and this was nearly a century ago! They came so close…

But, critically, the whole Austro-German customs union affair had damaged relations between France and Austria… and the project relied heavily on trust.

To make matters worse, after the “roaring twenties” decade, speculation and credit extension towards asset prices had overreached and a stock market, which had been running on fumes, suddenly imploded in the “Great Crash” of October 1929.

Great Depression - Car For Sale (flickr)

Great Depression – Car For Sale (flickr)


Why are we printing so much currency?

At this point I’m going fast forward in our time machine to the present day to get some insight from our friend and famous historian Adam Fergusson, speaking about current monetary policy, money printing and QE…

I think the position is, of course, terribly serious right through (again) the Western economies. I don’t see that any of these economies is going to be able to grow its way out of the extraordinary debts they have. The logic of that: if you can’t grow your way out of your debt, you have to repudiate that debt. And there is only one serious way of repudiating your debt and that is by inflating.

Here’s a simplified conceptualisation…

My dad could have had a mortgage of 25k in 1970, just before Fergusson’s book came out. It wasn’t until the mid-seventies when rates started to spike – so he could have got a fixed rate mortgage at relatively low rate in 1970 (base rates would rise as high as 17% by 1979). At the time, 25k was a pretty big mortgage – he may have been earning £5k per annum, so his mortgage would be five times his salary. Now, for the sake of argument, imagine his dad (my grandad) offered to pay his (fixed) interest for the rest of his life. Fast forward to today, 40 years later; even if my dad hadn’t paid a single penny of his mortgage principal down and just allowed my grandad to only pay the fixed interest, the resulting mortgage of 25k today is a mere pittance in the scheme of things. Because today his salary may be £50k; ten times higher than it was 40 years ago. So inflation has effectively paid down his mortgage for him. Thus we can say; on a relative basis, inflation has the effect of eroding the principal value of debt. Note: one can make the same argument by saying, even if he had to pay the interest himself; wage inflation should increase roughly in line with interest rates making this relatively painless. On the flip side, imagine if a normal salary in 1970 was £500k per annum and he’d got a mortgage for five times his salary – £2.5million. In a mirrored deflationary environment his salary would have deflated to £50k today – what we would consider pretty normal now-a-days. Here’s the problem, the debt doesn’t deflate. He still has a £2.5million mortgage! With a £50k salary… Game over. He might as well declare bankruptcy. This is because on a relative basis, deflation has the effect of expanding the principal value of debt.

So, just like the Weimar hyperinflation killed all the savers, the place you do NOT want to be is in a deflationary environment holding a significant amount of debt. Here’s the scary bit. Just look at these two charts of our debt-to-GDP ratios in Western Economies and you will never again need to ask the question: why are all central banks hell bent on cranking the printing machines and inflating the bejeezus out of their currencies?

McKinsey Chart on how global debt has seen a massive $57tillion increase in the last few years – full 136-page report (recommended reading) here.

Mckinsey Global Debt

Mckinsey Global Debt

Trend of US Federal Debt to GDP

US Federal Debt-to-GDP

US Federal Debt-to-GDP

G10 Debt Distribution

G10 Debt Distribution

G10 Debt Distribution

UK’s huge financial (private) debt is on account of the massive influence London’s financial sector has on the economy. Doesn’t look great, though, does it? Let’s be clear here. GDP is the ECONOMIC OUTPUT OF THE ENTIRE COUNTRY. Tax receipts are just a fraction of this. So when we say total debt is 100%, 200% 1000% of GDP, that’s a percentage which relates to the size of the entire economy. There does come a point when just the interest payments on government debt alone are bigger than entire tax receipts of the nation. That’s when you have that Wilde-Coyote-running-off-a-cliff moment – your economy’s about to plummet to the bottom of the canyon… then an ACME anvil is gonna fall on your head.

Now, knowing what we know about deflation, inflation and debt, it becomes more understandable when Fergusson says:

…there is only one serious way of repudiating your debt and that is by inflating.

That’s why the central banks around the globe; the BoE, the BoJ, the ECB, the Fed are all printing the crap out of currency – we’re at war, a currency war, a race to the bottom. Who can devalue their currency the fastest? And it’s why we’re soon to have negative interests rates across all developed economies, it’s why your bank is about to charge you for holding DEPOSITS (not overdrafts) with them. With negative interest rates, banks are effectively being punished for not making loans to customers and customers are being punished for not piling on more debt. Why? Because the government and the central banks effectively want to stoke an inflationary fire in order to engineer an inflation ‘soft default’ on the massive mountain of debt in the economy – and they want you, the diligent middle class saver, to pay for it. Is there some sort of ‘moral hazard’ associated with this monetary sleight of hand? You betcha, there is.


Debt and Deflation in Europe in the 1930’s

But let’s get back in the time machine and head back to the 1930’s and to Europe.

France and Austria’s relationship after the Austro-German customs union debacle is now unquestionably tarnished. Why did I mention the relationship between debt and deflation? Well, you see, at the time Europe was crippled with debt. Every government had borrowed to finance WW1. Indeed in just 5 short years British national debt increased from £650m in 1914 to a whopping £7.4 billion in 1919 (more than a 10 fold increase)! The rest of Europe was in the same treacherous boat and then, of course, after the war more spending was needed to rebuild infrastructure and the economy.

Furthermore, financial institutions were extending credit liberally, whether it was banks offering mortgages to fuel the property boom or brokers offering low margin requirements for highly leveraged stock broking accounts. One bank in Austria, called Creditanstalt, was the top bank in the country. In a pre-globalisation context, I guess you could say it was the European 1920’s equivalent of a bank like HSBC. This was a bank which, in the 1850’s had had an IPO wildly oversubscribed at 43 times. Indeed, it must have been the financial equivalent of launching The Titanic. While it came with a Titanic reputation as “unsinkable”, in the throes of choppy and icy waters of the 1930’s it was making a few wrong turns. Poor management and lack of organisational dexterity meant that in bad times, Creditanstalt found itself scraping the barrel of the loan market as more nimble operatives picked off the lower-risk opportunities. Also, being the ‘Motherbank’ of Austria, when things started to go pear-shaped the Austrian government coerced (forced?) the responsibility of more bad loans on to Creditanstalt’s huge balance sheet.

Meanwhile, back in the rest of Europe, governments, banks, businesses and individuals were already laden with debt and, as we now know, the worst thing that can happen to a severely indebted economy is the onset of dreaded deflation… but Europe’s worst fears were coming true. Because, as people lose confidence and as anxiety grows, business activity slows and slowing business activity is effectively the root cause of deflation. Because the entire banking system and economy works by a series of confidence tricks, the very existence of overbearing debt backs consumers into a causal loop, a self-fulfilling prophecy… the more debt you hold, the more you fear deflation… the more you fear deflation, the more likely it is to happen.

To make matters worse, in 1930 France, a number of banks collapsed. The banks were small enough to be absorbed by the economy in normal conditions but matters were made worse when some became embroiled in scandal involving government officials which inevitably led to the collapse of the French government. The worst case scenario for the indebted economies ensued… the chill of deflation became entrenched in Western Europe.

By May of 1931, Creditanstalt collapsed under the weight of its own debt and non-performing loans on its balance sheet. The bank had owed about $20 million, which was a lot of money in those days, and had only $7 million in capital. The Austrian government, together with the newly formed Bank for International Settlements arranged a loan but it simply wasn’t close to being enough. Creditanstalt was not only too big to fail, it was also too big to save for the Austrian government. Furthermore, still reeling from damaged relationships over the Austro-German customs union affair, France was unwilling to help bail the Austrians out… and just like that… BOOM! A powder keg was lit… the Austrian ship was going down, sinking into a dark, deflationary abyss… and it was taking everyone with it.


History Lessons

What happened next was so catastrophic it would go down in the annals of history as the worst ever global financial disaster and would never be forgotten. It would consume entire continents and it would be known as The Great Depression. The public swarmed to recover capital and there was a run on the banks, the banks stampeded and ran on each other and eventually demanded gold conversion for currencies including dollars which, of course, exported the crisis to America with devastating effect.

Furthermore, the rise in poverty and unrest caused by the depression gave opportunity to a Nazi propagandist called Joseph Goebbels. He would become Hitler’s right hand man and together they would form the darkest and most sinister plots on all humanity.

So in the 1930’s The Great Depression was a debt-induced banking crisis of European making which we exported to America – a favour they would pay us back for handsomely in 2008. But let’s be clear, the failure of Creditanstalt and subsequent effect was a bigger deal than the collapse of Lehman and the Financial Crisis of 2008. The devastation of the latest financial crisis simply does not measure up to the Great Depression of the 1930’s… but national debts are still rising and central bank impotence in fighting deflation/disinflation is becoming more and more alarming every day… so season monetary impotence with a bit of political absurdity and we still have time to put our black mark on history.

So now I’ve put the pieces of one puzzle together, why don’t you try your own hand at this game?

  1. Given we know that we, the largest and most developed global economies, are at record levels of total indebtedness.
  2. Given that we know the Great Depression was precipitated by a collapse of a bank who had been coerced into taking bad loans.
  3. Given we know that negative interest rates in Europe are putting exogenous pressure on banks by punishing them for not making loans.

What does this say for the future quality of loans European banks are taking and thus the health of European bank balance sheets (and thus the health of the European banking system)?

Hint. Hint. Hint. Hint. Hint. I’ll leave you with a quote from Fortune Magazine this week:

“The EU is making the same mistakes over and over and over again,” says Viral Acharya, a professor at NYU’s Stern School of Business. “They’re not demanding that the banks be recapitalized as they should be, and allowing things to get worse by enabling lenders to keep zombie loans they should have dumped years ago.”


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24th July 2016 – The Re-Birth of Germany: Power and Money

I’m Winston Wolfe – I solve problems.

Harvey Keitel [quote from the film; Pulp Fiction]


Schacht - Wikipedia

Schacht – Wikipedia

The Man with Two Names

Horace was a complicated character. Not an easy man to read, perhaps because he never really knew himself or perhaps because he did, yet changed with the weather like and philosophical cameleon. While unquestionably intelligent, maybe he lacked conviction and confidence or what we call “political spine”. His background and upbringing was atypical for a German growing up in the early twentieth century. Even his name was something of an enigma. His father, who had lived in America, had named him Horace Greely, after the famous activist politician and anti-slavery campaigner. But apparently a rather unruly grandmother insisted he be called by a Danish first name – Hjalmar. So from then on he was known as Hjalmar – but one wonders if he secretly preferred Horace.

His education was equally hard to pin down. Having studied Medicine, then Philosophy, then Politics, he was not the obvious choice for President of the Reichsbank in 1923, where the main contingent came directly from an education in economics. Germany was suffering from bouts of hyperinflation so violent, they were literally tearing the country to shreds, this was no time for an amateur at the helm. But perhaps it was time to think outside the box. He was appointed by an interesting duo; two of the three most powerful men in German politics at the time (the third being Adolf Hitler). The first was President Hindenburg, who many considered to be the only viable opponent capable of disrupting and defeating Hitler’s rise to power. The second was Chancellor Gustav Stresemann, an extremely influential liberal politician who subsequently won a Nobel Peace Prize after brokering a peace deal between France and Germany following the Occupation of Ruhr (a herculean healing effort) and subsequently seeing Germany’s re-admission to the equivalent of the UN, or the League of Nations, as it was then called.

These two men of German political prominence, President Hindenburg and Chancellor Stresemann, must have recognised that solving the hyperinflation problem was not about continuing a textbook approach to economics or politics. Not only was the country in a mess, it was a complicated sociological, economic and political mess that school and theory does not prepare you for. After Queen Victoria’s son-in-law Emperor Wilhelm II loaded up on debt and printed the heck out of the currency, Germany’s Gold Standard collapsed along with its economy after WWI (as described in an earlier post – Turbo-printing). Printing more paper money for WWI repatriations had sucked Germany into the swirling vortex of a hyperinflation death-spiral.  Furthermore, the German financing mechanism was destroyed and, even if she wanted to go back to the gold standard, there was simply no gold left in its banking coffers. Perhaps a tough and immeasurable problem needed a tough and immeasurable man to tackle it.


Enter The Wolf

I could go into detailed into on Schacht’s life but let’s just say he had a chequered history having just been fired by his previous employer, General Karl von Lumm, the Banking Commissioner for the then Occupied Belgium. Schacht had allegedly favoured his old employer, Dresdner Bank, for financing state transactions in Belgium. But Schacht’s reputation as an extremely proficient trouble-shooter or “fixer-of-problems” echoed through the halls of the then Weimar Republic with an imposing resonance. Despite his past, it speaks volumes of both the stature of his intelligence and the desperation of the times that he should be Hindenburg and Stresemann’s go-to-man for what basically seemed like Mission Impossible (cue the music). Perhaps we could view him as the Early-Twentieth-Century German-Politico-Economic Equivalent of The Wolf, in Pulp Fiction. You got a problem that needs fixing but looks impossible to fix…? Call The Wolfman… and he should be with you directly…

I’m fascinated by Schacht’s strange mixture of intelligence, humility, arrogance and cowardice. Despite his position and the enormity of the challenge before him, Schacht incredulously had no staff, save for his secretary, a certain Fraulein Steffeck, and set up his office in an old cleaning lady’s cupboard. Fraulein Steffeck’s occasional sideways gaze as he paced around the fog of his own cigarette smoke would provide a unique insight into the profile of a man deep in thought, with the weight of a giant nation on his shoulders. Even by Schacht’s exemplary standards, this challenge was a BIG one. In case there is any doubt about the magnitude of the task before him, let’s just quote a passage from Adam Ferguson’s legendary book from 1975, When Money Dies (a fascinating but perhaps not-so-gentle read for the beach?) which described the monumental “hospital ball” he’d received.

Schachter was faced with incredible disorder. During the previous ten days expenditure had exceeded revenue by 1,000 times. The floating debt had been increased fifteen times. The government would shortly be unable to pay cash wages to the Army, to the police or to its own officials. Already the officers of the Ministry of Finance itself were being paid in part in potatoes. The budgetary estimates included on every page the outrageous reminder, in brackets, that all figures were in quadrillions…


Enter the Rentenmark

What would you do, if you were Schacht, dear reader? I’m not too ashamed to admit that, I’d revert to my special “baby defence mechanism”…I’d soil my pants, throw up and then start wailing in despair until Fraulien Steffeck came to clutch me close to her warm and welcoming bosom. And yet Schacht did none of this. Instead he would conjure a solution to all Germany’s monetary woes with a shockingly simple master stroke. Enter the Rentenmark.

There is a, quite wonderful, quote from a Forbes Magazine article entitled In Hyperinflation’s Aftermath, How Germany Went Back to Gold where the author in turn quotes the great Adam Fergusson’s cult book.

“Dr. Schacht sat in a single room which had once been used as a charwoman’s cupboard, looking on to a backyard in the Ministry of Finance. From this post he transformed the German financial system from chaos to stability in less than a week. His secretary, Fraulein Steffeck, was later asked to describe his work as commissioner:

What did he do? He sat on his chair and smoked in his little dark room which still smelled of old floor cloths. Did he read letters? No, he read no letters. Did he write letters? No, he wrote no letters. He telephoned a great deal–he telephoned in every direction and to every German or foreign place that had anything to do with money and foreign exchange as well as with the Reichsbank and the Finance Minister. And he smoked. We usually went home late, often by the last suburban train, traveling third class. Apart from that he did nothing.

Farmers accepted the rentenmark in trade for their crop, and the crisis was resolved. A new reichsmark replaced the rentenmark a year later, at 1:1, putting Germany’s return to a gold standard on a more long-term basis.

So we see that it takes almost nothing to adopt a gold standard system. The Rentenbank held little if any gold. The rentenmark was not convertible into gold. No preparation was necessary. No staff was necessary. No time was necessary. The only thing that was necessary was a clear policy, namely to maintain the value of the rentenmark equivalent to a prewar gold mark, and a clear means to accomplish this policy, by restricting the supply of rentenmarks to maintain its value.

Renten is the German word for “mortgage”. What Schacht did was audacious. He needed a mechanism to stabilise the currency, but there was no gold supply left to back the currency. So he effectively backed the German Rentenmark with the only thing with more quantifiable, more transparent supply than gold: German land. The very agricultural land farmers were using to yield crops, the very commercial land manufacturers and service-providers were using to produce output became the yardstick to which German money supply was pegged. I’ll admit, it was a bit of a confidence trick. But isn’t all modern monetary policy? In any case, it worked. At inception, one Rentenmark started out its life equal to one trillion of the old German paper Marks and strict limits were put on how and when to print more currency.

What followed was quite an astonishing turnaround. Indeed, the only thing more remarkable than the speed of Germany’s economic collapse was the speed at which Germany was able to rebound, once a currency of trustworthy supply was in place. It is worth bearing in mind that only a few years after a complete annihilation of the economy, Germany had amassed a military machine on a scale the World have never before seen.


Hindenburg and Hitler - Wikipedia

Hindenburg and Hitler – Wikipedia


And the rest, as they say, is History…

Which guy in this picture looks the happier? Hitler’s largest political obstacle, indeed I think it fair to call him Hitler’s political adversary, was President Hindenburg. But he was getting old and by the time he was re-elected he was 84 years old, understandably weak and the weight of warfare and political turbulence seemed to have literally sucked the life out of him.

Schacht played an interesting role here too and this is where the complexity of Schacht’s character is hard to fathom. Schact clearly supported Hitler apparently from a strategic perspective – because he felt the country needed strong leadership. But was he just a cowardly populist and political momentum junkie? Hindenburg would use what strength he had in him to subdue Hitler’s insistence on wanting a prominent seat at the table and openly stated that “a presidential cabinet led by Hitler would necessarily develop into a party dictatorship with all its consequences for an extreme aggravation of the conflicts within the German people”. Alas, at 85 years of age, physically weak and mentally exhausted, Hindenburg eventually caved in to political pressure from his inner circle and appointed Hilter as Reich Chancellor.

Hindenburg died only a year later, in 1934 leaving a power-vacuum Hitler was all too quick to step into – announcing himself as Head of State and Head of Government only 2 hours after Hindenburg’s death. Schacht would eventually became Hitler’s banker and Minister of Economics and his deft stewardship of both the German economy and facilitation of Hitler’s financial might led him to become a recipient of the honorary membership to the Nazi Party and was awarded the somewhat dubious honour of the “Golden Swastika” in 1937. There is no doubt in my mind, Schacht did a lot to pave an economic pathway to pay for Hitler’s rearmament policies.

How much Schacht supported Hitler’s eventual brand of Facism is another matter open to debate. Schacht’s vision of “strong leadership” was clearly different to Hitler’s and he opposed The Fuhrer’s seemingly profligate military expenditure and the nature of his rule. Schacht would eventually become part of a stealthy collective who would form the Resistance Movement in Germany – their ultimate aim being to end Hitler’s reign in a violent coup d’etat. But, 72 years ago, the 20th July assassination attempt failed and thus opposing Hitler, even politically, was a dangerous place to be in Germany. Schacht was arrested and spent the rest of WWII in concentration camps.

Still, it’s hard to place Schacht’s views politically or make sense of his philosophical or ideological direction. Schacht said, in 1946, once the war was over:

I have never believed in war. It is a crime against humanity whether you win or lose. I just read an article in this magazine I have in my hands that one day the moon will fall on the earth, but it is my feeling that until then, we should try to make the world a better place to live in.

But perhaps we should leave the judgement of his character and political ambition to others closer to the matter, such as Chief Prosecutor at the Nuremberg Trials and US Solicitor General and Attorney General, Robert H Jackson, who described him as…

The most dangerous and reprehensible type of all opportunists, someone who would use a Hitler for his own ends, and then claim, after Hitler was defeated, to have been against him all the time. He was part of a movement that he knew was wrong, but was in it just because he saw it was winning.

A pretty damning assessment of his character indeed. Schact had managed to produce a monetary magic trick but he was not a politico-economic Winston Wolfe. Winston Wolfe was a comic book hero in a Quentin Tarantino movie, but this was no movie… and this was no comic.


Learning from History…

However, this is not the place to dissect Schact’s character or his political integrity, I’ll leave that to the historians to debate. What we are interested in is that, from an economic perspective, two things are clear:

  1. How utterly intertwined monetary policy is to political policy to the point, at times, it is hard to decipher when one ends and the other begins.
  2. How startlingly effective a supply standard (be it Gold or not Gold) was in bringing to heel even the most parabolic inflation of an out-of-control currency supply.

But we should end on an economic note, so I leave you with quotes, once again, from our friend, the great economic historian, Adam Fergusson [emphasis mine].

The important thing about the Schact Reforms was that the Reichsbank stopped discounting treasury notes and so inflation stopped “just-like-that” with astonishing speed…

… the effect of having the Rentenmark and a currency everyone believed in was very remarkable. In the first place, because people believed in it, the food started flowing from the country into the towns again…

… it had another effect, that all the revolutionary movements that were taking place in Germany at the time (and Hitler’s beer cellar Pusch) that had happened in early November [of 1923]… …With the introduction of the Rentenmark… all these political movements left or right, ceased to trouble… which was, again, an extraordinary thing. It was at that point, then when something began to grow again…


There are a million random walks I could have taken. I’m sure in the future I will read this all again and take a different journey through the history of money. That’s the beauty of reviewing our monetary ancestors. But, my dear and patient readers, we have gone from Caveman Capital, the Birth of Money and the First Bankers… to Roman Emperor Nero’s Debauchment of the Denarius… to Marco Polo’s account of Kublai Khan’s “flying paper money”… to The World’s First Central Bank, thanks to William of Orange … to a descendent of that, somewhat Germanic, British monarchy, Emperor of Prussia Wilhelm II, and the First World War and the subsequent Weimar Republic and Hyperinflation… and then, in this post, to Schacht’s Monetary Magic Trick and Germany’s economic rebound…


Where on Earth will we go next? I tell you, the chapters to come are the most enthralling of all…


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10th July 2016 – Goodbye to Vote Leave’s Biggest Campaigner

Blooperman - Image Attribution: WikiMedia - Zinneke

Blooperman – Image Attribution: WikiMedia – Zinneke

Will the Real Vote Leave Campaigner Please Stand Up

I think it may be time to say goodbye to Vote Leave’s biggest cheerleader. No, I’m not talking about Nigel Farage, nor Boris Johnson. I’m talking about this little fellow – The President of the European Commission, Jean Claude Juncker.

I’m not going to assassinate his character… well… OK, maybe just a little bit. But it’s not his lack of tact that draws me to him, it’s his predictably unpredictable lack of tact that makes him a truly intriguing specimen. I mean, what can I say about a man who returned to the country he presided over only to say, with great humility, that it had all turned to shit since he left? Mr Juncker was the Prime Minister of Luxembourg, a country with 570,000 people – that’s the same democratic footprint as the Mayor of Sheffield. Some of my non-British readers may not be able to place Sheffield on a map… I wouldn’t let that keep you up at night.

But to be fair to Mr Juncker, he was democratically elected and was subsequently one of Europe’s longest serving premiers. Luxembourg, nestled between Germany and France, is also a founding member of Europe’s union otherwise known as the Inner Six group of nations who signed the 1951 Treaty of Paris, one of the key let’s-stop-blowing-each-other-to-pieces agreements Europe ratified after WWII. With four languages under his belt and a leadership record, it’s easy to see how, on paper, Juncker seemed to have the credentials to lead the way in European politics.

But paper credentials do not count for much when projecting communications toward a population one thousand times larger (and infinitely more diverse and complicated) than his native Luxembourg.

The Taxman

Let’s start with Luxembourg. Under Juncker’s stewardship Luxembourg became a haven for tax avoidance. His administration facilitated legislation which encouraged large multinational companies to use their tax avoidance loopholes to circumnavigate domestic taxation systems in their operational markets. This systematic scheme was exposed by the International Consortium for Investigative Journalists who released a scandal called Lux Leaks. Here they revealed the names of hundreds of offshore asset managers and huge multinational companies who had slipped billions of backhanders through the tiny state. All the household names are there and some not-so-household names – I was genuinely surprised to see the name of one of the hedge funds I used to work at there! Lux Leaks even provided a cute little video showing, simplistically, how these companies went about their avoidance called Tricks of the Trade.

Suffice it to say, this humiliation dogged Juncker upon his affirmation among the political elite within the EU. This was probably the quietest he’d been throughout his career and attempts to brush the taxation issue under the carpet were almost comically undisguised. Indeed, it was the European Commission, led by Juncker himself, who were investigating allegations into… … … well, Juncker himself. Hmmm… I wonder how that would turn out? In an article by EuroActiv:

…an Italian journalist said that it was “scandalous” that while many Italian companies may have been involved in the Luxembourgish tax evasion schemes, leading to a deepening of the financial crisis in Italy, the Southern European country could now witness the former prime minister of Luxembourg, whose country benefitted from these schemes, imposing further austerity measures in Italy.

Ironic indeed.

Juncker the Drunker

Things were not looking good for the EPP’s (European People’s Party) man – who had been anointed via the controversial Spitzenkandidat loophole (referred to in an earlier post on account of its “tenuous basis in law”). Still, Juncker was used to loopholes. Once the tax haven discomfort had been suitably suppressed, Juncker arose again; like a flaming phoenix of political Tourette’s Syndrome. Embarking on a mission to cram as many political gaffs and slap-stick impudence into his tenure as could be conceivably imagined. At times he appeared to remove one foot from his mouth only to dexterously replace it with the other.

First, he sought to energise solidarity within The Union using the diplomatic skills only his mother could love. In Juncker’s view, Nato was not enough. But Juncker’s vociferous calling for an “EU Army” was almost immediately slapped down by the British and other EU states – who didn’t see the appeal in staring down Russia like an English hooligan at a football match in Marseille. These uncontrolled lurches toward European federalism, together with David Cameron’s outright assault on both the process of his appointment and the appointed man in question, marked the beginning of the UK’s not-so-amorous affair with the President of the European Commission. At times I actually enjoyed Juncker’s cavalier charges into the white-hot cauldron of political debate. His lack of predictability was at least making European politics interesting and that’s more than can be said for the other 32,999 people employed by the European Commission.

But adding to Juncker’s humiliation were the rumours that he was a “heavy drinker”, as many, including the Dutch Finance Minister and President of Eurogroup, had claimed. Now, in Britain that normally gets you a knighthood, but then came THAT YOUTUBE CLIP, where a, seemingly inebriated, Juncker seems keen on assaulting every World Leader within slapping distance, kissing the Belgian Prime Minister on the top of his bald head then, incredulously, shouting “Dictator!” at the Hungarian Prime Minister. At this moment Juncker had transcended from the politically blunderous to imbecilic diplomatic abandonment of comedy gold so pure not even the great Austin Powers or Inspector Clouseau could rival (any excuse to include a Peter Sellers clip). Still, David Cameron stuck his knob into a pig – so, hey, we’ve all got our little vices.

What I particularly love about this clip is how the woman to the left of Juncker (the Latvian Prime Minister, Laimdota Straujuma) is continually ushering and laughing nervously in an attempt to distract attention from the obvious embarrassment beside her. You know, the same way a mother laughs nervously when she returns from the toilet to detract from her son, who has pulled down his pants and is busy playing with his “ding-a-ling”, in full view of those in the dentist waiting room… anyway, enough about my troubled times as a hedge fund trader…

Is it a bird? Is it a plane? No… it’s Junckerman!

In many respects Juncker will be missed. He’s added some colour to what was otherwise a very stale, grey organisation. Indeed, the normally, critical ZeroHedge writer, under alias Tyler Durden, and Super Blogger, to sarcastically commentI think I think quite a bit higher of Juncker now”. To the blogosphere he’s a tap flowing endlessly with a golden rainbow of political blog content. Writing about Juncker is easy, one only needs to copy his quotes to get material. Speaking of quotes our dear friend Juncker is quoted to have once said, when referring to Greece and the prospect of a GREXIT:

…when it becomes serious, you have to lie.

Priceless. Gold. Solid Gold. It’s cheered up my, otherwise dreary, weekend. My wife has left me with the three kids and frolicked off to London for a jolly weekend with her sisters. I should on the verge of a mental breakdown. And yet I cannot type these words without grinning – and now cappuccino-sipping mums at this bacteria-infested death-trap of a “soft play” hell hole are staring at me and whispering between mouthfuls of muffin. “Look at him” they chatter… “he’s having a breakdown“. They think I’m as nutty as the slice of fruitcake their precious little Xavier has just chucked down the ball-pit slide – now I know how Jean-Claude must have felt in EU Parliament. But, on a more serious note, his handling of communication on Greece led to the less-the-complimentary nickname of “The Master of Lies”. His mouth seems intent on shooting what is left of his credibility in the foot (the one that’s not in his mouth, that is).

But if you savour democracy and are nervous about sovereignty, transparency, corruption and truth worry not, dear citizen of Europe, Junckerman has the tonic to put your mind at ease. Quoting the Telegraph’s article:

On EU monetary policy

“I’m ready to be insulted as being insufficiently democratic, but I want to be serious … I am for secret, dark debates”

On British calls for a referendum over Lisbon Treaty

“Of course there will be transfers of sovereignty. But would I be intelligent to draw the attention of public opinion to this fact?,”

On French referendum over EU constitution

“If it’s a Yes, we will say ‘on we go’, and if it’s a No we will say ‘we continue’,”

On the introduction of the euro [this one is the BEST]

“We decide on something, leave it lying around, and wait and see what happens. If no one kicks up a fuss, because most people don’t understand what has been decided, we continue step by step until there is no turning back.”

On eurozone economic policy and democracy

“We all know what to do, we just don’t know how to get re-elected after we’ve done it”

I know quotes can be taken out of context and, almost always are. The final quote, for example, is actually quite honourable and makes me smile in the way I think Juncker actually intended – he’s effectively saying he sticks to his principles even if, ultimately, it costs him his job. I think for this attitude, he is, rightly respected and liked by many of his peers – even those who disagree with his politics. But my point is; public-facing politicians know the risks of being misrepresented and are, boringly, “politically correct” for these reasons. But for a man, unelected by the people, at the helm of the largest, most powerful supranational governing body and leader of the institution with “legislative monopoly” in the EU, we are firmly in Prince Philip Territory of political faux pas here. He’s the “colourful character” on a nightclub dancefloor who you just know is going to end his evening being carried out by the bouncers – probably with his teeth missing. But that’s enough about my troubled times as a hedge fund trader … … … why do you think I was at the dentists in the first place?


But it was during the BREXIT debate where Junckerman excelled himself and, like a defective fracking drill, he drove harder to dig to new depths few thought were possible. The RemaIN camp did everything they could to silence Junckerman during the campaign and keep him in his box. Der Spiegel reported that Juncker was made to “promise British Prime Minister David Cameron that the EU executive branch would stay out of the Brexit debate”. Perhaps locking him in a cellar full of cognac. Alas, no cellar is that voluminous and, like a bewildered, bleary-eyed badger, the bedraggled Blooperman crawled out of his hole and started making noises with his mouth… threats that British “deserters will not be welcomed back” or how “community life would not continue as before” and that Britain would be treated as a “third country” if it left the EU may have been semi-accurate, but they did nothing to help the RemaIN campaign and played right into the hands of Vote Leave media hype-machine. It made some voters actually question which way he wanted the referendum to go! Was he making this personal? Was third country an upgrade from fourth?

As if that wasn’t enough, Juncker appears to have now angered the one person in Europe you do not want to get on the wrong side of: Angela Merkel. His immediate and overt meetings with Scottish Nationalist Party Leader Nicola Sturgeon were described as “unnecessarily provocative” and it is rumoured that Merkel has him under her steely gaze and “may have to deal with him” next year. But, to be honest, I wouldn’t put it past Juncker to survive even a full Merkel offensive against him. He has an uncanny ability to flip serious argument into petty tantrums which demeans the entire debate. I’m genuinely starting to wonder if this is a sign of weakness or an exquisitely disguised skill. Merkel is a rational human being and pinning Juncker down into a political corner using any form of rationality is like trying to herd jellyfish with a pair of pliers and a trombone.

The CETA His Pants

The latest big trade agreement on the EU table is with Canada: CETA (Canadian; Comprehensive Economic and Trade Agreement). At any other time it would just be another one of those murky deals between the power elite stealthily slithering between the cracks of democracy (perhaps we’ll talk about that another time, dear reader). But these times are different, every move from every European politician is under scrutiny. Only a few days ago Juncker wanted to push the deal through with minimal democratic friction or even influence from elected European heads of state. Deutsche Welle stated in an article a few days ago that:

European Commission President Jean-Claude Juncker told EU leaders on Tuesday that CETA would fall within the exclusive competence of the EU executive and therefore didn’t need to be ratified by national parliaments in the 28-nation bloc, sources in Brussels told the German news agency DPA.

However, only days later, in true flippant Juncker style he said that he “couldn’t care less” whether state members get to vote on the deal. The whole episode led Sigmar Gabriel, the German Minister for Economic Affairs and Energy, to refer to his positioning as “unglaublich toricht” which I believe, loosely translated means “incredibly stupid”. Then, instead of fast-tracking the ratification from a small handful of key member states (like Germany and France) as was expected, Juncker seemingly threw the cat among the pigeons by requiring ALL 28 member state leaders to vote on the deal. I have to admit I almost have admiration for him.

But we will probably have to say goodbye to our amusing political loose cannon. Juncker is good for entertainment but I fear he’s not particularly good for the future cohesiveness of the European Union. If Merkel doesn’t get him I fear, like a kaleidoscopic firework on Chinese New Year, he will dutifully self-destruct in quite spectacular fashion. Alas, the World will be missing one more colourful politician… and the bloggers will have to find something else to write about.

The fact that he’s a federalist I think is inconsequential, indeed it enamours me and probably other voters to him – at least he has a vision for Europe. But right now Europe and the EU needs cohesive healing rather than bickering, tantrums and divisive in-fighting. Perhaps more importantly, it needs to convey an image of cohesion and objective retrospection above all else. Juncker is not the man to deliver this image.

In recent days he took the bait that UKIP leader Nigel Farage (so obviously) dangled and got embroiled in a petty squabble in European parliament. It actually demeaned his stature, if that, indeed, were possible. I don’t think many Vote Leave campaigners even like Farage – picking a fight with him is like picking a fight with a four-year old kid at the queue for the Teacup Ride in Disneyland… anyway … that’s enough about my troubled times as a hedge fund trader…




…as for the Commission-led taxation investigations…

Bloomberg reports:

European Union nations were well aware that Luxembourg and other countries provided favorable tax rulings during the past decade but opted not to confront them in the interest of protecting their own harmful tax breaks for multinational companies.

A report from EU Parliament TAXE Committee members probing a special tax breaks from Luxembourg found that some EU member countries engaged in “systematic obstruction” of the panel in its efforts to uncover the details behind the “LuxLeaks” scandal.

“Documents we have finally been able to review in recent months show that member states were aware that general tax rulings were being offered to multinational companies such as in Luxembourg, and there was a decision not to challenge them,” said TAXE Committee Chairman Alain Lamassoure, a French member of Parliament from the center-right European People Party political group, at a July 6 news conference.

… go on my little jellyfish friend!


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24th June 2016 – BREXIT: The 12th Hour Came…

12th Hour Came - Courtesy of Gratisography

12th Hour Came – Courtesy of Gratisography

Quote from previous piece:

The pro-EU juggernaut in Britain has a much more powerful political army and a bigger arsenal than the Eurosceptics. Perhaps the most famous “Vote Leave” campaigner, and London Mayor, Boris Johnson is right, this is a David versus Goliath match up. In choosing to part from Goliath (and his Prime Minister and party leader, David Cameron) Boris Johnson too has staked his career on the EU referendum.

But, let’s leave Barack Obama, the European leaders and all the large corporations aside for the minute and examine just the domestic political landscape in the simplest terms. With the four most powerful domestic parties in the UK all wanting the same thing (RemaIN) you’d think they’d come together to deliver a powerful and meaningful message together, in unity, in solidarity. I’ve been waiting for this to happen. But so far it has not. At times it’s as though incumbent politicians here are so vehemently against agreeing with anything the “opposition” party has to say that, even on the things they agree on, they choose not to be even in the same room as one another. Perhaps they are saving this moment of union until the eleventh hour when the campaign will suddenly explode into life… but they are running out of time, it is now the eleventh hour and the 58th minute.

On the flip side, the political minnows on the Eurosceptic side (officially the “Vote Leave” campaign) of the fence seem to be delivering clear, succinct messages and are focusing, at least temporarily, on their commonality rather than their differences. There is nothing to corroborate this subjective, cloudy argument. It’s just my opinion. But, if the logic of causality is not there, the results certainly are, because in May of 2014 something quite strange happened…


Dear readers, welcome to the World of uncertainty. At this point is customary to say, with British politeness, “well nothing more could be done the people have spoken, you can’t point fingers now”. I disagree. All RemaIN voters can and should point the finger. At their very own political leaders.

Jeremy Corbyn, leader of the Conservatives main opposition party was missing in action. So many significant Vote Leave victories were in Labour strongholds. Where was Mr Corbyn’s EU campaign in Scotland and the North of England? The same place the Labour campaign was during the general election: missing in action. Perhaps there is a black hole in the middle of England which sucks all political will out of people. Paralysed between utter disdain for saying anything that might be agreeable with the Prime Minister and his own uneasy history – having been an outspoken anti-EU protagonist himself. The only sound bite I remember of his campaign was how he was definitely NOT on Cameron’s side.

Nicola Sturgeon, leader of the Scottish National Party, who were so victorious in the General Election staged a pretty poor campaign in Scotland. Scottish turnout was 5 percentage points lower than in Wales. Some may say they didn’t know what they were doing… hmmmm. Or maybe she knew exactly what she was doing. The ink is barely dry on the press releases and she’s already started her campaign for a SCEXIT (Scottish Exit from Britain) which, let’s face it, has been her agenda all along.

David Cameron. Where was he? He’s slick and polished with a prepared speech in his hand. He’s happy to bully and banter in the House of Commons but he seems to run a mile at any thought of a televised debate. Why was I hearing more sound-bites from Boris Johnson than David Cameron? Boris is not the Prime Minister… … … … … yet.

Tim Farron, leader of the Liberal Democrats… wait… Tim who? Oh, forget it…


2% is a narrow victory, it’s a rounding error. A display of solidarity from our political leaders could have turned the result. Yet, not once did I see these political leaders stand shoulder to shoulder to send a strong pro-EU message. They didn’t even have to talk. Just stand for a photo-shoot would have been a start!

For those RemaINers who want to point fingers I’m going to say, you’re within your rights to do so. Point them at your own political leaders. The RemaIN campaign was shambolic. Our political leaders are left hopelessly gawping at each other in disbelief like the English back four defenders when that Russian chap headed in a goal in the last minute of our first European Championship Football Game. And yet, like our footballers, for matters in Europe, they only have themselves to blame.

What happens to Scotland? What about Northern Ireland? Indeed, what happens to Europe now? Your guess is as good as mine – I can only hope for a pragmatic EU reaction, even from Jean-Claude Junker, who’s comments frankly did nothing to help the RemaIN campaign (rarely do British voters react well to threats). For all readers, EU members or not, welcome to the world of volatility. Between political uncertainty and reform, fiscal calamity and monetary impotence and unwinding of globalisation – all set to a backdrop of undeniable demographic headwinds (see interactive piece here).


Posted by on June 24, 2016 in David Cameron, David Cameron, Economics, EU, Europe, Politicians, UK


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30th May 2016 – The Study of Skies, Trees and the Mechanisms within the European Union

Clouds - Courtesy of Gratisography

Clouds – Courtesy of Gratisography

The Study of Sky – Joseph Mallord William Turner


I wandered lonely as a cloud

That floats on high o’er vales and hills,

When all at once I saw a crowd,

A host of golden daffodils;

Beside the lake, beneath the trees,

Fluttering and dancing in the breeze…

William Wordsworth – English poet



Just look up, the sky is a moving masterpiece laden with boundless forms full of expression, endlessly changing yet without structure or limits. Calmness ensues, peace overwhelms the body when take a moment you let your mind plunge, free-fall deep into cloud-gazing bliss. It’s therapy. We lose all desire to understand why and how … we just let go… as though we too are aimlessly wondering and floating over vales and hills…

Well I don’t care about what Oscar Wilde would call the uselessness of art … or of cloud configurations, I just like to take a moment to chill out. Flick an old reggae track onto my iPod and let the dulcet Jamaican melodies of Pete Tosh take me away. But only a few tracks in and I’m jarred by the contrast between the music pouring into my ears and the kaleidoscopic images streaming through the lenses in of my sunglasses – the clouds are white and fluffy but there is something spiky about Pete Tosh’s lyrics to the song, Small Axe, listen here

Why boasteth thyself, oh evil men,
Playing smart and not being clever?
I say you’re working iniquity to achieve vanity, yeah,
But the goodness of JAH JAH endureth forever.

If you are the big tree,
We are the small axe.
Sharpened to cut you down,
Ready to cut you down.

Pete Tosh – allegedly the unsung hero of Bob Marley’s Wailers, but that’s an argument my brother and I have had too many times…

An aggressive jibe at the Big Trees of society: while, individually, we may be smaller, we, the little people, are the Small Axe. Sharpened to cut them down… ready to cut them down. The notion of a glistening razor-sharp blade of an axe next to the trunk of a mighty tree is quite provocative. Yeh, power to the people, Pete. Next track…

It’s a reminder to me that, while the cloud-shapes are free-form, opaque, unpredictable, almost anarchic… we, the people require our political bodies to be the opposite. Perhaps unfairly, we want them to make sense of life. But they must at least strive to provide clarity, structure, transparency on even the most complex subjects. So let us start by making a small step towards providing some transparency on the EU machine.

The biggest issue facing Europe now is the British EU Referendum. In just three short weeks the notion of a potential Britain Exit (BREXIT) from the EU will be cast to vote. What happens either way will change Europe forever. But what is there to be afraid of in Europe? We are Europeans, we are already a member of the EU, it’s not as if electing to remain in the EU will suddenly change the clouds that drift over this green and pleasant island.

But the EU debate has turned British politics inside out. For me, it starts with democracy, because democracy has its roots embedded in the same virtues as (democratic) socialism; principally, egalitarianism. The Lawyer, the Builder, the Teacher, the multi-millionaire and the homeless person on the street all have the same power in their one vote – nobody’s vote is bigger than the other. In this sense we all have equal power, not just to elect, but also to cut down those politicians or parties who do veer from the want of the little people. We give politicians a huge amount of power to change all our lives, but it comes with a heavy caveat which balances this power: those that govern are directly accountable to those who are governed by them and, in wielding this claim, each member of the population has the same amount of power as the other. Indeed a powerful mechanism, a powerful concept.


Basics of the European Union

I’ve chosen this post to describe the mechanics of the European machine we loosely call the European Union or EU. I’ll be frequently referring to the European Union’s official website, Europa, from here on. Anybody who cares about their future in Europe ought to spend at least some time browsing this website, it holds a lot of information.

European Commissioners

European Commissioners

First question: who are these people? Everybody in Europe ought to know the answer to this question. To start with the flags at the back of the room give something away. Secondly, the shrewd observers would note that there are 28 of them – that’s a massive clue. Thirdly, the thing that really gives it away is the recognisable chap at the centre, Jean-Claude Juncker, the President of the European Commission.

This is the most powerful political body in the EU and is by far the most powerful supra-national governing body in the World. They reside over an economy the size of the United States and, with over half a billion people, it is far more populous. The European Commission is the rule-enforcer and has a monopoly on Union legislation, as described here on Europa. The President of the European Commission is the most authoritative person within the EU. Not a single policy can be proposed without the President’s agreement. This dude is powerful. He’s a Big Tree in this European forest of giants.

I’ve got no doubt these 28 cats are clever and not just playing smart, but who are they? I’m not sure my mates down the pub could name any of them outside Juncker and I’m willing to bet nobody in my entire village could name more than 3 of them. How about you? Who’s the second guy from the right? Well, that’s one of our very own; the British Commissioner, Jonathan Hill. Don’t bother looking for a riveting biography of his work under the confrontation of the press and scrutiny of the public eye… there isn’t one… and if there is, honestly, I doubt it’s worth reading.

So how did Jonathan Hill come to be in such a position of power? I don’t remember a campaign he led or a manifesto he delivered, domestically or in Europe. I haven’t seen him on the telly, I don’t even know who he is, I mean, I’ve read about him recently… but I still don’t really know.

The best way to find answers to these questions is to follow-the-vote. Take out your Small Axe and start chipping away at the bark on a few trees. First, let’s take a 30,000 ft view of the European Union structure. Two clicks on the Europa site gets you to a list of the European Institutions and other bodies. There are 14 of them. But let’s focus on the 7 most important:

  1. European Parliament
  2. European Council
  3. Council of the European Union
  4. European Commission
  5. Court of Justice of the European Union (CJEU)
  6. European Central Bank (ECB)
  7. European Court of Auditors (ECA)

At this point I could just refer you to Wikipedia’s clever Organisational Diagram of the EU inter-institutional organisation (see below) and say “go figure it out” but I think that’s a cop-out.

EU Organisational Diagram

EU Organisational Diagram

We need yet more focus. Let’s narrow it down to the 4 primary institutions within the EU; The European Parliament, the European Council, the Council of the European Union, the European Commission. An easy way to simplify things is to focus on My Vote and follow it through capillaries of the EU organism, like an iodine isotope trace in a blood-clot test.


The European Parliament

Let’s start with the institution closest to us, the European voter; The European Parliament. As mentioned previously and as stated on EU’s official website, every 5 years we enter into European Parliamentary elections. In Britain, we elect 73 Members of the European Parliament (MEPs) using proportional representation (D’Hondt method). Britain has 73 seats, France has 74 seats, Germany has 96 seats but, say, Belgium has 21 seats, Malta and Cyprus only have 6 seats, and so on. In total, there are 751 seats in the European Parliament. That’s quite a crowd! So, in order to contain the size of the European Parliament and to give smaller countries a voice, the rules were amended in the Lisbon Treaty and countries are limited to a maximum of 96 seats (Germany used to have 99) and a minimum of 6 seats (so little countries like Malta actually have a voice that can be heard). This seat allocation information is quite clearly communicated in Europa here and the actual seat allocations are also clearly specified here.

The European Parliament’s leader takes the role of Parliamentary Speaker and he’s called Martin Schulz of the Progressive Alliance of Socialists and Democrats (aka S&D). This may not mean a lot to some of my non-European (indeed, some European) readers. Only to say; there are two dominant political ‘Groups’ within the European Parliament the Progressive Alliance of Socialists and Democrats (S&D) and the European People’s Party (EPP). We’ll be examining political ‘Groups’ later. I could write an entire thesis on this subject but, to cut a long story short, there was a bit of a fight about how the European Parliament’s Presidential post was assigned, so the two leading factions within the European Parliament agreed a ‘tradition’ to share the post equally between an S&D and EPP candidate (regardless of the actual election result).

So far this quite simple. It’s sort of in line with our understanding of how democracies work in a modern society, albeit towards this unique, supra-national politico-economic behemoth spanning and entire continent. But here’s where the first curve-ball comes. The Parliament, elected, almost-proportionally, directly by the European people has no legislative initiative. This means, despite being the only directly elected institution within the EU, it does not actually have the power to bring legislation to the people. To quote directly the EU’s Treaty on the Functioning of the European Union (EFTU 2012) [emphasis mine]…

Union legislative acts may only be adopted on the basis of a Commission proposal, except where the Treaties provide otherwise. Other acts shall be adopted on the basis of a Commission proposal where the Treaties so provide.

That’s pretty black and white. It is the European Commission and solely the European Commission which brings bills to the table. But before we can trace our vote to the European Commission, we need to first look at the other two primary European Institutions. Dear reader, I’ve started writing this post and it’s becoming abundantly clear that this could take me 5000 pages to write, so we’re going to have to skip some bits and cut to the chase. I deeply apologise for over-simplification and the huge gaps that appear in my summary, but I’m trying to push 50 years of complicated European political evolution into a single post.


Other European Institutions

The European Council is dead easy to conceptualise. It comprises of all the leaders of each EU member state. So David Cameron of the UK, Angela Merkel of Germany, Francoise Hollande of France etc. The President of the European Council is currently Donald Tusk, Prime Minister of Poland. They meet 4 times a year. But the European Council cannot pass laws either. Clearly, these world leaders are not without influence, clearly they have big decisions to make. But it’s not immediately obvious how each of these decisions are arrived at. To quote the EU official site again, “the European Council mostly takes its decisions by consensus”.

The Council of European Ministers is different again and is not to be confused with The European Council. The role of The Council of European Ministers is very important. Every law or amendment must be first approved by national governments represented by The Council of European Ministers (usually by qualified majority). Then in an elaborate process known as “co-decision” this new position is negotiated back and forth with the MEPs of Parliament until an overall agreement is reached. For reasons I won’t go into the members of The Council of European Ministers is a fluid thing which is not completely nailed down, only to say it has 10 different ‘configurations’ and the personnel/configurations change depending on the subject matter and the respective national ministers applicable. Again, I apologise, you realise as this piece goes on I’m having to simplify and distil and reduce things further and further in order to get this article to an acceptable size. But to put things simply, if there is a new piece of legislation relating to agriculture then all the respective agricultural ministers from each nation gather to discuss the agenda. The 10 configurations are:

  1. General affairs
  2. Foreign affairs
  3. Economic and financial affairs
  4. Justice and home affairs
  5. Employment, social policy, health and consumer affairs
  6. Competitiveness (internal market, industry, research and space)
  7. Transport, telecommunications and energy
  8. Agriculture and fisheries


European Commission

So… back to the European Commission. We now know what the European Parliament is. We know what The European Council of Ministers is and also European Council. At least half of Wikipedia’s organisational diagram should start to make sense now (and I’m not going to explain every part of it). But in order to trace our vote through the mechanism of the EU like my iodine isotope in the bloodstream, we reach an eddy-current symbolic of a democratic clot.This is where one must chose one’s words carefully. For the President of the European Commission is a man (presumptious, but they’ve all been men) who is not elected by the people, he is ‘appointed’ or proposed by the European Council and subsequently elected by the MEPs in Parliament. But the process can be quite convoluted and can easily become heavily politicised. To quote Article 17 of the Lisbon Treaty.

Taking into account the elections to the European Parliament and after having held the appropriate consultations, the European Council, acting by a qualified majority, shall propose to the European Parliament a candidate for President of the Commission. This candidate shall be elected by the European Parliament by a majority of its component members. If he does not obtain the required majority, the European Council, acting by a qualified majority, shall within one month propose a new candidate who shall be elected by the European Parliament following the same procedure.

Interesting wording. Because some large Groups in the European Parliament made the interpretation that they could appoint their own party candidate, which came to be known as a Spitzenkandidat. Some political factions such as the third largest Group and brainchild of British Prime Minister David Cameron, The European Conservatives and Reformists (ECR), objected to the principle of Spitzenkandidaten and argued that it was based on a “tenuous reading of the Lisbon treaty”. This caused a rather public rift, an argument which Mr Cameron eventually lost. But it was interesting to see even journalists from, Britain’s traditionally left-wing broadsheet newspaper, The Guardian, slating the appointment of Juncker stating that “he sumbolises everything that is backward-looking and out-of-date” about Europe.

Never-the-less this assignment of a President is an incredibly important handover of power because the President of the European Commission, once elected, then hand-picks his team. The other Commissioners that constitute the 28 members from each state are selected by the President of the European Commission – one of whom is our very own Jonathan Hill mentioned above, remember him? It is the President who also assigns them their various posts or ‘portfolios’. Remember this is the only institution within the EU with legislative initiative and the body which, in the EU’s own words, has a “monopoly” on all EU legislation. But this is not all, the Commission and its president are becoming ever more powerful, it’s a trend that’s pretty well entrenched now, to quote from the official EU site, once more:

The President of the European Commission (EC) has taken on an ever more prominent leading role within the College of Commissioners, with the increasingly presidential system eclipsing the principle of collegiate decision-making. With the European Council and European Parliament now together responsible for the appointment, the Presidency has not only become a much more politicised office, but the President has also gained greater influence vis-à-vis the other members of the Commission.


Political Groups of the European Parliament

There’s where things get a little interesting. We may be used to the structure and consistency of our own domestic parties, but European MEPs are elected into the vast arena of the European Parliament, with 751 seats representing 28 different nations and God knows how many variations of national party interests. So something strange happens. MEPs prod and probe and gather into transnational, ideological clusters of like-mindedness known as European Parliamentary Groups. The two largest groups S&D and EPP we have already mentioned above. Now a ‘Group’ is not necessarily the same as an official European Party. One clear distinction is campaigning. Only official European Parties are allowed to campaign and they are funded by the EU itself. This was a strict measure taken to reduce the corruption which was corroding the internals of the EU. Never-the-less the barrier to entry for forming a European Parliamentary Group is still quite low, despite Parliament’s move to raise the threshold. In order to form a Group one needs 25 MEPs from at least 7 different states.

And so, like clouds wafting across a Turner sky, once inside the hallowed halls of the European Parliament our elected MEPs sort of swarm and swirl and melt and mix morph and metamorphosize into Parliamentary Groups. Some of which have a single official European Party as its backbone of political ideology, some do not and are just an eclectic mix of transnational political bodies. All this politicisation may seem transparent to a technocrat at the heart of the EU, but here, down on Planet Earth, the European Voter could be forgiven for thinking that at this point his or her vote is somewhat “lost in the soup”.

There is power in numbers within the European Parliament and these Groups are large and powerful, for example, in the sense that they reach internal consensus to eventually appoint the President of the Commission. But woeful turnout at EU elections is showing us how little Europeans truly empathise with these political Groups. Furthermore, huge power is delegated to the President who then appoints the Commissioners who then preside over the European Union. The consequence is that the EU voter may be left looking at a photograph of the European Commissioners blankly and wondering quite legitimately; “Huh? Where did my vote go?” The clarity and directness of accountability between the European Voter and the European Lawmaker is somewhat hazy. How easily can we pollard or, if need be, chop this tree down if it’s not growing the way I’d like it to? The vote I hold has lost some of its potency.


Conclusions to the Debate

For me, this is where the EU refraction into our own referendum debate yields some really interesting aberrations. It is a mistake to regard the RemaIN campaign as solely a left-wing agenda and the Vote Leave as solely a right-wing agenda. Things are getting mixed up. We have the so-called right-wing Vote Leave politicians talking about the “egalitarian virtues of democracy” with a socialistic tone. Simultaneously, the so-called left-wing RemaIN politicians talking about “the health of the financial sector and economic pragmatism” with a capitalistic twinge. It’s all getting very interesting.

I remember the only serious interview I had as a hedge fund manager with a chap who was running JPMorgan’s global prop book at the time. I was offered the job but didn’t take it, but something he said stuck with me. He said “Jonny, there will be times when you lose money on a trade and I don’t mind you losing money if you knew and fully understood the risks when you got it… what I cannot stand is losing money because you did not understand the risks”. With these words in mind, I have always taken contrarian views against myself in everything I do – it helps me to find conviction and balance. If I wanted to buy a stock, I’d read the “sell” recommendations. If I wanted to express an economic view, I’d read opposing views. If I wanted to write an opinionated blog post, I’d read blog posts on the other side of the argument and I’d slog my way through it, mentally arguing my way through each sentence. It’s a mentally exhausting way of approaching the world – I don’t recommend it if you just want a leisurely read of the paper on a Sunday afternoon!

This European Referendum has me more confused the more I read about it. While, during my time as a portfolio manager read enough articles based on economic modelling to take things with a pinch of salt, the benefits of remaining inside a cohesive and established single market is all too apparent and the price of a BREXIT is pretty clear-cut and quite daunting. But the price of membership is also high, as it strikes to the very fabric of our democratic mechanism. I would have loved to hear Pete Tosh’s opinion on this… he may well have said, “in the EU we are planting big trees, but are now only blunt axes”.


I wish I could tell you which I thought was the correct path, dear reader but the truth is, I simply do not know. I must find a way to make a decision but the more I read the less clear it becomes, I wake up on one side of the fence and go to bed on the other side. My only conclusion is that the stakes are high. Very high.


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22nd May 2016 – Britain and European Union – Partly Cloudy With Scattered Showers

Mendip Skies

Mendip Skies

It only rains twice a year in Britain, from January to June and from August to December.

Anonymous (joke)

Partly Cloudy With Scattered Showers

I don’t care what anyone says, I love the weather in Britain. I live in Somerset, one of the wettest counties in England, but also one of the sunniest (unlike Lancashire, which is just wet… and wet). That’s why we grow apples and make cider and hang out in muddy fields around Glastonbury.

What does “partly cloudy with scattered showers” mean exactly? That’s the meteorological equivalent of “I’ve got no *!&?ing idea what’s coming”. As the boys around here say, “noo point listenin’ to them forrrrecast son, you just look at them Mendips an’ she tell you al’ you need know”. My house sits on the edge of a village perched on the Somerset Mendip Hills, it looks over fields and forest but beyond that rolling green horizon, it drops down to the West coast of the Britain. Next stop New York. So the weather comes in from the Atlantic un-filtered, unrestrained and variable, very variable. But it makes for an interesting life. Today I meant to mow the lawn, but it was raining. Looking over the hills I knew it didn’t have legs and that we’d get some sunshine in the afternoon so, instead I stayed inside to write this post and mowed the lawn after lunch. See? Life could be worse.

But on this lowly, rainy island there are clouds gathering on the political horizon. It’s about Europe… and its “ever-closer” political union. Just like the British weather, it’s proving remarkably difficult to call. So I’m ditching the forecasters, the pollster, the media commentators and the politics of the situation and I’m just looking at the hills. In the skies of an EU referendum, from my house in Somerset, this is what I see; raw, untamed, without the complex political analysis or deep philosophy.

Most of you will wonder what has happened. One minute I’m talking about monetary inflation and the next European politics. But they’re related, of course. Wayward economic policies of the twentieth century were a precursor to the devastation of war. After WWII, Europe, devastated, came together at last and vowed never to let it happen again. They signed the Treaty of Brussels in 1948 and the Treaty of Paris in 1951, both of them could be summed up in one sentence “let’s stop spending all our energy making weapons to annihilate each other and try and do something productive for all of us”. And so the European Project began. Historically, the European union (with a small “u”) can be seen as an accumulation of treaties between European countries. So, you see, the economic predicament of Europe in the 1900’s has everything to do with the EU referendum. I just haven’t got enough time in the day to tie the two stories together articulately. Sorry…

BREXIT Tailwinds

A few short years ago the idea of Britain Exiting the EU, the “BREXIT” idea was a speck on the political landscape. A tiny piece of cloud, a wisp of stratocumulus drifting aimlessly, helplessly in the North Atlantic destined to be burnt out by the omnipresent heat of the sun. Somehow, between then and now, conditions aligned and it gathered energy, force and mass and now resembles something of a geopolitical hurricane with a path predicted to hit Western coast of Europe with great violence next month. So what happened? How did this come about? I’m examining the tailwinds to the BREXIT idea and how this wisp of a cloud managed to garner so much political energy.

On the face of it the likelihood of BREXIT seems absurdly low. The official manifesto of the Conservative Party, or Tories, in Europe is pro-EU, indeed, David Cameron has pretty much staked his job on it. But also the second, third and fourth most powerful parties (Labour, Scottish National Party and Liberal Democrats) are distinctly pro-EU. That leaves only the, very poorly-represented (and diminishing), UK Independence Party and a few Tory back-bencher dissidents feebly holding up the BREXIT campaign. To add to this, the UK voters are generally quite conservative bunch, who grumble and groan but generally only vote for change when the stress has stretched to palpably painful proportions. If life is OK, don’t bother changing it.

This is a non-issue right? The “RemaIN” campaign will win hands down, it’ll be a wash-out. Why are we and the markets even contemplating the notion of a BREXIT? What happened? I’m setting out on a voyage of discovery to find the answer to this question, and it starts exactly two years to the day, May 22nd 2014.

Why the BREXIT Campaign has gained traction in the UK

Reason 1 – political incohesion

The pro-EU juggernaut in Britain has a much more powerful political army and a bigger arsenal than the Eurosceptics. Perhaps the most famous “Vote Leave” campaigner, and London Mayor, Boris Johnson is right, this is a David versus Goliath match up. In choosing to part from Goliath (and his Prime Minister and party leader, David Cameron) Boris Johnson too has staked his career on the EU referendum.

But, let’s leave Barack Obama, the European leaders and all the large corporations aside for the minute and examine just the domestic political landscape in the simplest terms. With the four most powerful domestic parties in the UK all wanting the same thing (RemaIN) you’d think they’d come together to deliver a powerful and meaningful message together, in unity, in solidarity. I’ve been waiting for this to happen. But so far it has not. At times it’s as though incumbent politicians here are so vehemently against agreeing with anything the “opposition” party has to say that, even on the things they agree on, they choose not to be even in the same room as one another. Perhaps they are saving this moment of union until the eleventh hour when the campaign will suddenly explode into life… but they are running out of time, it is now the eleventh hour and the 58th minute.

On the flip side, the political minnows on the Eurosceptic side (officially the “Vote Leave” campaign) of the fence seem to be delivering clear, succinct messages and are focussing, at least temporarily, on their commonality rather than their differences. There is nothing to corroborate this subjective, cloudy argument. It’s just my opinion. But, if the logic of causality is not there, the results certainly are, because in May of 2014 something quite strange happened.


Reason 2 – poor turnout

On May 22nd 2014 Britain went into Local Elections but also, concurrently European Elections, which are held every 5 years around Europe. What is characteristic of both Britain and, indeed, the whole of Europe, was that turnout to European elections is woefully poor. Not only is it poor, it’s getting poorer and has been getting poorer for generation after generation of voter. As the allegedly independent EU media broadcasting site EurActiv informed its readers in a piece, It’s official – last EU elections had its lowest ever turnout:

The updated numbers, published on the Parliament website, show that turnout struggled to reach 42.54% in 2014, well below the 43.1% initially announced.

Diplomatic pencils will be being snapped in despair at the lowest public enthusiasm for an EU poll since 1979, when elections were first held.

Turnout is seen as a litmus for the EU Parliament’s democratic legitimacy by many but it has fallen steadily, from 62% in 1979 to 43% in the 2009 election.

Worryingly for europhiles, the new low will call into in question the legislative credibility of the European Parliament. Guy Verhofstadt, the lead candidate for the liberals and a convinced federalist had initially hailed the marginally-higher turnout estimate, saying the new Parliament “will be more representative than the previous one”.

However you quibble the numbers, the trend in the charts is apparent; even in the “Pillars of Europe” – countries like Germany, France and Italy. Lower turnouts mean that radical parties, both to the right and left tend to get higher representation. Eurosceptic parties are often to be found in the politically peripheral tranches within European states.

But this bears another, perhaps more worrying predicament to the European project, something which the Eurosceptics have been quick to pounce on. Europeans, all Europeans, not just the British, are simply disengaged from the political process and the politics of the European project. Why is this? Is it just too boring? Is it too complicated? Is it by design or by accident? What is unquestionable is that, while over the decades the power of the European Union has increased, public participation in that power has waned. This is a structural shift in the fundamentals of European democracy and it’s easy to see how a Eurosceptic would be quick to jump on this argument as indication of something more sinister beneath the surface.


Reason 3 – the mechanics of the voting system

On May 22nd 2016 a party which only has only one seat in the House of Commons (one seat out of 650 seats) rose victorious at the European Elections and triggered a political earthquake in Britain. An earthquake whose aftershocks would be felt on the other side of the Globe for years to come. The party was called the UK Independence Party or UKIP. No prizes for guessing what their agenda was towards Europe – the clue is in the name!

There’s a little quirk in the European voting mechanism that basically states that, provided proportional representation is used to determine the European parliamentary seats, it does not matter which method, specifically, is used.

Firstly, the point about proportional representation. Britain doesn’t have it. Not for general elections at least. We have a First Past The Post (FPTP) system. Take a simplistic and crude example: imagine you have a country with 100 constituencies representing 100 seats in parliament. Imagine you have two parties; Party A and Party B. If in every single one of the 100 constituencies Party A just eeks ahead of Party B by the skin of its teeth, then Party A ends up with ALL the seats in parliament. Not one single seat is attributed to Party B despite the fact it may have won 49% of the votes, proportionally. As far as seats, and thus legislative power is concerned, Party A has a 100% majority, Party B has absolutely nothing. This method has its advantages – favouring two-party systems and thus simplifying or adding clarity to the public political debate and it suppresses destructive extremism. However the main criticism of FPTP is that huge numbers of votes are often thrown away, wasted, ignored and thus it is not a true representation of public opinion or feeling.

The Economist Blog has a good graphical representation of this (the solid blocks representing real seats, the hollow blocks representing voting proportion not allocated as parliamentary seats). It is undeniable that FPTP favours larger parties and suppresses the votes of smaller (allegedly more radical) parties. The pros and cons of voting mechanics is not up for debate in this piece. All that concerns us is the fact that the British are not used to electing powerful governing bodies by proportional representation. But in European elections member states are required to use proportional representation and Britain opted to use a method known as D’Hondt method, named after the Belgian Mathematician and creator Victor D’Hondt. The D’Hondt method is a, rather beautifully simple, mathematical method of counting votes. Like a Blackjack dealer flinging cards across the table, seats are sprayed across the parties by a sort of round robin method based computationally on voting share. I won’t go into too much detail, only to say that this BBC explanation is pretty good.

In May of 2014, the tiny UKIP party stormed to victory due, in part, because the mechanics of the voting process favoured smaller, more radical parties. Of course, UKIP voters would suggest that, actually, it is the current British Parliamentary voting system that is flawed, not proportional representation – the method by which they claimed victory. In the last election the Labour required 34,244 votes per seat in The House of Commons. The Conservatives could feel slightly aggrieved, they required 40,290 votes per seat. A full 6,000 votes more than Labour. UKIP’s ratio was 3.9 million votes per seat. Ironically, while UKIP voters would argue vehemently that proportional representation is actually a fairer way to vote in Europe, it is a case they may not wish to argue too passionately for – after all it was the Big Bad EU that enforced proportional representation on EU voting – thus giving them a voice in Britain in the first place! But let’s face it, proportional representation helps the BREXIT case and there is nothing more proportional than a referendum.


Reason 4 – immigration rhetoric

There is no question that the immigration crisis has helped campaign Vote Leave and the BREXIT folk. As Der Spiegel, reports – handling of the immigration crisis has even cost the Great Merkel a great deal of her power. There is a nationalistic element of the Vote Leave campaign which has jumped onto the immigration bandwagon as vindication of how the EU system “simply doesn’t work” and will not ever work for the British nation. But this is not solely nationalistic, there is the antagonistic element that simply points to this as a demonstration of bureaucratic incompetence and political arrogance. That said, the timing of the immigration crisis is unfortunate for the RemaIN cause and will be a thorn in their side right up until election day.


I think these are the main reasons why the BREXIT campaign has gained traction over the last few years in Britain. There are of course other reasons; Vote Leave would point to the billions of tax dollars which Britain has exported to the continent as the “cost of membership” but this is balanced by the obvious argument of the economic benefits that have come with free trade, liquid labour and enablement of a “common passport”. I’m not getting dragged into this and other, quite valid, arguments at this stage, only to say that this referendum may be closer than it appears on paper for a variety of reasons.


New Romantics

You could thus far describe my post as describing simply the headwinds to the RemaIN campaign. It’s quite one-sided in this respect. But I believe both sides of the arguments have weak points, Achilles heels, which has rendered a strange sort of political stalemate and rhetoric which gives excessive focus on immigration and bizarrely contorted stand-off positions over the philosophy or culture of the European Union as a political establishment.

Hold tight now, dear reader, this is where I offend everyone and show my political naivety. My simple brain buckets UK EU referendum voters into a number of categories ranging from vehement Union-haters to roaring pro-Union fundamentalists.

  • Nationalist-leaning (ANTI EU – Vote Leave). A romantic notion of UK independence from Europe. We never wanted to be part of the European Union never mind an “ever-closer union” going forward. We want to preserve 100% of British sovereignty. The European project is fundamentally broken and always will be – we don’t want to be any part of it. Embodied by, Nigel Farage of UKIP.
  • Libertarian-leaning (ANTI EU – Vote Leave). A romantic notion the best way to affect European policy is to vote to walk away from the status quo. We like the idea of a closer Europe facilitating trade, but the European Union is simply not working and it places too much power in the hands of the governing bodies in Europe. It has to change and the only way we feel our voice will be heard is by voting to exit until suitable reform is made. Embodied by, Boris Johnson of Conservative Party.
  • Moderate Right (PRO EU – Vote RemaIN). A romantic notion that we can change the EU once we’re in it. We are EU reformists, we think the European Union is flawed, perhaps fundamentally so, but we have to be IN the Union to reform it and ensure that reformations are favourable to the British people. Embodied by, Prime Minister David Cameron of Conservative Party.
  • Moderate Left (PRO EU – Vote RemaIN). A romantic notion that the EU is roughly on the right track. Yes there are political and structural flaws to every political system but it’s a complicated challenge. Europe needs to change, but the European project is a long game easily derailed by political short-termism. We’re in and we’re willing to do our part and collaborate with European members. Embodied by, Nicola Sturgeon of the Scottish National Party.
  • Pro-Euro Activists (PRO or ANTI ???). Arguably the biggest romantics of all, calling for immediacy over European political harmony. Ever-closer-union is good but it’s not happening quickly enough with the EU. I want the Social Democratic United States of Europe and, enough already – get on with it, I want it now!

The final category of people who are so pro European integration that they simply don’t think Europe is moving quickly enough is a hard category to define (perhaps embodied by Jeremy Corbyn of the Labour Party? I’m not sure who they are or even if they exist, perhaps the younger voters? It’s a wild card. But both sides have Achilles heels which they’re trying desperately to conceal. What I think is interesting about this category is that they are so much in favour of European integration that they may actually be democratic puritans and could conceivably be pushed into an anti-EU stance… that’s the bit that makes us come full circle on the EU debate.


Achilles Heel of Vote Leave

Vote Leave actually has two Achilles Heels, one of which is within their control.

The first is the immigration rhetoric. Immigration has become a strong part of the argument, but, as the heat turns up its in danger of turning too nationalistic and they risk losing the moderate Libertarians and will lose all hope of taking Moderate swing voters. This is why I think, ultimately, the RemaIN will win. There are simply not enough Nationalists and Libertarians to get across the line, even with proportional representation. Part of me feels that it’s only a matter of time before a desperate and delinquent member of the Vote Leave campaign says something obnoxious about immigration which turns the Moderates off.

The other Achilles Heel for the Vote Leave campaign is so subtle it barely exists. It concerns the lack of an alternative plan towards a pro-Europe initiative. Because I believe some Vote Leave campaigners are actually pro-European integration of some form. It’s just that they are against the EU, specifically, as the mechanism to achieve this integration. Let’s face it, this is, specifically, an EU referendum, not a necessarily a pro-European integration referendum per se. But this faction of Vote Leave simply cannot present an alternative to European integration as it would be political suicide. They would lose their nationalist core and open themselves to the same criticism they are venting towards the RemaIN candidates, picking holes in the fabric of an inherently complicated political integration plan.

So the tactic is to deliver forceful, yet carefully measured rhetoric on immigration policies of the EU while simply saying that the “EU isn’t working” without ever suggesting a viable pro-European alternative. Putting the onus on the RemaIN campaign to respond.


Achilles Heel of Vote RemaIN

The Vote RemaIN campaign have one leading Achilles Heel. Simplifying greatly (as I always do), it basically concerns the answer they must give to the BREXIT slogan “the EU isn’t working”. No doubt, cross-border trade has been liberated, transport and travel has been lubricated along with the positives of a liquid labour force. But, let’s face it, while Europe can claim some of the credit for closing out the Cold War, most of the growth over the last 30 years has been from a rising tide of globalisation lifting all boats. By this measure Europe, crippled by chronic Eurosclerosis, has fallen woefully behind the US and other First World counterparts (including the UK, in isolation) on a relative basis. Of course, the economy isn’t everything, but from an economic perspective, it’s hard to fight the Vote Leave toe-to-toe that the EU is actually working.

But the “EU isn’t working” is a shrewd double-edged sword that the Vote Leave campaign is wielding. Because there is a structural argument about the democracy of the European experiment. In order to answer this question the RemaIN campaign cannot simply say “no, you’re wrong the EU does work”, because they know exactly what the follow up question will be. They must explain how it works, the very fabric of European democracy under the EU vessel. This is wonkish, it’s complicated, it’s not a topic to be taken into open and public debate. So the tactic is, rather than answer this head-on, to grin and bear it as the Vote Leave campaign ask the question again and again, knowing that each silent response adds volume to the Vote Leave thunder cloud. Instead the focus from RemaIN is on the economic credibility of the Vote Leave campaign, citing the potential economic turmoil that could result from an isolationist Britain.


It’s a funny sort of dance our politicians do. But, if anything I think this corroborates that a simple YES/NO vote does not mean a simple political debate. Anything but…


But I’m going to try and address the question of “how the EU works as a democracy” head on… that’s for another post.


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