Email of the day on Brexit, Ireland and Political Polarization
Comment of the Day

October 18 2017

Commentary by Eoin Treacy

Email of the day on Brexit, Ireland and Political Polarization

Well said Eoin. My vote was 'remain' but if there was another vote it would now be 'leave'. I admit I was wrong. I lost income from the leave vote (I used to consult for the EU) but, unlike others with vested interests, I will think independently and logically about what is best in the long term, as also you exemplify. My feelings at the time of the referendum were a reflection of the UK population, close to 50:50, but events since the referendum have made me absolutely a leaver, and the sooner the better. If we decided to 'crash out' tomorrow I would cheer, whatever the turmoil. Actually, I think that would be the best solution now. (Ironically, the EU would then beg for a deal.) There will not be another referendum, but if there was I strongly suspect the remoaners would get a shock at the increased majority for 'leave'. 

The EU has several serious and possibly terminal problems. 

1. It is frighteningly anti-democratic. Note I say 'anti-democratic' not just 'undemocratic'. It's shown its colours several times - vote until you give the 'right' answer then you are not allowed to vote again. Now they are moving to not allowing any democratic votes at all. EU leaders are not elected and not removable by Europe's voters. Voters have no say about federalisation - except by leaving!

2. Taxes in Europe and already cripplingly high, causing slow growth and massive unemployment, yet the EU wants to raise taxes even higher. How can Europe compete with emerging economies if it maintains crippling tax rates? It's a death spiral. That will become increasingly apparent as interest rates rise. EU taxation on top of country taxation is coming. the opposite needs to happen - Both EU and government spending needs to reduce and taxes to fall. 

3. What is the definition of a country? For me, control of its own borders; control of its own defense, control of its own taxation and spending; control of its own judicial system. (Maybe you can add more). All are being lost by EU members. How many will truly give up everything to become a 'region' or 'state' of the EU, and no longer a country? 

There are battles ahead, and the voters of the UK were wise to make the first move. I only wish Ireland would do the same. I love the country and its people, and worry how much it will suffer now the EU is removing all its competitive advantages for the future.

Once again, Eoin, thank you for your very clear views on this and many other matters. You are impressive.

Eoin Treacy's view

Thank you for this balanced email and your kind words. Brexit represents a challenge for Ireland because of the difficulties that would arise from both creating and policing a land border with Northern Ireland. Additionally, the UK is Ireland’s largest trading partner and the only other major economy in Europe it shares a language with. The challenges are far from insurmountable since neither country is party to the Schengen agreement but it is being used as a political football during the current negotiations. 

There is no sign of the same kind of pent up demand for change in Ireland that is present in the UK. Ireland was a net beneficiary of structural funds for a long time and the large US multinational employer base has little interest in seeing Ireland leave the EU. However, tax harmonisation represents a potential existential threat to Ireland’s economy. The primary reason Intel, Apple, Google, Facebook, Microsoft etc have their European bases in Ireland is because of taxes. When the Eurozone gets serious about foisting its corporate taxes on Ireland it will dwarf the challenge represented by Brexit.  

Generally, speaking Irish people tend to vote with their feet and there is still net emigration despite the fact the economy has staged an impressive recovery. In times of stress that pressure release valve acts to cushion the economy. On the other hand, it is a challenge to encourage people back when the cost of living is one of the highest in Europe. 
I agree with your point that defence, taxation, spending and the judiciary are all characteristics of what defines a country but when I think of the UK, Germany, Italy or the USA that is not the first thing the comes to mind. When I think about a country my first recourse is to the people and their culture. 

The problem many countries face right now is that resources are thinly spread so people tend to focus more on the people and less on the cultural affinity we share. When resources are plentiful people tend to focus less on the people and more on cultural affinity which contributes to the “we’re all in this together mentality” 

Widening income disparities resulting from central banks’ responses to the credit and sovereign debt crises have meant many people have seen their standards of living decrease over the last decade. This article from the Financial Times Alphaville section highlights the fact many US households were better off in 1998. Here is a section:

The median American family was richer in 1998 than it is now, and it also has about 30 per cent less wealth than at its peak in 2007. That measurement was obviously inflated by the housing price bubble, but even so the decline can nonetheless be understood as a massive shock to the value, real and perceived, of the typical household’s collateral. Other methodological approaches, perhaps using a different deflator, might yield a more hopeful trend, but the devastation wrought by the crisis remains hard to overstate.

That naturally sends an increasing number of people, and even those who should know better, into the arms of nationalist rabble rousers, who cultivate an us-versus-them mentality; with the ‘them’ focusing increasingly on the old targets of race, religion and gender as well as bankers and politicians who can be blamed for the current state of affairs. Political parties honing tailored messages for specific demographic groups only magnifies this growing sense of polarisation. 

The problem for the establishment, and I believe this is true across much of the OECD, is that they hued to a set of ideals based on globalisation and multiculturalism that helped the global economy prosper at the expense of a significant proportion of their domestic population which has grown over the last decade. When a large proportion of the population asks, “What about me?” then that emotion will be expressed in a number of different ways which can variously be described as populist, nationalist, racist, xenophobic etc. In my view, these are all reactionary movements against the status quo. The fact they refer to our baser or tribal instincts is reflective of the growing power of the crowd supporting them.

This increasing polarisation is exposing an identity crisis within establishment political parties because, faced with rebellion, they are struggling to come up with a clear answer to the question “What do you stand for?”  

In just the same way that the biggest bull in a bull market cannot hope to become the biggest bear in a bear market, and is usually swept away as the crowd dissipates and coalesces afresh around the bearish idea, it is unlikely that the current crop of politicians can come up with a satisfactory answer. Rather than being close to the end of political polarisation we are probably closer to the beginning because so far nothing has really changed. 

Outsized economic growth is the primary enabler for the big society ideal most of us identify with. For people whose living standard has been contracting for twenty years that probably means they want higher wages. I have sympathy with the view higher minimum wages will encourage automation but regulation and protectionism are wild cards while interest in Universal Basic Income is growing. 

Personally, when I think of Universal Basic Income (UBI) I am reminded of Winston Churchill’s quip, that the problem with socialism is that you eventually run out of other people’s money. In effect UBI is a modern iteration of communist ideals but that does not reduce its appeal for populations conditioned to expect something for nothing. From an investment perspective, I am watching how the political situation evolves because we have been wondering for a decade what the catalyst to deliver inflation might be. It could very well be that some combination of political polarisation, protectionism, rising wages and UBI provide that change. Meanwhile the impending shrinking of central bank balance sheets, represents a headwind of increasing magnitude for financial markets the longer it persists and there is no guarantee it will persist. 


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