Let’s begin today’s letter with a subject that is clearly close to home for many: border control (or the loss of it). Sweden has introduced mandatory identity checks for travellers across the Oresund Bridge. The bridge connects Copenhagen in Denmark with the Swedish cities of Malmo and Lund. The new ID checks began yesterday.
About 20,000 commuters a day cross the bridge, according to the BBC. But that’s not what Swedish authorities are worried about. They’re worried about the 150,000 asylum applications they received in 2015. And those are just from people who bothered to apply for asylum through official channels. The actual number of migrants — legal and illegal — is probably far larger.
The walls are going back up in Europe. It’s not just at the border of the EU (Fortress Europe) and the rest of the world. It’s within the EU as well. In fact, Sweden had to obtain a temporary exemption from the Schengen Agreement to impose the internal EU border control. Why is it a big deal? For several reasons.
First, the exemption granted by the European Commission shows how fickle the law can be. If you can change a law because it’s inconvenient, well then what kind of law is it? Yes, there are exceptions to any rule. But if the four freedoms — the free movement of goods, services, capital and people — are not really freedoms, what are they?
The 1985 Schengen Agreement was designed to allow for the passport-less travel within Europe. Yet not long after Sweden instituted tighter border controls with Denmark, Denmark did the same with Germany. The path to Sweden runs through Denmark via Germany.
It’s allowable, under Schengen, to require a photo ID at the border of the EU. In fact, as a legal alien, I have to show a photo ID every time I enter the EU or the UK. Nothing strange there, and not nearly as draconian as the finger printing and photographing you get entering the US as a non-resident.
But the migration crisis is complicating the borderless travel Europeans have gotten used to. Last year, nearly a million migrants and refugees came to Europe from Syria and the Middle East. The proxy war between Shia Iran and Sunni Saudi Arabia is getting worse. Do you think there will be fewer migrants in 2016?
The UK is exempt from Schengen. But like Sweden, Britain promises generous welfare state benefits to anyone who gets in the country. You could argue that a culture should be kind to strangers. You’d probably be right. But there is always a cost, in both money and social cohesion. Someone has to pay.
As someone from a country of immigrants, I’m all for adding a lot of variety to the social mix. Migrants can be some of the hardest working and most productive members of a society. But Sweden has accepted more migrants and refugees, per capita, than any other country. Perhaps it is finding out that there are limits to how many newcomers you can welcome into a small country.
Leave aside the social, ethical, and philosophical aspects of the issue. It’s more than a ‘migration crisis’. It’s an ‘existential crisis’ for the European Union itself, according to New York University Professor Nouriel Roubini. And in 2016, the survival of the EU is ‘ground zero’ for geopolitics.
Roubini wrote yesterday that EU disintegration is a bigger geopolitical issue this year than the Sunni-Shia conflict in the Middle East. It’s bigger than territorial disputes in the South China Sea. And it’s bigger than the low-level conflict between Russia and Ukraine. Why? He writes:
‘Those who argue that the migration crisis also poses an existential threat to Europe are right. But the issue is not the million newcomers entering Europe in 2015. It is the 20 million more who are displaced, desperate, and seeking to escape violence, civil war, state failure, desertification, and economic collapse in large parts of the Middle East and Africa. If Europe is unable to find a coordinated solution to this problem and enforce a common external border, the Schengen Agreement will collapse and internal borders between the EU member states will reappear.’
Roubini reckons the collapse of Schengen could trigger other dominos: Greece finally falling out with its creditors and leaving (or being kicked out of) the EU. ‘Grexit’ triggering a run on the euro. And even though Britain doesn’t use Europe’s common currency, Roubini believes ‘Grexit’ would make ‘Brexit’ more likely.
If Britain leaves the EU, the Nordic states (Sweden, Norway, and Finland) might follow. And it might not stop there. It will reopen the issue of whether Scotland should leave the UK, or Catalonia should leave Spain.
Is all this catastrophic? Or just the natural devolution of political power when a centralising project fails? The answer to that question may be interesting but irrelevant if Roubini is right. The migration crisis has made the survival of the EU one of the major topics for 2016.
China market stabilised suspiciously
Let’s switch back to yesterday’s big investment story: China going bonkers. The specific worry has been that China’s debt-laden financial system would drag down its economy and unleash a wave of global deflation, including falling stock, bond, and commodity prices.
Well, that turned out to be an accurate worry. China’s opening-day swan dive triggered the worst sell-off in global stocks in four months. The FTSE’s All World Index was down as much as 2.7% at one point. The Dow rallied 191 points off its intra-day lows, but still managed to close down 276 points, or 1.58%.
That’s just a reminder that even though China’s stock market problem is China’s stock market problem, it’s also a problem for investors everywhere. And if Chinese GDP grows at less than 5% this year — a possibility suggested Byron Wien, the vice chairman of multi-asset managing at Blackstone — it could trigger a bad debt crisis in China and further yuan devaluation.
It was the modest August yuan devaluation that triggered a big correction on global markets. But at sub 5% growth, with an honest to goodness banking and currency crisis, you wouldn’t be looking at a correction anymore. You’d be looking at a bear market.
Chinese authorities know this. It’s why they injected AU$28 billion into the financial system yesterday. When liquidity cracks begin to appear, find more cash! The People’s Bank of China made the money available through a seven-day reverse repurchase (‘repo’) agreement. It seemed to help.
After a chaotic opening, Chinese stocks suspiciously stabilised by the end of the day. The Shanghai Composite opened up the trading session 3% down. But then buyers — buyers from somewhere, anywhere — stepped in. The index managed to eke out a small loss on the day.
Here’s the question no one really knows the answer to: how rigged are global stockmarkets?
I’m not talking just the copious amounts of credit made available through low interest rates. I’m asking if you can trust stockmarket price action to be a reliable leading indicator of future economic growth. Are investors really in charge? Or is the market now run by computers responding to the words of central bankers?
In the event, China lives to fight another day. But for the rest of this year, it’s now clear that even the best-laid plans of central committees can quickly fall apart. When they do, liquidity evaporates and markets seize up. Add that to the ‘big risk’ column for 2016.
Economists agree: Britain better in EU
Not to worry, though. At least about ‘Brexit’ causing a crash in sterling, falling stock prices, and the relegation of the UK to Europe’s second tier. According to a group of esteemed economists surveyed by the Financial Times, Britain will not leave the European Union because it would be…bad for Britain.
That’s right! The FT surveys more than 100 economists at the end of each year. This year, 67 of the economists surveyed said Britain’s economic situation would deteriorate if voters decide to leave the EU. Not a single one thought a ‘leave’ vote would enhance Britain’s economic growth or national security.
Neville Hill of Credit Suisse seemed to speak for the 67 when he said that a vote to leave ‘could well be the catalytic event that turns the UK’s current account deficit from a ‘something to worry about’ to ‘a problem’.’ That ‘problem’ is that capital would flee the UK and sterling would crash based on the uncertainty of what a ‘leave’ vote would do the British economy.
It’s not a trifling worry. A capital exodus wouldn’t just trigger a sterling crash. It might trigger a property crash. Without large flows of foreign capital into London’s property market, the game could be up for property. Then again, a sterling crash would make British property prices a lot cheaper to foreigners.
I asked Charlie Morris about the conundrum. He wrote back:
‘A record current account deficit will lead to a crash in sterling whether we stay or go. If we go and sterling crashes, people will blame BREXIT. If we stay and sterling crashes, people will blame the EU.
‘Following a sterling crash, the current account deficit will recover because we will import less and, possibly, export more. Also foreign income will be worth more in GBP terms and outgoings will be lesser. This has already happened right across the Eurozone since 2008.
‘Pretty much every EU nation now has a surplus following the euro crisis. France has a modest deficit, so does Finland. Eastern Europe, including Turkey, have large deficits. Our current account deficit is in large part, because of the euro zone. It will be interesting addressing these issues over the next few months.’
Charlie’s response was much more considered than my initial response. Casting aspersions or making ad hominem attacks on the wisdom of economists is the low road. But it is oh so tempting, isn’t it? The entire economics profession remains in disrepute after its failure to anticipate or even understand the credit bubble that blew up in 2008.
The credibility problem of economists doesn’t make them automatically wrong about what would happen if Britain left the EU. But consider the source. When you’re trapped in a bubble of conventional thinking, and you have a vested interest in staying on the easy money/big government/big bank gravy train, anything that threatens that is…threatening.
Contributing Editor, Money Morning
Editor’s note: Long time Money Morning readers will remember Dan Denning, who previously wore many hats at Port Phillip Publishing, including company Publisher, and Editor of Money Morning and Markets and Money. Today Dan has moved on to the UK, where he pens Capital and Conflict for our sister company, MoneyWeek Research. The above article is republished from those pages.
From the Port Phillip Publishing Library
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