It never ceases to amaze me just how far the bureaucrats in Brussels are willing to go to deny reality.
The EU, politically, may have had the best single month in years in September and it appears that this simply isn’t enough for them.
First, they win a major political battle in Italy by helping cobble together an unstable government between the Democrats and Five Star Movement to oust populist Matteo Salvini and Lega from the government.
This puts on the back burner any threat of an Italian revolt against the euro and EU fiscal rules in the coming months. It may be a meta-stable solution but it kicks the Italy can of worms down the road so they can focus on Brexit.
Then, with the help of literal traitors in the British Parliament, they get a series of major victories which not only put the U.K. on the path to, at a minimum, delaying Brexit, but also destroying centuries of constitutional conventions and upending British law.
Having an unstable government in Italy is de rigeur. Undermining the oldest Parliament in the world is quite an accomplishment.
One would think EU leadership would be content with these outcomes and accept whatever minor changes to Former U.K. Prime Minister Theresa May’s horrific withdrawal treaty Boris Johnson offered them this week would be agreed to.
But no.
In fact, buoyed by these victories, the EU rejected out of hand Johnson’s formal — and in his words, final — offer to the EU which, in effect, does nothing except propose changes to the contentious Irish backstop while still holding firm to everything else agreed to in the treaty, which, itself, constitutes BRINO – Brexit In Name Only.
Because the U.K. would still be locked inside the major EU institutions for another two years, at a minimum, in the hope of a future government throwing Brexit aside then. Johnson would get to, politically, deliver on his promises but the EU would still have what it wants, the U.K. beholden to EU rules while kicking Nigel Farage and his Brexiteers out of the EU Parliament and the European Council.
Once this deal was delivered and the contents of it made public, the euro put on a small rally in the hopes that some form of sanity would prevail in Brussels.
Nope.
Guy Verhofstadt, leader of the Brexit Steering Group, and European President Donald Tusk backed up Republic of Ireland Prime Minister Leo Varadkar, who refused to give ground on requiring the backstop as a prerequisite for a deal.
Because it is the backstop that keeps the U.K. in the customs union and the single market, unable to move forward independently on trade while losing any voice in the European Parliament.
Now the EU is very good at saying no. It’s all they know how to do. Because they don’t have to say yes to anything as long as the British Parliament is willing to undermine the Prime Minister.
But given how rancorous the relationship between Parliament and the Government is right now, Johnson could come back with the unicorn deal for Brexit and they would vote it down because they don’t want to give him the political win.
And that leaves the EU thinking they still have leverage via the Benn Act — which forces Johnson to ask for an extension — when they don’t.
Why?
Arlene Foster, the leader of the Democratic Unionist Party (DUP) of Northern Ireland, was quite clear what’s going on here.
“It’s very clear that the Irish Govt are not interested in having an alternative to the Backstop and it actually exposes the fact that the Backstop was a trap. They had never any intention of allowing us to leave the Backstop and that’s what has been shown today.”
You can find her official statement to the Irish government’s response to Johnson’s proposal here.
Johnson’s proposal isn’t a great one for Northern Ireland. It cordons them off in a separate state with respect to the customs union and single market for four years. But the DUP can live with that because it would allay fears of a hard border returning and allow the distrust amongst Irish on both sides to settle down.
And this is the crux of the problem the EU faces over not only Brexit, but any other country looking to break away from it; the fear that the country will be successful outside the union and its stifling rules.
This is why the Irish backstop is and was, as Mrs. Foster put it, “a trap.”
The EU continues to make the argument that it is the U.K.’s responsibility to solve the Irish border, but it isn’t. The EU and Ireland are the ones using the fear of a hard border to scare the Irish to stop Brexit. But it is, has and was always just nonsense, nothing more.
Johnson’s strategy here is to lay the blame of a “No-Deal” squarely on the EU’s shoulders, specifically Mr. Varadkar and Ireland, as well as keep forcing Parliament into more desperate moves.
And none of this is sitting well with the British people or investors. Points go to Boris Johnson here. He’s winning the political war, they the legal one.
The uncertainty surrounding Brexit is killing business on both sides of the channel. We’re seeing it in the economic statistics coming out all over the continent. It’s reached the U.S. as well with our Institute for Supply Management Manufacturing Survey missing badly this month, prompting a big sell-off in U.S. equities.
It is obvious that the political animals in Brussels don’t care about that, only winning their ideological war to create the more perfect version of the Soviet Union. The French are happy to watch German industry struggle and the British eat themselves alive over Brexit.
The hardline EU firsters like Verhofstadt and the resurgent Greens in Germany have control of the political yoke as real solvency fears grip German and Danish banks, which is having contagion effects on U.S. banks, needing to belly up to the Fed’s emergency repo window to shore up the interbank markets.
This is why the euro entered Q4 at a low ebb, continuing its slide on both the monthly and quarterly time frames toward the 2016 low of $1.034. It’s why the two-day counter-trend rallied on hopes the Fed will cut rates again this year because those terrible ISM numbers failed to even push back above $1.10.
I’ve made my case in previous articles both here and on my blog that Europe is the key to the great unraveling of the global financial system. The U.K. is an integral cog in keeping that dream alive for a little while longer. And when Deutsche Bank collapses, the U.K. will be on the hook for the bailout on top of the money it currently pays in.
The threat to the EU is acute and the leadership in Brussels knows this. This is why we’re seeing a bit of a split between the hard-line politicos like Tusk, Varadkar and Verhofstadt and the realists like Jean-Claude Juncker, Angela Merkel and possibly even Emmanuel Macron.
Investors need to realize that if Johnson is successful in navigating through the next 27 days to a no-deal Brexit or a general election without a second Referendum, then it will be an amazing opportunity to go long the U.K.
There will be a final climactic selloff in British assets — the pound, the FTSE 100, Gilts — but the euro will sink into near oblivion as their sovereign bond market bubbles burst and the Brussels budget collapses without British funding.
The FTSE ended this week at near-term support just above 7000. A break below that will see it collapse to the 2018 low of 6536.53. I expect we’ll see that happen the closer we get to the threat of no-deal happening.
If Johnson fails and the uncertainty continues, then both the EU and the U.K. will be dragged down together. But even if Brussels and Westminster are successful in stopping Brexit, they will only be delaying their day of reckoning as their delaying tactics create the very dollar liquidity problems dragging down the global economy.
In either case, I would stay short the euro.
• Money & Markets contributor Tom Luongo is the publisher of the Gold Goats ‘n Guns Newsletter. His work also is published at Strategic Culture Foundation, LewRockwell.com, Zerohedge and Russia Insider. A Libertarian adherent to Austrian economics, he applies those lessons to geopolitics, gold and central bank policy.
