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LGT Vestra US

Blog post - How do you like your Brexit? - Feb 2017

Charlie Parnell – Partner, Investment Manager, LGT Vestra LLP

“I know many may fear this might herald the beginning of a greater unravelling of the EU. But let me be clear: I do not want that to happen. It would not be in the interests of Britain. It remains overwhelmingly and compellingly in Britain’s national interest that the EU should succeed.” Theresa May, January 2017

Since early-2016, the news agenda in the UK has been dominated by the “will-we-won’t we” pantomime of the country’s vote on its membership of the European Union. David Cameron, in the build-up to the 2015 General Election, promised us the opportunity to have a once-and-for-all ‘in/out’ vote. The accepted wisdom was that we would have the referendum on 23rd June, Remain would win, and we could then all get on with the business of preparing for a smooth handover of power from Barack to Hillary. Indeed, that stood right up until about 0100 on the morning of 24th June, at which point the bell was rung for all other news to cease. Seemingly forever.

Since then, it seems to me we have endured a barrage of ill-informed conjecture of what the future shape of our nation’s place in the world might look like. Hard, soft, hybrid, black, white, grey, red-white-and-blue, Canadian-style, Swiss-style, Norwegian-style, easy, hokey-cokey and post-inauguration of The Donald, perhaps even American-style Brexit are all on the agenda. This is in effect code for, “we didn’t expect it, Brussels didn’t expect it, the mandarins in Whitehall didn’t expect it, the media didn’t expect it, Angela, Francois, Michael, Boris, Nigel et al didn’t expect it…so we haven’t really got a plan about what to do next.” At the moment, then, it is fair to say that Brexit remains, like those eggs in the morning from the old joke, unfertilized.

Last week we did get a little clarity from the PM on her starting position for negotiations, beyond repeating the mantra that “Brexit means Brexit”. We also now know that the Supreme Court has ruled that a parliamentary vote will be required to trigger Article 50. Regardless of when that happens, Mrs May has articulated a number of points which, while perhaps obvious, needed to be made:

  1. The process will be a negotiation, not a diktat.
  2. It is not a given that the EU has the strongest hand at the table.
  3. The UK has the opportunity to strike compelling deals with partners outside of the EU.

All good stuff, and important to say something after so many months of nothing. Just as important to get out there, is that this country’s importance to the EU does give it a decent position to work from. But it has crossed my mind on more than the odd occasion that this might not actually matter a great deal.

An admission –I voted to remain, albeit out of selfish pragmatism rather than any love for the organisation. What set out to be an economic cooperative has to me become the ‘federal’ leviathan we see today.

It can be argued that the EU exists today solely to perpetuate its own existence. In the interests of extending its own might, a series of strategic errors have undermined its viability – the birth of the Euro, rapid expansion of membership, playing at geopolitics etc. At the same time, they have flagrantly ignored the history of the continent. Well intended, I’m sure, but currently dysfunctional.

Since the financial crisis of 2008 nowhere has the fallout been more acute than in the EU. Unemployment is rife across the region and entire countries are being suffocated by vast debts. The power players of the Union stick dogmatically to the rules of membership of the single currency, conveniently overlooking the irony that rules were initially bent to wave a plethora of otherwise ineligible countries into the Euro itself. Relatively speaking, British Euro-scepticism is arguably less justifiable than in many other parts of the continent. That is not to say that many of the problems faced by countless Britons are not real or truly shocking, but they are not primarily a function of the EU. For many Greeks, Spaniards, Portuguese, Italians etc, they can genuinely point to their membership of the Union as being a significant factor in their plight. No jobs, no money, no hope – as William Cobbett observed in the early 19th century, “I defy you to agitate a man on a full stomach”. It is a painful truth, but I would posit that the very organisation that is credited with keeping the peace in Europe will, sooner or later, prove to be the architect of its own destruction.

The point is, the terms on which the UK leaves the EU could be an academic irrelevance. There must be a very real chance that by the time negotiations are due to be completed, the blunt reality is that there simply may not be an EU to speak of. I think the Union is in desperate need of reform and there are some, for example Donald Tusk, who acknowledge the existential threat the project faces. But with important elections taking place across the region this year, those who could potentially start to turn the wheels of change will be distracted by the small matter of winning their own domestic mandates.

In 2008, as those early Vestra pioneers were setting out on their journey to the promised-land, the world was in the grip of the deepest financial crisis since the 1930s. We can say with reasonable certainty that the world did not end, but that it fundamentally changed. For those busy perpetuating the Long Complacency in Europe, assuming that everything would be ok because things had always been ok, they could have done worse than to have listened to the late Derek Scott, formerly of this parish, who could often be heard raging that “the problem is the Euro, and the Euro is the problem” when asked what the future held for the EU. It is fair to say he had his reservations about its viability. Personally, I gave the Union a (rolling) 10-20 year life span, on the basis that they would find a way to keep kicking the can down the road, but eventually, that road would run out.

Without wanting to overplay Britain’s importance to the EU, I can’t help but feel that our country’s position as a counter-weight to the millennium-old rivalry between Germany and France will be missed. If that proves to be the case, it is easy to see the cracks within the Union becoming ever wider, even if the “Brexit-style” electoral outcomes do not transpire in either country.

I wonder, therefore, to what extent Theresa May’s attempts to allay the fears of a “greater unravelling of the EU” might prove more than just a little prescient.