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Grey with some sunny spells - the outlook for Europe

Recent unrest among the middle classes across both sides of the Atlantic and a greater number of voters in both the UK referendum and US elections suggest they want change, and they want it soon. 

Wolfgang Münchau, Associate Editor of the FT, gave a keynote speech at our recent IUCM 2016 event, addressing a number of political phenomena across the globe including the rise of Trump [before his becoming president elect] and the must debated Brexit.

“So they always blame me, me being the media. Trump is a phenomenon of the media, Brexit is a phenomenon of the media – it isn’t like there are very clear reason for why this happened,” said Münchau.

The question Münchau proposes is: “Why did the voters, who don’t normally vote, vote?”

There is a reasonable response to this. There is clearly an insurrection happening among the median 50. These people were richer 13 years ago than they are today. This is reflected in both the UK and the US.

They have simply had enough and they want something to be done about it. One of the main reasons why the Remain campaign failed is that its pro-EU rhetoric no longer resonated with the general public, particularly the threat of a recession which the UK had been suffering from for the past 13 years anyway.

Münchau added that there are other accidents waiting to happen and reminded us that other parts of Europe are experiencing political uncertainty such as Renzi’s referendum in Italy and Le Pen’s running for the French presidency.

Referring back to the City of London, we were reminded that it’s such a key financial centre that it would be “delusional to think that even if Britain lost the single passport, the City of London will disappear.”

There has been much talk about the City being replaced by other European financial centres such as Frankfurt however there are a number of reasons why this wouldn’t happen. Firstly, there isn’t enough commercial space in Frankfurt for a single British bank. Secondly, Frankfurt currently has fewer inhabitants than the City and they simply couldn’t scale that quickly.

Münchau also said that, “Even if you add Frankfurt, Paris and Dublin together it’s still not enough – and yes, in the meantime the British banks will need to establish some subsidiaries when they are outside the EU, as they cannot serve the public from Britain so they will have to turn a branch in the EU into a subsidiary and that subsidiary would have to be regulated by Germany, for instance, and that is okay and really not that big a deal.”

He added, “There will be investment in the European cities, and the City of London will have enough to do – there is nothing stopping them from trading any European security and conducting any form of financial business that is not subject to single passport requirements. Jobs will be lost over the long run, but there will be a gain of jobs as the City of London finds new things to do, as I am sure they will.”

However, Münchau is more concerned with what’s taking place on the continent, Italy being an example. He stated, “Italy is fragile, it has a fragile banking system, and any financial shock will damage it. There is no immediate solution for Italy.”

Italy has not experienced any economic growth for 16 years, yet Germany has had consistent growth of between 7%-9%. There are numerous other European countries that also aren’t growing, which shows there are some significant imbalances in the EU.

Despite the current state of the political landscape, Münchau remains mildly optimistic and believes that Brexit should be viewed as an opportunity to resolve the imbalances within the EU and Eurozone. Ultimately, he thinks that the whole European project will survive under the proviso that the median 50 become richer but that will require restricting the EU and the way it is managed. 

 

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