Joel Ross

So far all the warnings of disaster and dislocation have proven wrong. Nissan just withdrew its threat to move its new plant, Google reversed and said it is going ahead with building its new headquarters in the United Kingdom. Consumer spending is up, exports are up, unemployment is down and nobody in London has said they are moving yet. The city has been the financial capital of the world for centuries, its place critical to international finance. You don't just pick up 50,000 employees, plop them down in a new country, and think the financial system will go on like nothing happened. UBS and others tried that on a far lesser scale by moving trading floors to Connecticut, and that did not work out well. Years ago Los Angeles thought it could compete with Wall Street. That did not happen. New York and London have always been, and continue to be, the main capital markets for the whole world, and while a lot of trading is now electronic and thus easily conducted internationally, it makes a difference that people are situated together in these two cities. They are a cab ride or short walk from each other, and that matters. Meanwhile, taxes in Frankfurt, Paris or Dublin are on the EU basis, close to two times the UK rates. The UK rates are being reduced further. Does anyone think the bankers are all going to move to Frankfurt and pay double the level of taxes? Living in Frankfurt is not the same as living in London. Very different culture. Paris may be lovely, but the French are not so hospitable and terror is a big issue to consider. Ireland is not London. While many bankers will move for the job and pay, many will not be in a hurry to do so. The banks are already complaining to Prime Minister Theresa May, but she has made it clear she is going to have sharp restrictions on immigration, no matter how loudly the bankers whine. The vote was mainly about Muslim—and to a lesser degree Polish—migrants taking jobs. The important word is “votes.” Bankers are not votes, they do not keep her in office. With the de facto devaluation of the Pound, British goods are now cheap, so exports will increase producing more jobs. While import prices will rise (and there will be some increased inflation), those European producers will have to reduce prices, or else get replaced by British or US made products. That is already happening. It makes no sense that the EU is going to impose large tariffs on UK goods, since 30% of German exports go to the UK. Do they really think the UK will not respond with similar tariffs? EU goods will be priced out of the market almost entirely, and that will create huge problems for Chancellor Angela Merkel, on top of the anti-immigration votes now happening in Germany. Tourism into England is increasing with the drop of the pound and terror attacks in Europe. It is a big inflow of spending and more jobs. There is really not that much that the EU can do that will not cost jobs and create political problems. Britain has been a center of capital and business for 1,000 years. It has survived the blitz and much more. Brexit is not going to take it down. In the end it will be a hard Brexit, and the UK will be the winner. The EU is doomed. If you look at history, tribes and groups bound by religion and culture migrated to Europe over 1,000 years ago, over time creating nation states with differing cultures and differing governments and laws. Despite Germany trying twice to rule by force and occupation, and many other wars and invasions from Russia, from the Turks and from each other, the original nation states have remained in one form or another to this day. The concept of the “land of our forefathers” is a very powerful force. It keeps people loyal to their culture and homeland. As a result, the EU may have been a nice idea to try to avoid another German war of destruction. It worked for decades, but the world has moved on now. Where Hitler and Bismarck tried to conquer Europe by force, Merkel has tried through the EU and other means. Now that cycle has run its course and the people of the other countries are pushing back against the German guilt trip of Schengen. Europe does not want the Muslims. They are not white Christians. Europe has fought the Muslims for over 1,000 years. Muslims who have come to France, Belgium, the Netherlands and other countries have refused to assimilate and have become a terror problem and a crime problem. There are areas of Europe where the cops do not go unless in groups. While the Jews were ghettoized over centuries, they were assimilated and productive. In Poland they were protected when they arrived in the twelfth century by the rulers who found the traders useful. That led to an eventual population of three million Jews in Poland in 1938, almost all of whom were murdered by the Nazis. Poles consider Muslims to be different and not welcome. The point is the Muslim refugee masses have changed the political dynamic in Europe. Even Merkel is now seeing her party suffer large losses at the polls. Right wing governments have come to power in Poland, Hungary and likely soon in Austria. Those countries have closed their borders. I just returned from Poland. It is 100% white and 90% Catholic. Their new president has closed the borders to Muslims. Hungary had already put up fences and armed guards. In France, and most other countries, the right wing parties are ascending rapidly. Their platforms are anti-Brussels bureaucrats and anti-immigration. Merkel is likely to lose the next election. France is leaning right. What all of this portends is the historic move back to the homelands. In other words, no more Merkel telling everyone what to do. No more laws and rules emanating from Brussels. The EU economy is going to remain mired in very slow growth for years. The Euro has depreciated. Most European banks are still in weak condition. As the frustration of slow growth and slow job growth continue, and as the standard of living declines over time from no growth and the declining Euro, the pressures will mount to end the EU. That is why Merkel and French President Francois Hollande are so desperate to prevent the UK from a full Brexit. And the hot button issue is the refugees. It all turns on that. Once that happens it is all over, and May is determined to not give on the immigration issue. Hard Brexit to follow. European economies will be hurt as exports flounder. The economy of the EU has no place good to go for a long time. This will lead to the eventual break-up of the EU within 5 years. So if you are invested in Europe now, or are contemplating it, the risks are not worth whatever rewards you may be projecting, which, most likely, will not materialize. Joel Ross is Principal at Citadel Realty Advisors. The views expressed here are the author's own.