How EU Overreach Pushed Britain Out

Martin Feldstein


CAMBRIDGE – A thoughtful British friend of mine said to me a few days before the United Kingdom’s “Brexit” referendum that he would vote for Remain because of his concern about the economic uncertainty that would follow if the UK left the European Union. But he added that he would not have favored Britain’s decision to join the EU back in 1973 had he known then how the EU would evolve.
While voters chose Leave for a variety of reasons, many were concerned with the extent to which EU leaders have exceeded their original mandate, creating an ever larger and more invasive organization.
Jean Monnet’s dream of a United States of Europe was not what the British wanted when they joined the EU 40 years ago. Nor were they seeking a European counterweight to the United States, as Konrad Adenauer, Germany’s first post-war chancellor, had once advocated. Britain simply wanted the advantages of increased trade and labor-market integration with countries across the English Channel.
The EU began as an agreement among six countries to achieve free trade in goods and capital and to eliminate barriers to labor mobility. When EU leaders sought to reinforce a sense of European solidarity by establishing a monetary union, Britain was fortunately able to opt out and keep the pound – and control over its monetary policy. But the opt-out has left Britain a relative outsider within the EU.
As the EU expanded from six countries to 28, Britain could not permanently limit entry to its labor market by workers from the new member states. As a result, the number of foreign-born workers in Britain has doubled since 1993, to more than six million, or 10% of the labor force, with most now coming from low-wage countries that were not among the EU’s other original members.
Although pro-Brexit voters worry about the resulting pressure on UK wages, they generally do not reject the original goals of increased trade and capital flows that are the essence of globalization.
Some Brexit defenders could point to the example of the successful US free-trade agreement with Canada and Mexico, which contains no provision for labor mobility.
Unlike Britain, the other EU countries, led by France and Germany, wanted more than free trade and an enlarged labor market. From the start, European leaders were determined to expand the “European project” to achieve what the Treaty of Rome called an “ever closer union.” Advocates of shifting authority to EU institutions have justified this with the notion of “shared sovereignty,” according to which British sovereignty could be eroded by EU decisions, without any formal agreement from the UK’s government or people.
The “Stability and Growth Pact” of 1998 imposed a limit on member countries’ annual deficits and required that debt-to-GDP ratios shrink toward a maximum of 60%. When the global financial crisis began in 2008, German Chancellor Angela Merkel saw an opportunity to strengthen the EU even further, by enforcing a new “fiscal compact” authorizing the European Commission to oversee members’ annual budgets and impose fines for violating budget and debt targets (though no fines have been levied). Germany also led the move to establish a European “banking union” with a single regulatory framework and a binding resolution mechanism for troubled financial institutions.
Not all of these policies directly affected the UK; nonetheless, they widened the intellectual and political gap between Britain and the EU’s eurozone members. That reinforced the fundamental difference between market-oriented British governments and those of many EU countries, with their traditions of socialism, government planning, and heavy regulation.
The division of powers between the EU bureaucracy and member states is governed by the ambiguous principle – borrowed from Catholic social teaching – of “subsidiarity”: decisions should be made at the “lowest” or least centralized level of “competent authority.” In practice, that did not limit the rulemaking in Brussels and Strasbourg. Subsidiarity provides much less protection for EU member governments than the Tenth Amendment of the US Constitution – which denies to the federal government any powers not delegated to it by the Constitution – does for US states.
The British public is of course not alone in its discomfort with the EU. A recent poll conducted in EU countries by the Pew Foundation found that a majority of voters in three of the largest countries – Britain, France, and Spain – view the EU unfavorably. In Germany, the public was split 50-50. In Italy, a clear majority say that they have benefited from EU membership; and yet the populist Five Star Movement, which recently won mayoral elections in 19 of the 20 cities it contested (including 70% of the vote in Rome), has promised a referendum on leaving the eurozone if it wins the parliamentary election later this year.
Although many officials and experts predict that Brexit will have dire economic consequences, this certainly is not inevitable. Much now depends on the terms of the future relationship between the EU and Britain.
The UK is also now in a better position to negotiate a more favorable trade and investment treaty with the US. Although the proposed US-EU Transatlantic Trade and Investment Partnership (TTIP) is bogged down, a British government outside the EU could negotiate a deal with the US far more easily. The US would be negotiating with one country, not 28 — many of which do not share Britain’s pro-market policies.
The question of Britain’s EU membership has been decided. Now its economic future depends on what it does with its new independence.

Deutsche Bank to Initiate the Next 'Financial Crisis'!

By: Chris Vermeulen

I am certain that you remember Lehman Brothers and the "chaos" that it created when it 'failed'. If you think that the Worlds' Central Banks are now wiser and consequently will not allow another similar event to occur, think again. We will not only see a repeat of this occurrence, again, but it will be exponentially larger than Lehman's was!

On June 29th, 2016 the IMF stated that "among the [globally systemically important banks], Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBCand Credit Suisse," reports The Wall Street Journal.

However, if you were to believe that statement, why should you be concerned about a German bank and how it will affect you while living in the U.S.? The IMF adds: "In particular, Germany, France, the U.K. and the U.S. have the highest degree of outward spillovers as measured by the average percentage of capital loss of other banking systems due to banking sector shock in the source country," reports Bloomberg. The chart below clearly shows the systemic risks emanating out of a Deutsche Bank (DBK) collapse.

Systemic Risk Among GSIBs

Two years in succession, the American unit of Deutsche Bank has failed the FED's "stress test" which is what determines the ability of the bank to weather out yet another 'financial crisis'.

Leverage of Lehman vs. Deutsche Bank:

In 2007, Lehman had a leverage (the ratio of total assets to shareholder's equity) of 31:1. At the time that Lehman filed for bankruptcy, it had $639 billion in assets and $619 billion in debt. Still, it caused a 'systemic risk' worldwide.

In comparison, DBK has a mind boggling leverage of 40x, according to Berenberg analyst, James Chappell. He stated, "facing an illiquid credit market limiting Deutsche Bank's (DBK) ability to deliver and with core profitability impaired, it is hard to see how DBK can escape this vicious circle without raising more capital. The CEO has eschewed this route for now, in the hope that self-help can break this loop, but with risk being re-priced again it is hard to see DBK succeeding."

Why Can't the ECB save DBK in the similar fashion as how the FED saved the banks, in the US?

The nominal value of derivatives risk that DBK holds on its' books is $72.8 trillion, according to the banks' April 2016 earnings report. What is astounding about this, is that a single bank owns 13% of the total outstanding global derivatives, which was a staggering $550 trillion in 2015.

What is more concerning and alarming is that the market cap of DBK is less than $20 billion.

Nonetheless, the nominal value of derivatives exposure does not mean that DBK will have a default worth trillions of dollars seeing as most of the contracts are covered by counterparties. However, when the domino effect is put into motion, we have witnessed how it engulfs the entire world, into it.

If the domino effect does occur, Germany with its GDP of $4 trillion or the EU with a GDP of $18 trillion will not be in a position to gain control over it.

A nominal figure of the high derivatives risk on DBK, as of December 2014, is shown in the chart below.
German GDP versus Eurozone GDP and Deutsche Bank Total Deratives Position

Negative interest regime is NOT the solution to global economic problems which we are facing today:

The European Central Banks' NIRP policy is making matters worse for DBK, as the banks' profits are getting squeezed thus making it difficult for it to repair its' balance sheet.

The bank is finding it difficult to sell its' assets because of illiquid credit markets. The banks' management will also find it difficult to raise capital as the investment-banking industry is in a "structural decline", according to Berenbergs' James Chappell.

BREXIT is adding to the woes:

DBK receives 19% of its' revenues from the UK. After the "BREXIT" vote, the uncertainty regarding future relations of the U.K. with Europe has increased the risk for all of the banks. President Francois Hollande of France is eyeing the financial industry and is pitching for them to move to Paris from London.

DBK is the biggest European bank in London. Moving operations, which are handled by 8,000 members of the staff, will not be an easy task for DBK and will further weaken their balance sheet.

How is the stock behaving?

The stock is in a downtrend and has broken below the panic lows of 2009.

Deutsche Bank Monthly Chart

The stock is quoting at a price to book ratio of 0.251, which indicates the pessimism of the markets towards the stock. The investors believe that the stock is not worth more than a quarter of its' liquidation value.

A comparative study of the stock, with Lehman, gives a more accurate picture of the future price of DBK, which is zero.

Deutsche Bank versus Lehman Chart

The German Newspaper 'Die Welt' reported that the great George Soros had recently opened a short position of 0.51% of the DBK's outstanding shares. This equates to 7 million shares, worth $7.5 billion, reports Investopedia.


The easy monetary policy of various Central Banks is the main reason for the banks holding such massive leverage. The "next financial crisis" will cause the Central Banks' actions to be redundant and ineffective, as they will not be in a position to control this impending catastrophe! In such a situation, the world will revert to the only remaining resort left, and that is gold.

Why ISIS Persists

Jeffrey D. Sachs

NEW YORK – Deadly terrorist attacks in Istanbul, Dhaka, and Baghdad demonstrate the murderous reach of the Islamic State (ISIS) in Europe, North Africa, the Middle East, and parts of Asia. The longer ISIS maintains its strongholds in Syria and Iraq, the longer its terrorist network will create such carnage. Yet ISIS is not especially difficult to defeat. The problem is that none of the states involved in Iraq and Syria, including the United States and its allies, has so far treated ISIS as its primary foe. It’s time they do.
ISIS has a small fighting force, which the US puts at 20,000 to 25,000 in Iraq and Syria, and another 5,000 or so in Libya. Compared to the number of active military personnel in Syria (125,000), Iraq (271,500), Saudi Arabia (233,500), Turkey (510,600), or Iran (523,000), ISIS is minuscule.
Despite US President Barack Obama’s pledge in September 2014 to “degrade and ultimately destroy” ISIS, the US and its allies, including Saudi Arabia, Turkey, and Israel (behind the scenes), have been focusing instead on toppling Syria’s Bashar al-Assad. Consider a recent candid statement by Israeli Major General Herzi Halevy (quoted to me by a journalist who attended the speech where Halevy made it): “Israel does not want to see the situation in Syria end with [ISIS] defeated, the superpowers gone from the region, and [Israel] left with a Hezbollah and Iran that have greater capabilities.”
Israel opposes ISIS, but Israel’s greater concern is Assad’s Iranian backing. Assad enables Iran to support two paramilitary foes of Israel, Hezbollah and Hamas. Israel therefore prioritizes the removal of Assad over the defeat of ISIS.
For the US, steered by neoconservatives, the war in Syria is a continuation of the plan for global US hegemony launched by Defense Secretary Richard Cheney and Under Secretary Paul Wolfowitz at the Cold War’s end. In 1991, Wolfowitz told US General Wesley Clark:
“But one thing we did learn [from the Persian Gulf War] is that we can use our military in the region – in the Middle East – and the Soviets won’t stop us. And we’ve got about 5 or 10 years to clean up those old Soviet regimes – Syria, Iran (sic), Iraq – before the next great superpower comes on to challenge us.”
The multiple US wars in the Middle East – Afghanistan, Iraq, Syria, Libya, and others – have sought to remove the Soviet Union, and then Russia, from the scene and to give the US hegemonic sway.
These efforts have failed miserably.
For Saudi Arabia, as for Israel, the main goal is to oust Assad in order to weaken Iran. Syria is part of the extensive proxy war between Shia Iran and Sunni Saudi Arabia that plays out in the battlefields of Syria and Yemen and in bitter Shia-Sunni confrontations in Bahrain and other divided countries in the region (including Saudi Arabia itself).
For Turkey, the overthrow of Assad would bolster its regional standing. Yet Turkey now faces three foes on its southern border: Assad, ISIS, and nationalist Kurds. ISIS has so far taken a back seat to Turkey’s concerns about Assad and the Kurds. But ISIS-directed terrorist attacks in Turkey may be changing that.
Russia and Iran, too, have pursued their own regional interests, including through proxy wars and support for paramilitary operations. Yet both have signaled their readiness to cooperate with the US to defeat ISIS, and perhaps to solve other problems as well. The US has so far spurned these offers, because of its focus on toppling Assad.
The US foreign-policy establishment blames Russian President Vladimir Putin for defending Assad, while Russia blames the US for trying to overthrow him. These complaints might seem symmetrical, but they’re not. The attempt by the US and its allies to overthrow Assad violates the UN Charter, while Russia’s support of Assad is consistent with Syria’s right of self-defense under that charter.
Yes, Assad is a despot, but the UN Charter does not give license to any country to choose which despots to depose.
The persistence of ISIS underscores three strategic flaws in US foreign policy, along with a fatal tactical flaw.
First, the neocon quest for US hegemony through regime change is not only bloody-minded arrogance; it is classic imperial overreach. It has failed everywhere the US has tried it. Syria and Libya are the latest examples.
Second, the CIA has long armed and trained Sunni jihadists through covert operations funded by Saudi Arabia. In turn, these jihadists gave birth to ISIS, which is a direct, if unanticipated, consequence of the policies pursued by the CIA and its Saudi partners.
Third, the US perception of Iran and Russia as implacable foes of America is in many ways outdated and a self-fulfilling prophecy. A rapprochement with both countries is possible.
Fourth, on the tactical side, the US attempt to fight a two-front war against both Assad and ISIS has failed. Whenever Assad has been weakened, Sunni jihadists, including ISIS and al-Nusra Front, have filled the vacuum.
Assad and his Iraqi counterparts can defeat ISIS if the US, Russia, Saudi Arabia, and Iran provide air cover and logistical support. Yes, Assad would remain in power; yes, Russia would retain an ally in Syria; and yes, Iran would have influence there. Terrorist attacks would no doubt continue, perhaps even in the name of ISIS for a while; but the group would be denied its base of operations in Syria and Iraq.
Such an outcome would not only end ISIS on the ground in the Middle East; it could lay the groundwork for reducing regional tensions more generally. The US and Russia could begin to reverse their recent new cold war through shared efforts to stamp out jihadist terrorism. (A pledge that NATO will not offer admission to Ukraine or escalate missile defenses in Eastern Europe would also help.)
There’s more. A cooperative approach to defeating ISIS would give Saudi Arabia and Turkey reason and opportunity to find a new modus vivendi with Iran. Israel’s security could be enhanced by bringing Iran into a cooperative economic and geopolitical relationship with the West, in turn enhancing the chances for a long-overdue two-state settlement with Palestine.
The West can defeat ISIS. The question is whether the US will undertake the strategic reassessment needed to accomplish that end.

A World in Crisis, and No Genius in Sight

An old order is being swept away, and political leaders everywhere seem lost.

By Peggy Noonan 

    Photo: Getty Images/Ikon Images

The leaders of the world aren’t a very impressive group right now. There’s a sense with some of them of playing out a historical or cultural string, that they’re placeholders in some way. Many are young, yet so much around them feels tired.

Which has me thinking, again, of the concept of the genius cluster. They happen in history and no one knows why. It was a genius cluster that invented America. Somehow Franklin, Jefferson, Washington, Adams, Madison, Hamilton, Jay and Monroe came together in the same place at the same time and invented something new in the history of man. I asked a great historian about it once.

How did that happen? He’d thought about it too. “Providence,” he guessed.

There was a small genius cluster in World War II—FDR, Churchill, de Gaulle. I should note I’m speaking of different kinds of political genius. There was a genius cluster in the 1980s— John Paul II, Reagan, Thatcher, Vaclav Havel, Lech Walesa, Lee Kuan Yew in his last decade of leadership in Singapore.

The military genius cluster of World War II—Marshall, Eisenhower, Bradley, Montgomery, Patton, MacArthur, Nimitz, Bull Halsey, Stilwell—almost rivaled that of the Civil War—Grant, Lee, Stonewall, Sherman, Sheridan, Longstreet.

Obviously genius clusters require deep crises, otherwise their gifts are not revealed. Historic figures need historic circumstances. Also members of genius clusters tend to pursue shared goals.
We have those conditions now—the crises, and what should be shared goals.

Everything feels upended, the old order that has governed things for 70 years since World War II being swept away. Borders have disappeared before our eyes. Terrorism, waves of immigration transforming whole nations, Islam at war with itself and parts of it at war with the world. In the West, the epochal end of public faith in institutions, and a dreadful new tension between the leaders and the led. In both background and foreground is a technological revolution that has actually changed how people experience life.

It is a world crying out for bigness, wisdom, steady hands and steady eyes.

We could use a genius cluster.

I’m not quite seeing its members coming, are you? Maybe they’re off somewhere gaining strength.

But the point we’re in feels more like what a Hollywood director said was the central tension at the heart of all great westerns: “The villain has arrived while the hero is evolving.”

Let’s hope some evolve soon.

This thought is inspired by the past week’s Brexit aftermath. To limit criticism to the political players, the European Union did not distinguish itself, the British government didn’t even create a contingency plan in case Leave won, and the victors actually scrammed while markets convulsed and the pound fell. When Leave leader Boris Johnson finally did speak, what he said was astonishing.

The vote was significant, he wrote in the Telegraph, but shouldn’t be misunderstood: “It is said that those who voted Leave were mainly driven by anxieties about immigration. I do not believe that is so.” Instead they had “a sense that British democracy was being undermined.” The public wanted to seize back some control.

Well, yes. But immigration was very much part of the seize-back-control story. It’s in all the polls.

Then: “And yet we who agreed with this majority verdict must accept that it was not entirely overwhelming.”

It was 52% to 48%, not huge but decisive enough. And wait a second, “we who agreed” with the verdict? He led the campaign! He didn’t “agree” with the outcome, he was its most prominent advocate!

Whatever changes come, he added, they “will not come in any great rush.”

There’s a line between calming markets and undermining your cause. He crossed it.

What a failure of nerve. It likely contributed to the restiveness that led the other main Leave proponent, Michael Gove, to bolt away from Mr. Johnson and announce he would run to replace Prime Minister David Cameron.

Contrast what Mr. Johnson wrote with the statement, days later, of Home Secretary Theresa May, who had been pro-Remain though relatively quietly, certainly relative to Mr. Johnson.

“Brexit means Brexit,” she said. “The campaign was fought, the vote was held, turnout was high and the public gave their verdict. There must be no attempts to remain inside the EU, no attempts to rejoin it through the back door and no second referendum.”

“Politics,” she added, “isn’t a game.”

Thank you, madam, and well done.

Ms. May is a moderate conservative with a steady hand who is said to be somewhat ideologically opaque. But here she was blunt and clear. More, she seemed to intuit the damage to be done to the public’s trust if Parliament threw the decision back in its face. Part of politics is simply knowing what people need when they need it. In this case it was the unambiguous taking of a stand.

In the end, Mr. Johnson bowed out of the contest for party leader. He is a witty and clever man, a showman who may have more lives than a cat. But he won’t be part of a genius cluster anytime soon.

EU leadership since the referendum has been wholly lacking. “What doesn’t kill you makes you stronger,” purred European Council president Donald Tusk, quoting Nietzsche.

In this case what doesn’t kill you this time will likely kill you next, so you might want to wake up.

The EU should be supple now, not brittle and predictable, which is to say bureaucratically brutal. It should surprise the world and demonstrate some give. It should grant Britain a relatively smooth exit.

Let people see the decency and constructiveness of it and come to doubt their own antipathy.

You’re not such a bad lot. Strategic pliancy would actually be an assertion of strength. If the European Union is a prison, as Brexit supporters felt, it makes sense for the warden to make an example of Britain to keep the other inmates in line. But if the EU is a place of peaceful commerce it has an opportunity to show it. Take it. The Brits aren’t the only ones who hate you.

The EU was founded for one great reason: to redirect the energies of a continent twice convulsed by world war and turn them to peaceful pursuits—trading goods, making money, each nation knowing the other in a context of constructiveness. It succeeded! But in the past 30 years it expanded, took on more power and authority, made more demands, fell too in love with its ability to apply limits. Even during the Brexit debate the EU’s conversation was not of devolving power to member states but taking more to Brussels. As Boris Johnson noted in March, when he seemed to remember such things, the result, in Britain, was public alienation, which contributed to a sense of “disengagement,” which has contributed to “the rise of extremist parties.”

That was an accurate diagnosis. I add only that the EU inculcated in its officials and apparatchiks an outrageous and insular snobbery that left them incapable of seeing critics as anything but ignorant, racist knuckle-draggers. They noticed, didn’t like it, and rebelled when they could.

Here’s to rebellion. Happy 4th.