The Black Swans Are Circling

Joel Ross

Brexit has been triggered and the final outcome is very unclear. Chances are high that it will be a hard Brexit, but it is way too early to tell. The EU cannot let the UK off softly, or many more will leave. The UK cannot agree to a large payment nor to allowing free entry to the UK for anyone from the EU which is what the vote was largely about. Meantime, the UK economy is doing nicely, and has not yet been hurt by Brexit. In fact, several major companies have announced expansions in the UK. Inflation due to the drop in the pound has been partially offset by rising wages, so consumers have not been nearly as hard hit as projected. The lower pound has created a material increase in exports, so jobs are plentiful. None of the banks are up and leaving, nor will they. Some staff will be moved to Dublin and maybe some to Frankfurt, but the London capital markets will remain where they are. The EU cannot afford to disrupt world capital markets by shutting out London. On top of all this is the French election which could create other major problems for the EU.

The French election is just a few weeks away, and it is definitely possible Le Pen could win enough votes to be president or, if not, to be a major force in French politics. If she wins then everything changes for the EU. She says she wants Frexit, and that would completely blow the negotiating position of the EU on Brexit. Assuming she cannot win, which is what you read and hear from pollsters and the press, is reminiscent of what those same people said of Trump winning. Just because Wilders did not win has nothing to do with France. Completely different calculus. He was a complete nut. She may have far right positions, but she is not her father, and is much more sophisticated about her campaign. If she wins, the Euro tanks and currency markets become volatile. The UK will look good to investors and bankers. Add to all of this, Putin is throwing all he has into seeing her elected, and he may be able to influence the outcome. France is not the US.