Everyone has been focusing on the potential negatives to Britain for leaving the EU in their now infamous Brexit referendum decision, but up till now they have not much considered the downsides to the EU itself. This past week the painful truth regarding the severe budget shortfall the EU will soon experience when Britain stops contributing finally hit home. Scotland threatened to leave the United Kingdom if the country loses common market access to the EU. The Euro continued what is now being described as its inevitable march towards parity versus the U.S. Dollar. Scandinavia closed its last coin mint production facility as it spurns cash in circulation more than any other place on earth. These are all excellent reasons to stay long gold.
Brexit to Mean Severe Budget Cuts for Remaining EU Member States
Denmark has identified the proverbial elephant in the room that no one much in the European Union has been addressing with Britain leaving the block. Absent the second largest single nation contribution the EU budget enjoys from Britain, the EU and its remaining member states will soon have to work with a significantly tinier budget. Germany is the largest contributor every year, but they have already made it crystal clear that they do not wish to fill in the British 7.6 billion euro hole that Britain will soon leave, per the Danish Finance Minister Kristian Jensen. “The EU cannot continue spending the same amount of money when one of the largest countries, one of the largest contributors, leaves,” he warned.
This fiscal alarm bell speaks volumes of how acrimonious the hard talks will be for EU members after the British are gone. The common block has enjoyed spending a yearly budget of approximately 140 billions euros since the last time they agreed on the seven year budget. National governments are famous for fighting for everything ranging from research support to agricultural subsidies. The year 2020 will mark the end of the present budget period, and this will be the very first instance where the EU has been forced to cut spending. Jensen has spoken all too truly when he added that there will no longer be a place for the generous levels and types of programs which have existed so far. Chief among the programs which will suffer most grievously are the huge amounts of money the EU has devoted lavishly to agriculture in the form of subsidies to countries such as France, Denmark, and Eastern European countries. “We need to look very critically at the expenditure, even the more difficult parts,” he added.
This is likely to increase tensions in a block already showing signs of fractures at the seams. The Eastern European member states hold on dearly to the agricultural subsidies which they count on to build their smaller economies. Key to them are the industry and agriculture development funds along with the regional development programs. All of these will likely suffer as Britain no longer contributes. In the end, the EU is likely to threaten Britain with its beloved access to the single market. If they do not keep making generous contributions, ala Norway’s model, then they will likely find themselves shut out in the proverbial cold. This is becoming known as the pay to play model for Brexit. “There’s no such thing as a free lunch, not even for a country like Britain, which has been a close ally of Denmark for many, many years. So if the EU is to stay open to Britain, then Britain has to follow the same rules as other countries like Norway,” Jensen threatened matter of factly.
Scotland Threatening to Leave U.K. If It Loses Common Market Free Access
Speaking of dangerous matter of fact threats, Scotland issued one of its own this past week. Scotland will hold yet another independence referendum from the U.K. if the British lose Scotland’s beloved and essential access to the common market, per Scottish First Minister Nicola Sturgeon. “Independence must remain an option for safeguarding our European status, if it becomes clear that our interest cannot be protected in any other way,” she warned in an op-ed piece in Sunday’s Financial Times newspaper. It is unclear if Britain will allow Scotland to hold another legally binding referendum only a few years after the last one which was convincingly decided in favor of keeping the United Kingdom together. Also unsure is how the Scottish Independence Party would garner enough votes to actually win such a referendum if they are even permitted to hold one.
Euro Heading Towards Parity as Interest Rate Direction Disparity Increases
Followers of global currency majors will have noticed that the euro versus the U.S. dollar has been dramatically declining in recent weeks. Now Dutch investment banking giant ING Group has announced that the increasing divergence in U.S. and European monetary policies will cause the euro value to decline to parity against the resurgent U.S. dollar. This past Thursday saw the euro reach a 13 year low versus the dollar as it reached as low as 1.0357.
The strength of the dollar has been powering the currency on as the Federal Reserve has been talking up a more aggressive interest rate increase path for 2017 to match the apparent pickup in U.S. economic momentum. At the same time, the European Central Bank has recently announced an additional 540 billion euros of quantitative easing stimulus injection into the staggering euro zone economies of the European Union. This is likely to only continue and increase as inflation in Europe continues to struggle to rise. “With the U.S. economy close to reaching escape velocity and sustainable two percent inflation, it will only reinforce the downside risks to EUR/USD,” ING wrote. The euro last saw parity status against the EU more than 15 years ago.
Scandinavia Moving Forward with Cashless Society
At the end of December, the last operating mint in Scandinavia will close. Denmark has elected to outsource its coin production to Finland in the example set by Norway and Sweden. The Danish Central Bank has already abandoned banknote printing domestically. They are not even in a hurry to source a replacement producer for the bills. While other countries including India and Venezuela are abandoning high denomination cash notes and bills, Scandinavia leads the race to do away with cash in circulation. One of the main arguments in favor of this strange trend to all electronic forms of payment revolves around the side effects of effectively reducing tax evasion, organized crime, money laundering, and drugs distribution.
As the chart above clearly demonstrates, Denmark and Sweden are among the countries with the absolute smallest percentages of coins and notes in circulation today. Back in 1991, checks and cash accounted for fully 82 percent of transactions in Denmark. In that time period where the utilization of physical currency has dramatically declined, the portion of the country’s economy occupied by the black market has declined precipitously by a third from even 2012 to 2014, per the Tax Ministry of Denmark. The chart below illustrates how steeply cash usage has fallen in this period in Denmark.
A cashless society is also one in which it is hard to protect yourself from economic crises and profligate government spending. This is a reason why gold will assume an even more important role in your retirement accounts than ever before as the global war on cash makes it more and more difficult to find and utilize it as an at least somewhat secure store of value.