The Changing Face of the EU
Brexit is the topic of the moment. How does it affect property
in the EU? What happens if you are living in your own home in
Portugal or Italy and Britain leaves the EU?
The strange thing about this Europe thing is that no-one wants
to tell the truth. There are several reasons for this. The two
main ones are very simple.
First: Politicians like secrets. That isnít necessarily because
they are covering up something, but they say as little as
possible just in case. In short, even they canít foretell the
future. And in this instance I dont think anyone can tell how
things will turn out. What is the truth? No-one knows.
Second: In some instances the truth is very unpalatable,
therefore it is kept under wraps. This was the case with the
first referendum. The government were advised that the EU was a
political construction and the aim was to forge ever closer
ties, and create a super state ruled by an unelected commission
which would control the whole continent. PM Edward Heath quite
deliberately withheld that information from the public, rightly
suspecting that they would not vote for entry if they knew.
That hasnít changed. The aim is to have all states cede their
power to govern to a centralised group of civil servants. The
question then becomes: who will control the civil servants? One
assumes the European Parliament will do that, only they dont
have the powers. That leaves the whole edifice controlled by
unelected people who are answerable to nobody.
Thatís bad enough, but what happens when that body becomes
controlled by someone or by a group with unpleasant intentions?
A system is being created which is fascist by nature (the state
is more important than the people in the state); in short, a
state rather like that intended by the Third Reich in the
thirties and early forties.
It now becomes ironic that the war the Brits and others fought
against this fascist empire, is now being fought without guns,
and because so many people are sleep-walking, and simply dont
care, it is getting quite some way down the line.
Let me go back again to the late forties. We then had a
situation where the German banking community, fearing a
surrender, found a way to protect themselves from disaster. It
didnít work, but they started buying up the French industrial
complex by purchasing shares on a crashed stock market.
Isnít it alarmingly similar to what is going on now? Just look
at what is happening around us. First Greece, then Cyprus, and
probably the next country will be Portugal. Whole economies are
effectively being bought at knock-down prices. In all of these
countries there are corrupt and largely stupid governments.
Those in government control the finances of a country. The more
corrupt the government, the more they are all on the take. This
means they will keep taking money which can be wasted, and large
amounts of it can find its way into their pockets.
Let us take a typical government in Southern Europe. There is
massive incompetence, and bad decisions are legion. There is
also the desire to take decisions which can lead to private
payoffs. The government borrows money. Ideally that should be
either for a project which will pay back the funds needed for
the development plus the interest on the loan, or for an
emergency. Unfortunately any emergency tends to be permanent.
I always used to try and din in to my children that if you canít
afford something then you most certainly canít afford to borrow
to buy it AND then pay the interest charges. My kids seem to
have got the message, but most people dont get it at all. Almost
all governments dont get it.
The problem with this business of borrowing to stay afloat is
that it is no different than taking a mortgage out on your house
to go for a trip round the world. By all means take out a
mortgage to buy a car which you then use as a taxi, and the
extra income pays for the car. If you just drive around in the
car without using it for business then the value of the car
depreciates, and after a decade or so the car is almost
worthless, and you still probably have the loan.
The way borrowing works in the EU with governments permanently
in hock is very similar to what life is like when you lose your
job and canít pay your mortgage. Eventually the bank forecloses
and you are out on the street.
Okay, so the Portuguese government for example, canít pay itís
bills so it borrows on the bond market. It now has a bigger debt
than before, so it now has to budget for the interest on the
debt as well as the debt itself. Oddly, after a few years they
need more money and borrow again. Eventually the country loses
its investment grade status, and now it can only borrow from the
ECB. No problem, the ECB issues bonds, and the government gets
money in return for signing over a few more loan documents.
There is no problem if the country works its way out of the
mess, and gradually pays off the loan secured by those bonds,
but if it doesnít, then the bank forecloses. That has already
happened in Cyprus and Greece. In both cases it was a partial
foreclosure. But with that partial foreclosure comes a further
bond issue. That will eventually lead to more foreclosures of
assets that are part and parcel of the countryís patrimony.
Europeís basket cases will gradually be bought by the ECB which
is effectively an arm of the Bundesbank. It may take a decade or
two, or even fifty or sixty years, but some countries will get
to a state where they are too far in hock to ever get out. They
will then be ruled from Brussels. Hold on, the bank is
effectively in Berlin, so who really holds the purse strings? He
who pays the piper calls the tune.
No bad thing maybe, until it does become a bad thing. But this
is where certain countries within the EU are heading. It reminds
me of the defeat of Poland. That was done disarmingly simply.
The Germans simply took down the border posts and shrugged their
shoulders. Poland became German within minutes by simply
pretending there was no border.
Portugal will become ruled from a civil service office in
Brussels, or from a bank board room in Berlin when their debts
have become unsustainable.
This is a long term situation which can stretch out anywhere
from a decade to a century. Greece is sliding irretrievably into
the clutches of Brussels. Cyprus has already hocked its main
economic future, its oil, and has lost control of its finances.
Portugal is likely to lose the last rating agency support
sometime in the next three to six months. Itís bonds are already
rated as junk by all the main agencies. That means the
government can only borrow from the ECB.
Now comes the interesting bit. Austerity measures will make sure
there is no recovery possible, and austerity will be demanded as
a term of future borrowing. The country will have no choice but
to continue getting further and further in debt at the same time
it gets less and less able to pay back the loans. The end game
is obvious. You now have a satellite state. I could be more
brutal and say that you now have a defeated country. There is a
war. The war is being waged by financial blackmail. The war will
be won over a very long term without a shot being fired, and
with no apparent physical casualties.
How does this affect real estate? The answer is very easy to
spot. Austerity in certain countries is here to stay. It is the
equivalent of the guns and tanks in a traditional war. In fact
it is really rather like a medieval siege. Certain states,
Portugal and Greece for a start, are under siege. Their industry
and social fabric is being garrotted by austerity. That will
lead to a smaller and smaller industrial base, an increasing
imbalance in the way a budget can be financed, more
unemployment, a brain drain, a populace getting gradually
poorer, and that in turn will lead to a further downward path
for house prices.
There will be enclaves of expensive housing. That housing will
be reserved for the very rich, and for foreigners. Lisbon will
become divided into rich and poor zones, while the south will
still thrive in the Golden Triangle. I dont see much future for
the rest of the countryís real estate unless there is a complete
change in the way things are done across the EU.
Eventually, the time will come when it will be a great idea to
buy into these countries which are financial wrecks. The time to
buy into them is not as the countries are in the process of
imploding. The former situation will allow cheap purchases. The
latter will ensure a slow erosion of value. To quote an old
phrase, you will get sand-papered to death.
As an aside here, there is certainly an element of this
underlying scenario that guides current thinking in other
countries across the EU as the British referendum approaches.
Germany needs an ally. Britain is ideal in this instance. They
need a stooge, or at the very least an apparently impartial
state still standing shoulder to shoulder with them. Other less
fortunate countries need help. Itís that simple.
Next week I will have a look at the value of money across the