Executives at Elliott Management, a near $30 billion US-based hedge fund, say that the European Union could end up undergoing a “very painful” unravelling in the coming years, and Brexit is just a symptom of a wider discontent that threatens the existence of the 28-nation bloc.
Writing to clients in early November, the fund headed by Paul Singer, says that the basic premise of the European Union, as well as the single currency area is fundamentally “unsound.”
“We believe that the linkage of 28 countries in the European Union (EU) in one economic unit, and 19 of them in one currency union, is unsound,” the letter says.
“Even before the Brexit vote there were growing centrifugal forces related to the sovereignty, culture, prosperity and freedom of the constituent countries. Brexit is just a symptom of the possible unravelling of both unions, which would be very painful, as obstacles are placed in the way of those wanting to leave and as the complexities of withdrawal make things worse for everyone,” it continues.
Italy is a particular point of concern for Elliott, which as CNBC previously reported, the fund believes it is in a state of “tremendous flux” in the lead up to December’s constitutional reform referendum. Should Prime Minister Matteo Renzi fail to win the vote, that flux could intensify. “The resulting unrest may be more impactful than Brexit,” the letter says.
Across Europe, parties like the Front National in France, Germany’s Alternative for Deutschland, and Five Star in Italy are rapidly gaining support, and Austria could be on the brink of electing a far-right president in Norbert Hofer. Put very simply, politics in Europe is changing massively.
That change is likely to keep coming, and in the next few years there are a whole host of major events and elections that could alter the landscape even more. France will hold a presidential election early in 2017, where FN leader Marine Le Pen is widely thought to have at least some chance of victory.
Germany also has an election next year, and in 2018 we’ll see a general election in Italy — although it should be noted we may get one much earlier if Renzi loses his referendum.
Discontent is growing, with Brexit just one sign of that ill feeling towards Europe’s elites, something that could be intensified by Donald Trump’s shock victory in the US election.
HSBC’s chief European economist, Simon Wells, said in a note sent to clients last Wednesday: “There is a risk that the Trump victory could boost the popularity of anti-immigration and populist parties across Europe. The recent EU barometer shows that immigration and terrorism are now the two biggest threats among the population, which has contributed to the rise of populist parties across the EU.”
Elliott’s letter to clients says: “Perhaps some new great global boom can put off the fraying of the euro and the European Union, but that does not look to be on the horizon.”
The view of senior staff within Elliott Management is in line with the beliefs of Nobel Prize-winning economist Joseph Stiglitz, who told Business Insider in August:
“What’s going to happen is that there will be a definite consensus that Europe is not working. The diagnosis will be to shed the currency and keep the rest, or that Europe is not working and a broader rejection — like in the UK.”
“So my worry that this is precisely that kind of political event [something like Brexit] is that is what will be the catalyst for change.”