Stratfor: the EU faces painful budget battles after Brexit

Summary: Europe’s elites warned that Britain would suffer for daring to leave the EU. Suffer severely and soon. Four months have passed since the June 23 vote and Britain has felt no ill effects. Britain might have the last laugh, since the EU has to redo its budget following the loss of its second largest contributor. The EU is already under stress. Cutting the budget and raising taxes will make it worse. Perhaps sparking more exits.


A Bitter Budget Battle Looms in the EU
Stratfor, 13 October 2016.


  • Because of the Brexit, the European Union will lose a net contributor to its budget, forcing the remaining members to rethink the bloc’s spending limits and priorities.
  • EU members will have three options for dealing with the loss of the United Kingdom’s income: increase national contributions, trim the budget or look for new revenue sources. Each choice carries political risks.
  • Budget-related issues will create new sources of friction in the European Union as national interests shape the negotiations.


When Britain leaves the European Union, it will take with it the sizable financial contributions it makes to the bloc’s budget. That will leave remaining member states with some difficult choices to make about how big future budgets should be, what they should pay for and how much members should pony up for them. In all likelihood, key policies — from agricultural subsidies to development funds — will have to be redesigned. And as members decide how to proceed, new sources of conflict will arise that will do little to help reverse the bloc’s political fragmentation.

The EU budget is organized around the Multiannual Financial Framework, which establishes spending priorities and limits for a seven-year period. (The current one lasts through 2020.) Every year, the European Commission, the European Parliament and EU member states negotiate annual budgets based on the spending limits and priorities established by this framework.

About 75% of the EU budget comes from payments made by member states, calculated based on their gross national incomes. This means that, in absolute numbers, the largest economies make the largest contributions. But not all member states contribute the same proportion of that income, which leads to imbalances in contributions per capita. Moreover, since the budget is used to finance most EU programs, many countries give more money to the bloc than they get from it. In 2015, for example, 10 of the bloc’s 28 members were net contributors to the budget. The others received more in program spending than they paid in.

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“PARIS 2016: Scenes from the Apocalypse”

Summary: The effects of mass immigration are undernews, ignored by the mainstream media. This looks at the streets of the Paris that tourists seldom visit, home to generations of immigrants. Here they live, many in poverty, some without hope, most alienated from French society (famous for its inability to assimilate foreigners, as the Jews learned).


“PARIS 2016: Scenes from the Apocalypse –
Mass Immigration ruins streets of France.”
Source: unknown.

“The Paris you know or remember from adverts or brochures no longer exists. While no part of Paris looks like the romantic Cliches in Hollywood movies, some districts now resemble post-apocalyptic scenes of a dystopian thriller. This footage, taken with a hidden camera by an anonymous Frenchman in the Avenue de Flandres, 19th Arrondissement, near the Stalingrad Metro Station in Paris as well as areas in close proximity, shows the devastating effects of uncontrolled illegal mass immigration of young African males into Europe.

“If it weren’t for the somewhat working infrastructure, the scene might as well have been the setting of movie shooting – or a slum in Mogadishu. The streets are littered in garbage, the sidewalks are blocked with trash, junk and mattresses, thousands of African men claim the streets as their own – they sleep and live in tents like homeless people.

“If no portable toilets are in reach, open urination and defecation are commonplace. Tens of thousands of homeless Illegal immigrants, undocumented or waiting for a decision of their asylum application, waste away trying to pass the time in the city. Although their prospects of being granted asylum as Africans are bleak, they’re hoping for a decision that would grant them an apartment, welfare and make France their new home.

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Move evidence the Fed will not raise rates on our slow-mo economy

Summary: On Thursday I posted “Ignore The Bond Bears, The Fed Will Not Raise Rates“. Many on Wall Street disagree — most of whom since 2012 have expected a cycle of rising rates to begin really soon.  Such as J. P. Morgan’s prediction of a rate increase in December. Friday’s data confirms my forecast in a big way.

Slow Economic Growth

First, yet another in the almost endless series of economic indicators showing the US economy stuck in “slow”. Retail sales — critical in our consumer-driven nation — is up only 2.9% YTD YoY, with September +3.4% YoY (NSA) — see the report. We should be at peak growth in this expansion; instead growth faded in Fall 2014 and has remained slow since then.

Retail Sales - September 2016

Click to enlarge.

Second, with this data the Atlanta Fed’s GDPnow model lowered its prediction for Q3 real GDP to +1.9%. The forecast on August 5 was for 3.8% growth. On October 28 we get the advance estimate from the BEA. The average GDP growth since the trough in Q2 of 2009 has been 2.1%. The data for Q3 shows no change in that slow growth.

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The real reason for America’s hostility to China

Summary: Americans who read the news know that China is a designated bad guy, which justifies the full deployment of US power to contain it. Efforts by China to resist (or even defend itself) show its malevolent intent. Here is the rest of the story — the true story.

Globe and China Flag

What is America’s strategy to manage China? To discover the opinion of US elites, I first turn to The Economist (or Stratfor): “They have returned“, 12 August 2010 — “China should worry less about America’s ‘containment’ strategy and more about why the neighbours welcome it.”  The Economist’s attempt to distract us from the containment program shows that China should worry about US efforts to contain it. To understand this conflict, we begin with the previous global struggle.

“The ‘Long War’ is a term for the conflict that began in 1914 with the First World War and concluded in 1990 with the end of the Cold War. The Long War embraces the First World War, the Bolshevik Revolution, the Spanish Civil War, the Second World War, the Korean War, the War in Vietnam and the Cold War.  The Long War can be understood as a single conflict fought over the constitutional issue of what form of the nation-state — fascist, communist or parliamentary — would succeed the imperial states of the 19th century.”

— Interview with Philip Bobbit, author of The Shield of Achilles: War, Peace, and the Course of History (2003).

I believe the Long War as won by “market-based States”, not “parliamentary” states. Now the US attempting to retain its hegemony over the other market-based nation-states — especially China. From 1950 to 1972 one of the top goals of American foreign policy was to contain China. This culminated in the Vietnam War, as described in the memorandum from Secretary of Defense McNamara to President Johnson, dated 3 November 1965. The opening of the memo is clear (red emphasis added).

“The February decision to bomb North Vietnam and the July approval of Phase I deployments make sense only if they are in support of a long-run United States policy to contain Communist China. China — like Germany in 1917, like Germany in the West and Japan in the East in the late 30’s, and like the USSR in 1947 — looms as a major power threatening to undercut our importance and effectiveness in the world and, more remotely but more menacingly, to organize all of Asia against us.

“The long-run US policy is based upon an instinctive understanding in our country that the peoples and resources of Asia could be effectively mobilized against us by China or by a Chinese coalition and that the potential weight of such a coalition could throw us on the defensive and threaten our security. This understanding of a straightforward security threat is interwoven with another perception — namely, that we have our view of the way the US should be moving and of the need for the majority of the rest of the world to be moving in the same direction if we are to achieve our national objective.”

After Nixon went to China, from 1972 -2001 the US pursued a policy of engagement. But China’s unexpected hypergrowth transformed it from a trading partner and distant threat into a current rival — and after 2001 US policy changed from cooperation to quiet containment.

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The Fed Will Not Raise Rates In The Foreseeable Future

Summary: Since 2010 I have said that the economy is locked in slow-mo and the Fed will not start a new rate cycle. It’s even more true today than in 2010.

  • Many investors and economists are convinced that the Fed will soon end its near-zero interest rate policy and begin raising rates – “normalizing them”.
  • As I and others have said since the crash, these times are not normal (i.e., the post-WWII era has ended).
  • Most economic indicators show flat or slowing economic growth.
  • The developed world has fallen into secular stagnation.
  • The next event is not a boom requiring higher rates, but a recession.

Slow Economic Growth

Short-term riskless US rates are set in the world’s largest market:
when will rates return to normal?

Market yields on 3-month T-bills

We have been told for six years that soon interest rates will rise. During that time, the right-wing’s inflationistas have predicted rising inflation, or even hyperinflation (remember the 2010 “Obama will turn America into Zimbabwe” scare?). Incredibly, many experts still believe this despite…

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