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 isn’t necessarily because they are covering up something, but they say as little as possible just in case. In short, even they can’t 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 hasn’t 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.
That’s 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 didn’t work, but they started buying up the French industrial complex by purchasing shares on a crashed stock market.
Isn’t 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 can’t afford something then you most certainly can’t 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 can’t pay your mortgage. Eventually the bank forecloses and you are out on the street.
Okay, so the Portuguese government for example, can’t pay it’s 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 doesn’t, 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 country’s patrimony.
Europe’s 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. It’s 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 country’s 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. It’s that simple.