Victor Hill, macro strategist at investment media company Master Investor, says that a no-deal Brexit would hurt Germany more than it does the UK. The shape of Britain’s departure from the European Union, he argues, will determine whether the Eurozone tips into recession or not in 2019.
The nature of Brexit is currently in limbo since the UK Parliament rejected Theresa May’s Withdrawal Agreement last month. The possibility of Britain leaving the EU with no deal has remained a possibility but highly unlikely.
Hill argues that recession in the Eurozone is closer than it appears, and that a no-deal Brexit will prove insurmountable in avoiding one.
“The Eurozone has the inherent flaw that there are just two surplus countries (Germany and the Netherlands) – and the rest run substantial trade deficits with them,” Hill has told Private Banker International.
“Yet there is no mechanism to facilitate fiscal transfers (as in the USA). In the first Eurozone crisis it was the weaker, southern, peripheral economies that encountered solvency problems. Italy is very likely to encounter a solvency crisis soon (Italian government bond yields are rising again).
“But the second Eurozone crisis will be even more sobering. That is when the German economy, which is highly exposed to a downturn in cross-border trade, stutters because it either can’t or won’t boost domestic consumption as exports wane. German bank shares (dire) are the canary in the coal mine.”
No-deal Brexit and Germany
Hill has argued previously that there are three factors that could conspire to push Europe towards recession: the ECB’s end to quantitative easing, a hard Brexit, and the financial crisis in Italy potentially triggering a culture war with European elites, inciting other dissidents like Hungary.
Germany would stand to feel the brunt of this such a downturn in Europe, as its trade surplus stands at around 8% of its GDP, Hill argues.
“When global trade plunged in Q4 2008 as a result of the financial crisis, the German economy lost more than five percent of its value.”
Hill tells PBI he is advising investors to hold only as many Euros as they need to spend in Europe, and re-allocate the rest elsewhere. He cites US small-caps, UK house-builders and selected emerging market currencies as examples.