EU-Canada can't find agreement on CETA: What's the point of the EU?

Outlook:

It's the thir d week of the month and ther efor e a giant calendar of r eleases. In the US, we get the Markit preliminary manufacturing PMI, September durables and the advance Q3 GDP (Friday). The Atlanta Fed GDP Now forecast for Q3 is a lousy 2.0%, although the NY Fed NowCast has 2.2% and Bloomberg has 2.5%. The worrisome thing is the NY Fed also showing 1.4% for Q4. It's odd and disturbing that growth is tepid and stumbling just as the economy reaches full employment. See the chart from tradingeconomics.com, whose forecast was updated today and shows 1.4%, too. We don't know what to make of this slowdown, and the Fed probably doesn't, either. We can't blame the Fed and we can't blame politics, although it's fun to see those arguments.

We say the most important thing that happened Friday was the breakdown of the EU-Canadian trade talks, seven years in the making. Canadian trade minister Freeland walked out of the talks, saying "It is evident to me — evident to Canada — that the European Union is incapable of reaching an agreement." The current EU president, Mr. Tusk, was appalled, saying that if the EU can't do a deal with oh-so-nice Canada, it will never strike another free trade deal. "If we are not able to convince people that trade agreements are in their interest .... I am afraid, that CETA could be our last free trade agreement." Canadian PM Trudeau said earlier this month, according to the Telegraph, "If ... we see that Europe is unable to sign a progressive trade agreement with a country like Canada, well, then with whom will Europe think that it can do business in the years to come?" People will ask "what is the point of the EU?"

Trudeau is asking exactly the right question. As Stiglitz and others point out, the EU grew out of the Coal and Steel Community, designed to share the resources of the Ruhr Valley and stop fighting wars over them. But the idea of "Europe" was never a populist movement. It was always a sell-job of the elites. When the euro came along, even the elites couldn't get pan-European institutions to pass the voters' smell test, and so the euro was launched without the institutions that would make it workable. To this day Germany opposes any whiff of a transfer union, and it's precisely the transfer union that makes the US system work.

The conflict between local self-interest politics and the "idea" of Europe has come to a boil in Wallonia, of all places. The backstory is that all of Belgium's regions must agree to a treaty before Belgium can, and Wallonia (population 3.5 million) doesn't like competition from Canadian dairy—depriving some 500 million EU residents of wider prices and selection. Actually, you can look it up--Wallonia has 5500 dairy farms. Talk that the real Walloon objection has something to do with establishing new courts to adjudicate trade issues is a smokescreen on a par with saying the US Civil War was about states' rights. No, it was about slavery, and the Wallonia refusal to allow a trade deal with Canada is about rejecting competition. Walloon famers may have to accept competition from the Netherlands, but Canada is a bridge too far.

Everyone has been following the story because of its critical implications for the UK, whose financial services exports, not to mention autos and other things, are at risk. It's a tyranny of a minority (1.2% to be exact). When something is so dumb that even the famously well-mannered Canadians walk out, the whole world has a problem. Why couldn't the Belgian PM bribe the Walloons with something they want more than protecting dairy farmers? That's how politics works. Some of the commentary is ferocious but it all boils down to local self-interest getting an upper hand over the general welfare. You can bet that the folks intending to manage Brexit had a horrible weekend.

Several press outfits have a special Brexit edition delivered by email, including Bloomberg. We are learning to take whatever Bloomberg publishes these days with a grain of salt, because it has been inflating tiny scraps into massive, screaming headlines (like the ECB taper story). All the same, this time Bloomberg reports the CEO of the British Bankers Association saying in the Observer that banks are already planning to move out of London late this year and in Q1. They are "quivering over the relocate button."

Real estate companies are running to the Continent ahead of the banks to snap up scarce space. If banks do move to Paris and Amsterdam, it will deprive the UK Treasury of some £66 billion in taxes. This is 11% of tax revenue, about the same as defense spending. Logically, the solution is to reduce taxes on financial activities. One of the taxes is a surcharge of 8% of bank profits that started in January—the BBA wants it gone.

On another front, the May government is meeting with N. Ireland, Wales and Scotland to keep them inside the tent, but "Scottish First Minister Sturgeon is already preparing legislation for another referendum on independence if May strikes a Brexit deal that takes the country out of the EU single market. Scotland has a Brexit Minister, Michael Russell, who says "The Scottish government is becoming increasingly concerned that the U.K. is heading for a hard Brexit with all the damage that will bring to the Scottish and U.K. economies. Four months on from the referendum, we have yet to see a proposal from the U.K. government on how the views of people in Scotland will be taken into account." This is exactly the right question. It's one thing for the May government to hold its cards close to the chest, but fear that Brexit will be really hard is damaging confidence to an extreme. If super-nice Canada can't get a trade deal, sometimes-snotty Britain doesn't have a prayer. That is how you get from Ottawa to Brussels. May has to act and PDQ. We need that white Paper the government says it decided not to prepare.

We must expect these hard Brexit stories to keep coming. The pound is steady at the moment and even improving a bit from the Friday low, but this is probably just a normal pullback. The story that will drive sterling far lower is being prepared. Get ready.

US Election: Polls today show Clinton leading by as much as 12 points. The CNN poll of polls has Clinton ahead by 48% to 39%. The weekend talk shows mostly addressed the down-ballot races, what Trump will do after he loses, and whether Hillary really said the elites should be in charge in the Goldman speeches, the latest attack.

The FT reported Friday that a Brooking Institution indicates an election victory by Trump would "lower the value of shares in the US, UK and Asia by between 10-15 per cent, reduce the price of oil by $4 dollars a barrel, and trigger a 25 per cent drop in the Mexican peso." We would add the dollar does down by 20% or more. Stock markets go up (for a while) when Republicans win the presidency alt-hough they do better over the entire tenure of Democrats than of Republicans. The one notable loser on a Clinton win is Big Pharma, due to her promise to end price gouging. We are not holding our breath. The president can't do stuff like this alone. It takes Congress, and Big Pharma lobbying is among the biggest ($2.3 billion over the past decade).