Europe’s Ivory Tower Politics by Merk Investments

Just because we have been favoring the euro over the U.S. dollar in recent years doesn’t mean we believe everything is perfect in Europe. The rejection of Irish voters of the latest attempt by the European Union (E.U.) to streamline its decision processes highlights a fundamental weakness: the inability of European politicians to communicate with its citizens.

Just because we have been favoring the euro over the U.S. dollar in recent years doesn’t mean we believe everything is perfect in Europe. The rejection of Irish voters of the latest attempt by the European Union (E.U.) to streamline its decision processes highlights a fundamental weakness: the inability of European politicians to communicate with its citizens.

 

In 2005, Dutch and French voters declared the new European Constitution dead by rejecting referenda. In the days leading up to the vote in France, their president at the time, Jacques Chirac, appeared on TV and told his citizens that it is their duty to approve the treaty and great harm will be done if anyone dared to vote no. This sort of bullying tactic has been the modus operandi in France for years; this time around, it didn’t work.

With constitutional reform dead, European politicians devised an alternative to find a way to govern their 27 member states: the Lisbon Treaty, a reform package that achieves many of the same goals, such as negating the need for unanimous votes on many issues. Key aspect of this treaty was that it did not require a referendum to be held in most member states. The idea is straightforward: if the public cannot be convinced, do not ask the public.

Now in Ireland, the one state in the European Union many may argue has benefited the most from membership in the E.U. has rejected the new treaty by referendum; it’s the only state that requires a referendum; parliament decides in the other states.

Ireland’s rejection shows that European politicians simply have not learned their lesson. A representative democracy can only represent their citizen if they communicate with them. Politicians must learn to both listen (first) and speak (second). There is a valid criticism that some U.S. politics may be based too much on polls, but that does not justify retreating to an ivory tower to conduct European business. The White House in Washington may be one of the world’s best-known brands; it’s a symptom that the U.S. is pretty effective in communicating with the public. Few know whether European politicians indeed work in an ivory tower or possibly in a sandstone tower (historic buildings in Brussels are made out of sandstone). It turns out that the European parliament meets in both Strasbourg and Brussels; both buildings suggest that they may be working from a glass cage (link to Strasbourg and Brussels buildings).

The lack of knowledge about European parliament’s architecture is just a symptom of the lack of communication. Laws are passed that then have to be implemented by member states. In those states, it has become routine to ‘blame’ Brussels for any domestic ills. This happens in the U.S. as well, where blame is readily shifted by states to the federal government. But at least in the U.S., the federal government is fighting back with its own charm offensive. Depending on one’s political persuasion, one may or may not like what comes out of Washington, but at least there’s a dialogue. There are other challenges in the U.S., such that too small a portion of the population ever reads or views political news; but in Europe, where traditional evening news are still far more commonplace, European politicians fail in relaying their ideas to the public at large.

Voters in Ireland are sending yet another wakeup call to their elected representatives. Politicians better listen as populist politicians may seize the moment sooner rather than later to fill the gap.

In the meantime, what does it mean for Europe and the euro? Europe will never have a legislative and executive branch as effective as the federal government has in the U.S. Europeans like the resulting stability that most European member states have learned to cherish; Europeans don’t like to have leaders that actually have power to get things done quickly, as they could overturn long cherished policies; the flip-side of that approach is, of course, that ill-perceived policies tend to live on.

Stability must not be mistaken with stagnation, which may result if the E.U. does not find an effective way to govern. We are not too concerned, as Europe has been around for a long time and will continue to be around; but we don’t see a reason why Europe must find its way within a year or two – constitutional reform, even when packaged as “merely” a treaty, deserves to be done right. And, more importantly, the citizens of Europe deserve to be part of the process. When we raised similar issues in 2005, I was told that the issues at hand were too complex to be discussed with the public. When you treat your citizens like babies, don’t be surprised if they throw a tantrum from time to time. More to the point, our outlook on the euro has not changed; any temporary weakness may be a buying opportunity, just as it was in 2005.

We manage the Merk Hard and Asian Currency Funds, mutual funds seeking to profit from a potential decline in the dollar by investing in baskets of hard and Asian currencies, respectively. To learn more about the Fund, or to subscribe to our free newsletter, please visit www.merkfund.com.

Axel Merk
Manager of the Merk Hard and Asian Currency Funds, www.merkfund.com.

The Merk Asian Currency Fund invests in a basket of Asian currencies. Asian currencies the Fund may invest in include, but are not limited to, the currencies of China, Hong Kong, Japan, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

The Merk Hard Currency Fund invests in a basket of hard currencies. Hard currencies are currencies backed by sound monetary policy; sound monetary policy focuses on price stability.

The Funds may be appropriate for you if you are pursuing a long-term goal with a hard or Asian currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Funds and to download a prospectus, please visit www.merkfund.com.

Investors should consider the investment objectives, risks and charges and expenses of the Merk Funds carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Funds’ website at www.merkfund.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest.

The Funds primarily invests in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Funds owns and the price of the Funds’ shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. The Funds are subject to interest rate risk which is the risk that debt securities in the Funds’ portfolio will decline in value because of increases in market interest rates. The Funds may also invest in derivative securities which can be volatile and involve various types and degrees of risk. As a non-diversified fund, the Merk Hard Currency Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. For a more complete discussion of these and other Fund risks please refer to the Funds’ prospectuses.

The views in this article were those of Axel Merk as of the newsletter’s publication date and may not reflect his views at any time thereafter. These views and opinions should not be construed as investment advice nor considered as an offer to sell or a solicitation of an offer to buy shares of any securities mentioned herein. Mr. Merk is the founder and president of Merk Investments LLC and is the portfolio manager for the Merk Hard and Asian Currency Funds. Foreside Fund Services, LLC, distributor.