‘Europe Needs More Euros’

We are a very special construction unique in the history of mankind,’ José Manuel Barroso said in 2007, then president of the European Commission.

Sometimes I like to compare the EU as a creation to the organisation of empire. We have the dimension of empire…What we have is the first non-imperial empire…We have 27 countries that fully decided to work together and to pool their sovereignty. I believe it is a great construction and we should be proud of it.

I wonder how José feels now more than 10 years on…

The Union was supposed to create unity and prosperity for all.

Working together under one banner, Europe would never again see another war. With a common currency and the free movement of capital (factories and alike), investment would spread across the Union.

Places like Spain and Greece would be lifted to the level of Germany and France.

But is this how the Union looks today?

‘The empire’ is failing. And the ones in power don’t want to admit it…

FREE report: Why ‘Nano Metal’ could soon be Australia’s most valuable export.

Biggest economic decline in three years!

It’s not just Australia that’s had a bit of trouble lately. From the Australian Financial Review (AFR):

Most analysts thought the central bank would wait for more economic data before making a move. But the bank’s in-house economists significantly lowered their forecasts for growth and inflation, prompting the bank to act sooner.

In estimates published Thursday, the central bank economists said that growth in 2019 would be 1.1 per cent, compared to a previous forecast of 1.7 per cent.

Money Morning

Source: the Bloomberg
[Click to open new window]

To put context on this, the downgrade on growth this year is the largest in the past three years.

Money Morning

Source: the Bloomberg
[Click to open new window]

And it’s not just the sick men of Europe, countries like Italy, Spain and Greece pulling everyone else down. The pillars of the system, the economies of Germany and France are also expected to dive heading into 2019…

Money Morning

Source: the Bloomberg
[Click to open new window]

But how can this be possible?

Wasn’t the ECB prepared? Didn’t they flood their system with cash? Weren’t businesses investing and consumers spending?

The ECB even restored to helicopter money. This is when central bankers enter asset markets and buy up securities in bulk.

The idea is shower money onto the public from above by transfer newly created money for bonds or stocks. This newly created money then gets spent or invested within the Eurozone.

It creates jobs, new goods and services. Living standards rise and everyone’s happy…

That how it was all supposed to work anyway.

The ECB didn’t buy hundreds of billions, they bought trillions of bonds with this goal in mind. Their purchases have dominated the entire market.

Bond prices have skyrocketed and remained at those lofty prices, hence why the volatility of euro government bonds is the lowest it’s been in decades.

Money Morning

Source: the Bloomberg
[Click to open new window]

So, what’s the grand plan now? What next can the ECB do when helicopter money fails?

They can always just print more money, right? Again, from the AFR:

The European Central Bank has signalled deep concern about the state of the region’s economy by unexpectedly reversing course and reviving stimulus measures originally designed for times of crisis.

The move by the normally cautious bank on Thursday (Friday AEDT) to try to forestall recession showed how much trade tensions have reverberated through a slowing world economy while clouding the outlook for growth.

The decision, coming amid a slowdown in China, also revealed how difficult it has been for much of the world’s central banks to return policy to normal a decade after the beginning of the global financial crisis.

The unanimous vote by the central bank’s Governing Council to start adding a stimulus measure intended to encourage lending, when it had only recently been taking it away, comes a little more than a month after the Federal Reserve suspended its plans to raise interest rates in the United States.

If this doesn’t show you how useless central bankers and interest rates are in our world today, I don’t know what does.

The ECB has pumped trillions into the Eurozone. Clearly that was not enough, according to the heads of the central bank.

No. Europe needs more euros. The problem, it seems, is too little debt in the system. The problem is not the ECB and their bond purchases.

The problem is the orange man in the US, stirring up things with China and the rest of the world. The AFR continues:

Mario Draghi, president of the European Central Bank, implicitly blamed White House policies for the decision to restart a program designed to encourage lending by commercial banks and prevent a credit crunch.

“Lower confidence produced by the trade discussions” was a key cause of economic slowdowns in Europe, China and emerging markets, Draghi said at a news conference in Frankfurt. He added, though, that he does not expect a recession.

And it’s only because of these external factors, nothing to do with the ECB, that the EU is in trouble.

Yeah. Good one Mario!

The European Union had a purpose

Clearly all the problems with Europe are happening for internal reasons.

How can you expect 27 nations to take orders from body? How can you expect Italy to suffer, and suffer for the gain of Germany? And then expect the Germans to use their tax dollars to help out those in Italy?

I think it’s pretty clear the EU had a purpose. And that was to benefit Germany and France.

Most of the countries in Europe are manufacturers. Germany is the strongest. Their factories are more efficient. They can produce not just cheap manufactured goods, but high-end products.

How can Spain or Italy compete?

The workers aren’t as skilled. They’re also not as efficient.

What really puts the nail in the coffin, though, is the euro.

Places like Italy and Spain have given up the power to control their currency. They can’t devalue their currency to make their goods more appealing to international buyers.

And so, they’ve become extremely uncompetitive on a global scale.

‘…if you can’t control your exchange rate, you can’t protect yourself against the competitiveness of Germany,’ says Columbia Business School professor Bruce Greenwald.

‘…you’re going to have this chronic deflationary problem. And you can either adjust to it by changing the competitiveness of Italian businesses, getting productivity growth higher than it is in Germany, and lots of luck with that because it’s unlikely to happen.

Or you can lower real wages in Italy, and that’s not going to be a pleasant process. That is, lower real wages by actually lowering wages, because then the debts that people have incurred become a bigger part of their income to service them, and you start to see real households suffering.

So, what’s ended up happening is places like Greece, Spain and Italy, they produce very little and consume a whole lot. They’ve become the consumption nations. And Germany has become the producing nation.

Of course, this doesn’t happen in a vacuum.

It’s the poorer consumption nations that are propping up the few producing nations like Germany. Someone has to eat up the surpluses of Germany. And it’s fallen on debt-laden, poor countries like Italy, Spain and Greece.

Economist Milton Ezrati explains:

International Monetary Fund (IMF) data suggests that at the euro’s inception, this currency distortion gave German industry a 6% competitive advantage compared with the country’s economic fundamentals.

Right from the start, then, the currency union divided the Eurozone into two classes of economies: producers and consumers. Greece, Spain Portugal, Italy, and other weaker economies over consumed and under produced. The Germans did the opposite. The difference surely contributed to the fiscal-financial crises that have plagued Europe’s periphery since.

And what’s the solution?

To continue pumping euros into these consuming, over-leveraged countries, who will continue to keep Germany prosperous.

This will likely be the shortest empire in history…

Your friend,

Harje Ronngard,
Editor, Money Morning

PS: In a brand-new report titled ‘Three Golden Rules for Investing in Pot Stocks’, you’ll learn three things you must consider before investing a dollar into the cannabis industry. Click here to download the free report.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia