OECD estimates of Real GDP Growth for 2018 have been revised up for Europe (to 2.5%). However, 2019 estimates have been cut to +1.9% growth.
Continue reading Germany and Inflation Expectations. Is European Growth at Risk?
Category Archives: Europe
The ECB’s Devil’s Alternative
The ECB faces the Devil’s Alternative that Frederick Forsyth mentioned in one of his books. All options are potentially riskly. Mario Draghi knows that maintaining the so-called stimuli involves more risks than benefits, but also knows that eliminating them could make the eurozone deck of cards collapse. Continue reading The ECB’s Devil’s Alternative
Juncker Demands More Europe… Or More Interventionism?
“And I will pray to a big god, as I kneel in the big church” Peter Gabriel
Imagine for a moment that you are a British citizen with doubts about Brexit. You turn on the television and listen to the President of the European Commission, Jean-Claude Juncker, state the following:
– That the 27 countries of the Union should adopt the euro and be in Schengen by 2019.
– That “we are not naive defenders of free trade”.
– That Europe needs a European superminister of Economy and Finance who is also Vice-President of the Commission and President of the Eurogroup.
– That a European Monetary Fund should be created
Probably, at that moment, many doubts will dissipate. Unfortunately, for those who would like the UK to remain in the European Union, in the opposite direction of their wishes. You would probably think “thank God we are out”.
Juncker’s speech on September the 13th did not seek to find elements for an agreement with the United Kingdom, but to strengthen the current model of the Eurozone at all costs. It was presented as an opportunity to remind us all of his real project for the European Union, clearly based on the French interventionist economic and financial “dirigisme”, and very far from the UK, Finnish, Irish or Dutch open model of economic freedom.
That is the big problem. The message of “more Europe” is always oriented towards “more interventionism” .
A few weeks ago we questioned in this column the triumphant message of the European Commission affirming that “Europe has left the crisis thanks to the decisive action of the European Union“. With Juncker’s speech we can say that the slightest hint of taking advantage of Brexit to improve in freedom, flexibility and dynamism disappears.
Instead of reflecting on the reason why the hyper-regulated and massively intervened Europe has taken more than three times as other countries to emerge from the crisis, we are faced with the classic response of bureaucratic power.
According to Juncker and others’ in Brussels, one could think that if Europe grows less, creates less employment and comes out of the crisis later, it is not because of excessive bureaucracy, but because there is not enough.
The EU runs the risk of falling into the glorification of centralized planning first and foremost, absolute uniformity, and obsolete interventionism that has nothing to do with the plural, free and diverse United States of America and which shows too many coincidences with the Soviet Union dependent on the politburo.
Juncker’s call for efficiency can be interpreted as a breath of fresh air, but it contrasts with reality.
According to the Intelligent Regulation Forum and with the official data of the European Union for 2015, the member countries are subject to more than 40,000 rules by the mere fact of being part of the EU institutions . In total, including rules, directives, sectoral and industrial specifications and jurisprudence, they estimate that there are some 135,000 obligatory rules.
A European Monetary Fund is clearly a subterfuge to give free rein to the uncontrolled financing of white elephants to greater glory of governments and rent-seeking sectors. Faced with the evident failure of the already forgotten “Juncker plan”, no one seems to consider the failure of constant wastefulness in industrial and stimulus plans that have led the European Union to overcapacity of more than 20% and huge financial holes. According to Transparency International, in the European Union, between 10% and up to 20% of all public contracts are lost in excess costs and 5% of the EU’s annual budget is not accounted.
No one thought about it before… A mega Monetary Fund that finances megalomaniac projects with no real economic return with unlimited funds paid with taxpayers’ money, and a superminister that joins to the other superministers and the national and supranational superstructures. A strategy that has worked perfectly… never .
An incorrect model
The fundamental problem of these proposals is that they push forward an incorrect model, which could be improved by learning from those that this “more Europe” message intends to ostracize, be it the British, Finnish, Irish or Dutch.
That none of Juncker’s advisers and assistants have questioned the convenience of including the following phrases is revealing: “We are not naive advocates of free trade”, “We propose a new community framework for the control of investments”.
But no. It is not a question of correcting the evident errors of interventionism. It is not a serious debate on why Europe does not have a Google, an Amazon or an Apple while maintaining dinosaur conglomerates. It is not about improving in openness so that the investment comes to Europe. It is about imposing “dirigisme” above all, whether it works or not. It is about creating a sanctuary of adoration of bureaucracy at all costs, and covering it with unnecessary expenses and burning the printing machine when the evidence of stagnation is imposed after minimal rebounds.
The worst thing is not that the British citizen thinks “it’s a good thing we’re out.” The worst thing is to ignore a part of the European Union that does not want a photocopy of French interventionism.
When Brussels equates more Europe to more interventionism, the EU runs the risk of being less. A lot less.
Daniel Lacalle is Chief Economist at Tressis, SV a PhD in Economics and author of Life In The Financial Markets, The Energy World Is Flat (Wiley) and Escape from the Central Bank Trap (BEP).
The Eurozone is recovering, but we cannot afford to be complacent
This article was published at World Economic Forum here.
Here are 3 reasons why (World Economic Forum)
If there is a term that can best describe the current climate in the Eurozone, it is “complacency”. Markets are rising, bond yields are at an all-time low, growth estimates have improved and the European Union has triumphantly declared the end of the crisis, thanks to its “decisive action”.
There is no denying that the European Union is in recovery mode, and that is a positive. Business confidence is rising, and manufacturing indices are in expansion. However, the pace of said expansion has moderated in the past months, and challenges remain.
Ageing Europeans
The biggest problem for the Eurozone is demographic. The population is ageing rapidly, and in several countries that issue is compounded by a shrinking number of inhabitants. Average age in the largest Eurozone countries ranges between 44 and 47. At the same time, the United Nations estimates that the European Union population will have peaked and start shrinking in less than two decades. Less people and older, too.
Ageing presents many challenges. The cost of healthcare and pensions rise, while tax revenues decrease as consumption and investment slow down. This demographic challenge creates a fiscal and productivity challenge that can only be reversed by attracting high added-value investment and incentivizing high productivity sectors. The European Union is doing the opposite: it mostly subsidizes low productivity and taxes the productive, penalizing foreign technology giants and increases the tax wedge on small and medium enterprises.
The strong euro
This takes us to the second risk. The euro has strengthened against all its main trading currencies, despite a massive expansionary monetary policy that has taken the European Central Bank’s balance sheet to 35% of the Eurozone GDP. Eurozone countries mainly export to each other, with 75% of exports made within the single currency boundaries. This means that financial repression measures might help to artificially boost internal demand through credit expansion, but it immediately creates an inconvenient side-effect by strengthening the euro. As such, non-EU28 export growth has stalled since the European Central Bank started its enormous asset purchase programme.
Image: Eurostat
A strong euro is not a problem for consumers or high-added-value companies. Consumers benefit from low inflation, and their savings are predominantly in deposits, so a strong euro helps families navigate a challenging environment thanks to contained prices and better purchasing power. High-added-value companies are exporting without a problem, as demand for quality and advanced products is soaring, and these companies do not need the artificial subsidy of devaluation to increase sales.
A strong euro is a problem for the European Central Bank’s plan to inflate its way out of debt. Inflation expectations have been cut dramatically in the past month, and this obliterates the idea that price increases will help deflate the debt of deficit-spending countries.
The strong currency is a relevant problem for low-added-value and productivity sectors. The main trading partners of the Eurozone are the US and China, which account for nearly 50% of the group’s exports. A strengthening single currency diminishes the possibilities of selling more abroad, when competitiveness is not driven by technology or innovation, but costs. As the Eurozone has focused its efforts in supporting these weak-to-average competitiveness sectors though low rates, devaluation and subsidies, it is a challenge for them to grow when the euro becomes a “safe haven” currency. Additionally, investors are realizing that a strong euro erases the earnings growth estimates of the large European stock market indices, making stocks more expensive in the process.
Bad habits
The third risk is financial. The Bank for International Settlements warns that the percentage of zombie companies has soared to 9% of the total of large quoted non-financial entities. Zombie companies are those unable to cover financial expenses with operating profits. At the same time, non-performing loans in Eurozone banks have reached a three-year high of more than €1 trillion, 5.1% of total loans.
What these figures tell us is that ultra-low rates and massive liquidity have not made the financial and corporate system stronger, but weaker. European governments have “saved” nearly €1 trillion in financial costs due to the European Central Bank’s extreme loose monetary policy, but the vast majority of them remain in deficit and continue to delay essential reforms to strengthen their fiscal position. In fact, there are political calls all around Europe to spend more and forget the wrongly called austerity, which was in reality just a very moderate budget adjustment.
There is an even more concerning conclusion. Neither deficit-spending countries nor weak companies would be able to absorb a mere 1% increase in rates, and the financial system would suffer more liquidity and solvency episodes than the ones we have seen in the past years.
The European Central Bank cannot fix structural problems, and it seems that countries and companies have forgotten that unconventional monetary policies are there to buy time to strengthen the system and undertake reforms and restructuring, not to grow accustomed to massive liquidity and low rates as a given. Complacency is the last thing that European governments and companies should fall into.
Daniel Lacalle is Chief Economist at Tressis, SV a PhD in Economics and author of Life In The Financial Markets, The Energy World Is Flat (Wiley) and Escape from the Central Bank Trap (BEP).
Article and photo courtesy World Economic Forum. Image courtesy Eurostat. Re-printed with permission.