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EU Economy Traveling Along Same Worn Dead-end Road

EU Economy Traveling Along Same Worn Dead-end Road

With so many countries across the world facing difficulties, many people have yet to notice the Euro-Zone has become a place where hope goes to die. The last round of elections in the Euro-Zone should bring little comfort to those supporting a stronger Europe. Huge gains were made by forces seeking more power for the populist agenda. In short, it is a boost for the rights of individual nations to have more say in how they are governed.  Two of the most pressing issues are that insolvent Italy struggles with a stagnate economy and Spain is coming apart politically with Catalan separatists defying Spain’s Prime Minister. 

To avoid the union coming apart at the seams and a miserable future, the European Commission recently unveiled an unprecedented €750BN CoVid-19 recovery plan. It consists of €500 billion in grants to member states, and €250 billion would be available in loans. This means they are asking for the power to borrow. This is geared to tackle the worst recession in European history and shore up Italy. It would mean transforming the EU’s central finances to allow for it to raise unprecedented sums on the capital markets and hand out the bulk of the proceeds as grants to hard-pressed member states.

The Euro-Zone was already in deep trouble before CoVid-19 hit, the weakness that started in 2017 never ended. In the fourth quarter even Germany narrowly escaped recession. This could be blamed on the Brexit or Trade War but it goes beyond that, they abandoned all structural reforms in 2014 when the ECB started its quantitative easing program (QE) and expanded the balance sheet to record-levels. In 2019, almost 22% of the Euro Zone GDP gross added value came from Travel & Leisure, a sector that will unlikely come back anytime soon. Add this to weak exports and a banking sector that is totally decimated and everything points downward.

…click on the above link to read the rest of the article…

Third Mega-Crisis in 12 Years: Eurozone Economy Plunges at Fastest Rate on Record

Third Mega-Crisis in 12 Years: Eurozone Economy Plunges at Fastest Rate on Record

First the Global Financial Crisis, then the Euro Debt Crisis, now the Big One.

In its 21 years of official existence, the Eurozone has already been through two brutal crises — the Global Financial Crisis and one of its own doing, the Euro Debt Crisis — that nearly tore the bloc apart. Now, it is in the grip of another one that is already exacting a larger toll than the first two, despite having barely begun.

The preliminary GDP in the first quarter for the Eurozone, GDP fell by 3.8%, according to Eurostat’s flash estimates (for the entire EU, it fell by 3.5%), “the sharpest declines observed since the time series started in 1995,” Eurostat said. This is despite the fact that most of the region’s lockdowns did not begin until mid-March:

All things considered, the Euro Area’s biggest economy, Germany, got off relatively lightly. It shrank by just (!!) 2.2% compared to the previous quarter. It was still its biggest contraction since the the Global Financial Crisis, more than a decade ago. German industrial production was particularly hard hit, tumbling by 11.6% year-on-year in March, when the lockdown forced factories to close. In Q4 2019, Germany’s GDP growth rate was already negative (-0.1%).

But many other Euro Area countries fared a lot worse. Of the four worst performing economies, three are the bloc’s second, third and fourth largest, France, Italy and Spain, which between them account for almost 45% of Euro Area GDP. The other was Slovakia. Spain, Italy and France suffered more cases of Covid-19 and resulting fatalities than any other countries in the Euro Area. They also imposed the most draconian lockdowns. The impact on their economies has been brutal.

…click on the above link to read the rest of the article…

Huge Protests in Germany Against Government’s Lockdowns

Huge Protests in Germany Against Government’s Lockdowns

The German Press is starting to wake up at last after a period of just saying Yes mam! They have run the story that if we acted rationally, we could quickly overcome the consequences of the corona crisis. But politics is deliberately spreading panic among the population and stirring up fear – and in this way causes a severe economic crisis.

For today, the initiative “lateral thinking 711” announced a rally with 500,000 participants in Stuttgart have registered. But there are protests rising in Munich and Berlin. The number of people may reach 1 million.

The government is trying with the aid of most press to label these people as right-wing racists because they cannot address their actions on false forecasts. Meanwhile, unknown persons have set up a replica tombstone in front of Chancellor Angela Merkel’s (CDU) constituency office in Stralsund symbolizing her reign some call of Terror between the refugees and now the virus over-reaction has destroy their lib=vlihoods and their future.

On top of that, the rising resentment against the Eurozone control from Brussels has many wanting to kill the Euro and return to national currencies. I have warned that the cultural divides are far too great and this virus is being used for a total environmental reconstruction of the economy by sheer force. The lack of a transition or any planning whatsoever has cast the livelihoods and future of the world population is tremendous jeopardy and has drastically increased the outcome of our forecasts for not just the collapse of the Euro, but the rise in civil unrest and international war.

…click on the above link to read the rest of the article…

Eurozone Breakup Risk at New High

Eurozone Breakup Risk at New High

The German Constitutional Court made an unexpected and significant ruling last week against the ECB and Quantitative Easing.

QE Deemed Illegal

In the midst of a pandemic and an important presidential election, it is very easy  to miss globally significant events. 

Here is one that is way under the radar: The German Constitutional Court ruled the ECB’s QE Program Could be Illegal.

That is a landmark ruling that challenges the independence of the ECB and the authority of the Court of Justice of the European Union (CJEU).

In announcing the ruling, German Chief Justice Andreas Voßkuhle said the CJEU had approved a practice that “was obviously not covered” by the ECB’s mandate. Voßkuhle spent months crafting the 77-page decision, announcing the ruling just a day before his official retirement on Wednesday. “

Dismissing a 2018 CJEU decision to allow the bond purchases, the German court ordered the ECB to provide Germany with adequate justification for the program within the next three months. Should it fail to do so, the Bundesbank, Germany’s central bank, would no longer be permitted to participate in the program.

What it Means for the Future of the EU

Eurointelligence explains What it Means for the Future of the EU.

The ruling raises complex and potentially troubling issues for the EU as a whole. The German constitutional court has accused the ECB and the CJEU, the court of Justice of the European Union, of abusing their power, and of acting beyond their assigned competences. That concept is known in German constitutional law as acting ultra viresIn the German legal interpretation of European integration, all sovereignty still rests with the member states. The EU is clearly not a federal state, but a deferred power.

…click on the above link to read the rest of the article…

Eurozone Collapse: V-Shaped Recovery Mirage Is Gone

Eurozone Collapse: V-Shaped Recovery Mirage Is Gone

Eurozone Economy Collapses 3.8% in the first quarter, the worst on record.  Spain (-5.2%) and France (-5.6%) GDP were much worse than Italy (-4.7%).

Economist Daniel Lacalle offers his thoughts on the European economy in a YouTube video. 


Daniel Lacalle✔@dlacalle_IA

EUROZONE COLLAPSE

The V-Shaped Recovery Mirage Is Gone.

https://www.youtube.com/watch?v=kO_RxjESCk4 … YouTube at 🏠 ‎@YouTube


What LaCalle says about the Eurozone also applies to the US. 

What’s Next for America?

For a 20-point discussion of what to expect, please see Nothing is Working Now: What’s Next for America?

No V-Shaped Recovery

Here’s the correct viewpoint: The Covid-19 Recession Will Be Deeper Than the Great Financial Crisis.

Simply put, a quick return to business as usual is not in the cards.

Inflation or Deflation?

Meanwhile, the debate over inflation or deflation continues.

Will it be Inflation or Deflation?

If you believe the answer is inflation, then you do not understand the importance of credit and demand shocks. Click on the link for discussion.

Eurozone

QUESTION: Hi Marty,

I’m based here in South of England, within the commuter belt into London. The ECM forecasts an economic downturn 18.01.2020, and Europe looks to be at the epicentre. My own research tells me the job cuts in the auto sector in Germany are quite severe.

How does all this play out after January? We have already witnessed companies collapsing, Thomas Cook, and many teetering on the very of edge of collapse. How bad is this going to be, and how does this compare to 2008?

Of course, the next 3 months of 2019 are going to be very volatile, what I’m trying to understand is how does all this look like to the average city worker within finance, law or professional services.

Within my own peer group most are clueless on what is going on and perhaps they should be thinking of income protection rather than going out and buying £60k Range Rovers. The apathy never ceases to amaze me.

I welcome your insight. Thanks for your great work which keeps us mere mortals informed.

Cheers IB

ANSWER: The answer is very bad. The structure of the Eurozone is an absolute disaster. It is promoted as a single country, but it lacks everything that stands behind a currency. Just look at the tariffs starting between the USA and the EU. It is IMPOSSIBLE to negotiate a trade deal with Europe because each country can veto any deal, proving this is not a single country, and thus there is no substance behind the single currency. This is why I say Brexit is the only way for Britain to survive. It cannot negotiate any trade deals with the USA, China, Canada, or whoever because any other state can veto it. They surrendered their sovereignty and it is undermining the European economy.

 …click on the above link to read the rest of the article…

Is Turkey “City Zero” in Global Contagion

Is Turkey “City Zero” in Global Contagion

Last year Turkey’s lira crisis quickly morphed into a Euro-zone crisis as Italian bond yields blew higher and the euro quickly reversed off a major Q1 high near $1.25.

It nearly sparked a global emerging market meltdown and subsequent melt-up in the dollar.

This week President Erdogan of Turkey banned international short-selling of the Turkish lira in response to the Federal Reserve’s complete reversal of monetary policy from its last rate hike in December.

The markets responded to the Fed with a swift and deepening of the U.S. yield curve inversion. Dollar illiquidity is unfolding right in front of our eyes. 

Turkish credit spreads, CDS rates and Turkey’s foreign exchange reserves all put under massive pressure. Unprecedented moves in were seen as the need for dollars has seized up the short end of the U.S. paper market.

Martin Armstrong talked about this yesterday:

The government [Turkey] simply trapped investors and refuses to allow transactions out of the Turkish lira. Turkey’s stand-off with investors has unnerved traders globally, pushing the world ever closer to a major FINANCIAL PANIC come this May 2019.
There is a major liquidity crisis brewing that could pop in May 2019. 

Martin’s timing models all point to May as a major turning point. And the most obvious thing occurring in May is the European Parliamentary elections which should see Euroskeptics take between 30% and 35% of seats, depending on whether Britain stands for EU elections or not.

That depends on Parliament and the EU agreeing to a longer extension of Brexit in the next two weeks.

Parliament has created “Schroedinger’s Brexit,” neither alive nor dead but definitely bottled up in a box no one dares open. And they want to keep it that way for as long as possible. Their hope is outlasting Leavers into accepting staying in the gods-forsaken fiscal and political black hole that is the European Union.

 …click on the above link to read the rest of the article…

Super Mario Draghi’s Day of Reckoning Has Arrived

Super Mario Draghi’s Day of Reckoning Has Arrived

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” — MARIO DRAGHI JULY 26TH 2012

No quote better defines Mario Draghi’s seven-plus years as the President of the European Central Bank than that quote. Draghi has thrown literally everything at the deflationary spiral the Euro-zone is in to no avail.

What has been enough has been nothing more than a holding pattern. 

And after more than six years of the market believing Draghi’s words, after all of the alphabet soup programs — ESM, LTRO, TLTRO, OMB, ZOMG, BBQSAUCE — Draghi finally made chumps out of traders yesterday.

Draghi reversed himself after December’s overly hawkish statement in grand fashion but none dare call it capitulation. For years he has patched together a flawed euro papering over cracks with enough liquidity spackle to hide the deepest cracks. 

The Ponzi scheme needs to be maintained just a little while longer.

He’s not alone. In fact, all the major central banks have been working in concert since the day they broke the gold bull market back in September 2011, when the Swiss National Bank pegged the Franc to the euro which began the era of coordinated central bank policy.

And since 2013’s Taper Tantrum when then FOMC-Chair Ben Bernanke  
timidly announced a future without QE the markets have consistently tore at their resolve to normalize monetary policy.

Because when you paper over reality you don’t fix the underlying problems. The losses are still there, hidden in plain sight, held at mark-to-model prices, on central bank balance sheets. 

Ben retired and Janet took over. She held the fort for nearly her entire term, refusing to raise rates while Draghi sent rates negative alongside Japan’s Kuroda. 

 …click on the above link to read the rest of the article…

The ECB’s Quantitative Easing was a Failure–Here is What it Actually Did

The main reason why the ECB quantitative easing program has failed is that it started from a wrong diagnosis of the eurozone’s problem. That the European problem was a demand and liquidity issue, not due to years of excess.

The ECB had been receiving tremendous pressure from banks and governments to implement a similar program to the US’ quantitative easing, forgetting that the eurozone had been under a chain of government stimuli since 2009 and that the problem of the euro-zone was not liquidity, but an interventionist model.

The day that the ECB launched its quantitative easing program, excess liquidity stood at 125 billion euro. Since then it has ballooned to 1.8 trillion euro.

“Only” after 2.6 trillion euro purchase program and ultra-low rates.

Eurozone PMIs are atrocious. The euro-zone index falls from 52.7 in November to 51.3 in December, well below the consensus forecast of 52.8. More importantly, France’s PMI plummeted from 54.2 in November to a 34-month low of 49.3.

Unemployment in the euro-zone, at 8%, is double that of the US and comparable economies. Youth unemployment rate remains at 15%.

Economic surprise has plummeted as the ECB balance sheet reached 41% of GDP (vs 21% of the Fed).

More than 900 billion euro of non-performing loans remain in the banking system, which keeps a trillion euro timebomb in its balance sheets (read). A figure that represents 5.1% of total loans compared to 1.5% in the US or Japan.

Deficit spending is rising. Government debt to GDP has risen to 86.8%.

The number of zombie companies -those that cannot pay interest expenses with operating profits- has soared to more than 9% of all large quoted firms, according to the BIS.

…click on the above link to read the rest of the article…

The Tragedy Of The Euro

The Tragedy Of The Euro

After two decades, the euro’s minders look set to drive the Eurozone into deep trouble. December was the last month of the ECB’s monthly purchases of government debt. A softening global economy will increase government deficits unexpectedly. The consequence will be a new cycle of sharply rising bond yields for the weakest Eurozone members, and systemically destabilising losses in the bond portfolios owned by Eurozone banks

The blame-game

It’s the twentieth anniversary of the euro’s existence, and far from being celebrated it is being blamed for many, if not all of the Eurozone’s ills.

However, the euro cannot be blamed for the monetary and policy failures of the ECB, national central banks and politicians. It is just a fiat currency, like all the others, only with a different provenance. All fiat currencies owe their function as a medium of exchange from the faith its users have in it. But unlike other currencies in their respective jurisdictions, the euro has become a talisman for monetary and economic failures in the European Union.

Recognise that, and we have a chance of understanding why the Eurozone has its troubles and why there are mounting risks of a new Eurozone systemic crisis. These troubles will not be resolved by replacing the euro with one of its founding components, or, indeed, a whole new fiat-money construct. It is here to stay, because it is not in the users’ interest to ditch it.

As is so often the case, the motivation for blaming the euro for some or all the Eurozone’s troubles is to shift responsibility from the real culprits, which are the institutions that created and manage it. This article briefly summarises the key points in the history of the euro project and notes how the mistakes of the past are being repeated without the safety-net of the ECB’s asset purchases.

…click on the above link to read the rest of the article…

Italy’s New Government Eats Its Words, Joins Bank Bailout Club

Italy’s New Government Eats Its Words, Joins Bank Bailout Club

Well, that didn’t take long. And whatever happened to the Eurozone’s new bail-in rule?

Italy’s government, in its eighth month in power, has already bailed out a bankrupt bank, mid-sized Banca Carige, with public funds. If approved by European Commission and the ECB, it will be the fourth Italian bank rescue in just over two years. As Italian daily Il Sole 24 Ore points out, Italy’s populist government has adopted virtually the exact same playbook to save Carige that was used by its predecessor in the previous three resolutions:

The draft of the new Carige decree is a carbon copy of the one used by the Gentiloni Government for the bailouts of Monte dei Paschi di Siena (MPS), BPVI and Veneto Banca — identical in every detail from the rules on state guarantees to the mechanisms adopted…

It took just eight minutes for Italy’s coalition partners, Five Star and the League, to renege on their flagship promise never to bailout a bank, reports Bloomberg. The new decree will allow the government to guarantee Carige bonds up to a maximum value of €3 billion, making it easier for the lender to retain access to the funding market. The government also wants the option, if necessary, to recapitalize the bank by injecting as much as €1 billion into its coffers despite having lambasted the previous government for doing the exact same thing with MPS.

It’s not yet clear whether the proposed rescue of Carige will contravene EU state-aid rules, which are supposed to impose strict conditions on the “precautionary recapitalization” envisaged by the government. Carige is already under the administration of ECB-appointed administrators after failing to agree to a €400 million capital increase at the end of last year. So if there are any issues it should be easy for European Commission or the ECB to stop the bailout dead in its tracks.

…click on the above link to read the rest of the article…

The Delusional Leaders of the Eurozone

 I was looking forward to chilling with family and friends in Sydney this New Years Day, but Phil Dobbieruined it for me with this tweet:

I had forgotten that this was the 20th anniversary of the start of the Euro. But the Eurocrats in Brussels hadn’t. Some hours before the New Year commenced, Juncker and friends put out a press release extoling the virtues of the Euro. Virtues such as “unity, sovereignty, and stability … prosperity”.

Well so much for New Year cheer. With this one tweet, the EU put 2019 on track to be even worse than 2018. Using anyof those words to describe the Euro—apart perhaps from “unity”, since the same currency is used across most of continental Europe now—is a travesty of fact that even Donald Trump might baulk at.

Sovereignty? Tell that to the Greeks, Italians or French, who have had their national economic policies overridden by Brussels. Stability? Economic growth has been far more unstable under the Euro than before it, and Europe today is riven with political instability which can be directly traced to the straitjacket the Euro and the Maastricht Treaty imposed. Prosperity? Let’s bring some facts into Juncker’s fact-free guff.

I’ll start with Phil’s point about Greece. Greece’s GDP has fallen at Great Depression rates since the Eurozone imposed its austerity policies on it, and nominal GDP today is more than 25% below its peak.

Figure 1: Greek GDP and economic growth rate

Now of course that could be blamed on the Greeks themselves, so let’s look compare economic growth in the entire Eurozone to the USA (minus Ireland and Luxembourg, since in the former case their data is massively distorted by data revisions, and the latter has highly volatile data as well, and is so small—under 600,000 people—that it can safely be ignored).

Figure 2: Real economic growth rates

…click on the above link to read the rest of the article…

The Brewing European Debt Crisis

Macron is pushing for the European Finance Minister to raise money by selling EU bonds and then distribute the money to the 19-member Eurozone. France is very heavily indebted and here once again we have simply the goal to raise more money rather than reform. Because of the riots in France, Macron is trying to get the EU to fund France. They want to call this the European Monetary Fund and it would be pitched as stabilizing the Eurozone, but in reality, it is circumventing the austerity principles and budget constraints.

Juncker was the European Finance Minister to chair a body of European Finance Ministers from each member state. He would also become the Vice President of the European Union.
Juncker is seeking to use the European debt crisis that is brewing as the means to the ends resulting in the final federalization of Europe. If the EU raises the money and hands it out like welfare to the states, then they become addicted and totally dependent upon Brussels and thus eventually all sovereignty is surrendered.

This new European Monetary Fund would incorporate the European Stability Mechanism (ESM) which is a Luxembourg-based fund that lends money to states in crisis. They lent money to Cypris, Greece, Ireland, Spain, and Portugal. They were issuing their own debt but were not an EU entity. The ESM capitalization was guaranteed by the euro countries. Therefore, the proposal is really a takeover and it would be a way to funnel money to states such as France.

The Big Bet Against Italian Banks

The Big Bet Against Italian Banks

Italy

The eurozone’s third-largest economy, Italy, is marooned in a deep political and economic crisis, with seeming endless problems: an economy that has barely grown in decades, sky-high unemployment rates, ballooning national debt, an inability to form a stable coalition government and, lately, a looming showdown with the EU over mounting debt.

These have precipitated a wave of populism that has rejected the old establishment and brought in a new guard.

Unfortunately, that has done little to resolve another Italian bugaboo: a massive banking crisis.

European banks have accumulated about $1.2 trillion in bad and non-performing loans (NPLs) that have continued weighing down heavily on their balance sheets. Italian banks are sitting on the biggest pile of bad debt: €224.2B ($255.9B), with NPLs and advances making up nearly a quarter of all loans.

As if that is not bad enough, the banks now have to contend with potentially heavy penalties coming from Brussels after Italy’s recalcitrant leadership refused to revise the country’s fiscal 2019 budget to lower debt and borrowing.

The sharks can already smell the blood in the water, and investors have been shorting Italian banking stocks to death. Italian banks hold nearly a fifth of the country’s government bonds.

(Click to enlarge)

Source: Bloomberg

(Click to enlarge)

Source: Reuters

Short sellers have mainly been targeting medium-sized lenders as well as asset manager Banca Mediolanum and investment bank Mediobanca. According to FIS Astec Analytics data, the volume of these banks’ shares on loan—a good proxy for short interest—has shot to its highest in 15 months.

Short interest on Mediolanum’s shares now stands at 8.7 percent of outstanding shares, while Mediobanca has 15 percent of its shares sold short.

Rome Refuses To Back Down

…click on the above link to read the rest of the article…

The Eurozone Banks’ Trillion Timebomb

The Eurozone Banks’ Trillion Timebomb

Eurozone banks have fallen dramatically in the stock market despite the results of the stress tests carried out by the ECB, and the EU Banks Index is down 25% on the year despite year-long bullish recommendations from almost every broker. This should not surprise anyone because we have seen in the past that these tests are only a theoretical exercise. Moreover, stress tests’ results are widely challenged, and rightly so, because the exercise starts with the most ridiculous premise in economics: Ceteris Paribus, or “all else remaining equal”, which never happens. Every asset manager knows that risk builds slowly and happens fast.

Disappointing earnings, rising risk in the eurozone as well as in their diversification markets such as emerging economies, weak net income margins and low return on tangible equity are factors that have contributed to the weak performance of European banks. Investors are rightly suspicious about consensus estimates for 2019 with expectations of double-digit EPS growth rates. Those growth rates look impossible in the current macroeconomic scenario.

Eurozone banks have done a good job of strengthening their capital structure, reaching almost a one per cent per annum increase in Tier 1 core capital. The question is whether this improvement is enough.

Two factors weigh on sentiment.

. More than EUR104 billion of risky “hybrid bonds” (CoCos) are included in the calculation of core capital.

. The total volume of Non-Performing Loans across the European Union is still at around EUR 900 billion, well above pre-crisis levels, with a provision ratio of only 50.7%, according to the European Commission.  Although the ratio has declined to 4.4%, down by roughly 1 percentage point year-on-year, the absolute figure remains elevated and the provision ratio is too small.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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