Euroscepticism Grows In Germany
A noteworthy reader-led discussion just took place in response to my previous article Euroscepticism Grows In Germany as 63% Say the EU is Excessively Bureaucratic
One of my readers, PecuniaNonOlet, commented “I thought Germany was the biggest beneficiary of the EU.”
That is (or was) an accurate assessment. The response from TexasTime65 was perfect.
“They were the biggest beneficiaries. But now they are potentially the biggest losers because all the other countries owe them a lot of money and have no real way to pay any of it back unless Germany becomes a net importer of goods and services (which is politically a no-go in Germany),” replied TT.
Trade Statements by German Finance Minister “Utter Lunacy”
I have commented on trade aspects many times before.
For example please consider my September 13, 2016 article Michael Pettis Calls Surplus Trade Statements by German Finance Minister “Utter Lunacy”
At that time the six largest deficit countries owe a collective 797.3 billion euros to the four creditor countries, primarily Germany.
Target 2 Imbalances
It’s been a while since I reported on Target2 (what countries owe each other).
Spain, Italy, Greece, and the ECB now owe Germany (alone) over a trillion euros!
Tiny Luxembourg is a creditor to the tune of 267 billion euros.
The creditor total is over 1.5 trillion euros!
How can that be paid back?
It can’t. Target2 is one of the fundamental flaws of the Eurozone.
The ECB denies this and so does the pro-EU clan in general, but Target2 imbalances are a measure of capital flight.
Those imbalances can only be paid back in one of these ways: Default, forgiveness, monetary printing and handouts against Maastricht Treaty rules, or a very prolonged period in which Germany becomes a net importer of goods and services from Spain, Italy, and Greece.
Place your bets, but I rule out the last choice.
Euro What If?
Let’s explore another question “What if the UK had moved to the Euro?”
Undoubtedly the UK, like Germany, would have been a huge creditor country.
It would have then been stuck, like Germany is now, with bailing out the EU debtor states.
There would have been eventual pressure on the UK to pony up for bailouts even if the UK stayed in the EU but remained on the British pound.
This is yet another excellent reason the UK was wise to Brexit.
Income Transfer Schemes
Long-time readers will note that occasionally I mention a pending currency crisis.
Issues like the above are why it could start anywhere. The US, EU, Japan, and China all have serious issues.
Michael Pettis and I discussed a different form of “who pays?” in Income Transfer Schemes US vs China, Which Country is in the Worst Shape?
Pettis concludes that China is in the worst shape in at least one measure.
Demographically speaking, Europe and Japan are at the top.
Pettis made this accurate overall assessment regarding China: “Because these transfers must ultimately be funded by liquidating government assets, in the end they cannot help but represent a significant shift in the distribution of political power.“
In response to a my question regarding the EU, US, and Japan, Pettis replied” The extent and direction of the transfers are different, Mish, so I’d argue that the political implications are likely to be different, but one way or another we should expect political changes. You can’t shift income without affecting the distribution of power.“
Currency Crisis Starts When and Where?
The political repercussions of Target2 bailouts are still unresolved.
EU Traget2 imbalances will not grow forever, nor will the losing policy of Abenomics last forever, nor insane deficits in the US, nor numerous setups in China.
People who assume the next currency crisis is bound to start in the US are simply too US-centric.
A currency crisis could start in the US of course, but my belief is something blows up elsewhere first.
Since it is impossible to say where, when, or how, I will again be accused of making a pointless observation.
But I do have a practical point best addressed with a question: Got Gold?
Mish
The EU’s fatal flaw is monetary union without political union. They should have stopped before the monetary union and just had integrated markets. To avoid the drag of currency conversion charges they could have used some type of government backed bulk conversion at market rates for smaller transactions up to a specified limit, say $1 million dollar equivalent. Larger transactions typically had low overhead (conversion fees) anyway.
The US’s fatal flaw is reserve currency status. It allowed us to become complacent until it was too late to fix the structural rot (the hollowing out of our industrial base) that it caused.
Both of these problems are so large that they can’t be fixed without a lot of pain. The longer we wait the greater the pain will be. So nothing will be done until a solution is forced upon us.
I got gold but better are Gold/Silver mining stocks that leverage precious metal prices and have lower PEs and greater CFO growth than any other stock group.
Althought its a flattering assumption actually the UK is in a near permanent trade deficit with the EU. A supposed trump card in the negotiations although never played and one of the reasons why the trade issues won’t be so bad as the UK is mainly a buyer not a seller.
Germany has been vendor financing, but of the main creditor nations, who hasn’t?
All good points about Germany benefiting early and now paying a price with noncollectable debts, but there’s another side. Businesses that operate across Europe have less transaction costs and don’t need to hedge across multiple currencies. Consumers are more prone to travel and purchase goods across borders. Yes some member countries like Spain or Portugl wind up importing the high prices of Germany and France but overall economic activity is higher.
Yes, the EU and the Euro in particular, with interest rates cut in half overnight, gave a artificial,cheap debt boost to economic activity overall, that’s true. As far as I remember though individual countries were doing just fine, in a healthier more sustainable way even, BEFORE the euro, we already had open borders that was practical(I had a import export business), megalomaniac ambitions should ve stopped there ! We are now stuck with a intrinsically sick, disrupted, unsustainable system. Was it worth it, short term benefits long term misery ?
ES is Spain, Not Estonia
EE is Estonia
DB’s math was wrong
You are correct.
Brain fart on my part.
Soros did the UK a very big favor when he broke the Pound on Black Wednesday September 16, 1992,
I was working in a dealing room at the time. I remember hearing the gasps as our sterling money market dealer shouted that they’d raised the base rate again from 12% to 15%. It started the day at 10%.
I was in Paris in an equity dealing room the same time too. The next day I was in London sounding our clients. At first they were down then they brighten up when they realized that rates were dropping like a rock, the Pound was down, the market was down and that that meant that the UK market was a screaming buy. Euphoria came back with a vengeance.
The joys of a truly floating currency 🙂
Fear and Greed and nothing between. I love it.
…a silly song pops up in my mind, Those Were The Days My Friend (Mary Hopkins) We are now mired in a algorithmic, digitalised mess…it is called progress…
An old Italian grandfather was telling his grandchildren stories about his time during the war. One of them reproached the grandfather for giving the impression that he missed wartime since his stories where upbeat and funny. The grandfather replied that it wasn’t the war he missed. What he missed was his youth..
Not only youth… I remember my father telling me about the war , he was a armed officially confirmed resistance member at the age of 17, then joined the liberating american army under Patton, pushing forward to Germany, got caught in the Battle of The Ardens… that awful feeling of ‘freedom’, anarchy even, having to Kill not to get killed, stealing to survive, being on the alert all of the time, adrenaline constantly flowing… Isn t that what life should be about, is our smug, taking everything for granted existence really worth to be called life? At the time people didnt even know what “depression” was, according to what he told me though he must ve suffered a post war one, having difficulty to adjust to ‘normality’ again….
My wife’s uncles were both killed in the Resistance. One was caught, tortured and dispatched with a bullet in the back of the head. The other one was caught and tortured but since he was only 17 years old they took pity on him and sent him to Buchenwald instead. He survived the camp but his health and spirit was broken and he died a year after liberated. When I see some people in the US proudly proclaiming they are part of the “Resistance” and telling everyone I would like to laugh but I can’t. I see it as just obscene.
Well….yeah, I guess so …sigh
I love listening to you old pros talk trading. I’m probably lucky I grew up in a place and time where I never realized that kind of job even existed until I was about 30 years old.
I’d have been completely sucked in by the adrenaline rush of that kind of work….I’d probably be dead already, or dead broke.
You would have done well I think. You are an information junkie.
What is to keep Germany from using their surplus to buy farms, homes, apartments, and businesses in the debtor countries?
Because the debtor countries will refuse to sell them to Germans.
I don t think they’ d refuse, Mallorca is already more German than Spanish, in fact, if I remember well, rumour had it that Germany offered to buy the entire island which Spain refused. That being said, China seems to be buying up the US (and other countries) with its surpluses….and that s no rumour…
I think, the rumor that Germany wanted to buy Mallorca is folklore, but the facts on the ground certainly promoted that folklore.
Good for the Germans to carve out their own homeland in the sun, unlike the homeland they are losing.
It’s clear to me that the Euro is the most vulnerable and potentially the most valuable depending on how it breaks apart. There is a feeling that the EU expanded too much and let in countries that weren’t ready economically and in other cases just weren’t a good fit. The original membership was basically a German-French-Italian club with a couple of small states stuck on and formed a block that contained almost all of Europe’s industry, finance and wealth. That is still true today. It had a unity and since consisting of only a few members it was much easier to reach consensus on decisions. Some people believe that the EU should shed the more unsuitable members and go back to the core. That wouldn’t change the debt picture but would make it more manageable. It would change the debt from internal to external and allow more flexibility as to write-offs, write-downs and forgiveness. If Germany wants out so will Holland, Belgium and France. If they go back to the core then it would be a very strong entity with tons of industry, finance and scientific institutions. Its’ money would be nice to own.
Charles-Maurice de Talleyrand-Périgord once said that the art of statesmanship is to foresee the inevitable and to expedite its occurrence. I wonder if I am seeing that now with what is happening.
The concept of european integration must have started during WW2 with the formation of BENELUX …next came La Communauté Européenne de Acier et Carbon with six countries, ( Be, Ne, Lux, France, Germany Italy) next Euratom and the CEE(1957) with the same six countries again. With hindsight I d say that s where ambitions should ve ended, definitely as far as a common currency is concerned. I really don t understand how it occurred to those very clever people, for that s what they are supposed to be, to integrate Germany and Greece into the same currency system…. Short term benefits of course, but nonetheless shortsighted stupidity that was…
It was hubris.
Do you really believe that the elected representatives of the people are exceptionally smart? As stated, more hubris than brain.
Friday afternoon question:
Is is proper to refer to Caitlyn Jenner as a Log Cabin Republican?…..or is there some new, more appropriate term for a trans Kardashian candidate?
She’s a Big Tent Republican.
Just another Lizard Person with a bad human suit.
She was beautiful when she won the Decathlon. I remember that finish like it was yesterday.. They even put her on the Wheaties box. I wonder if they’ll reprise that if she wins the gubernatorial race.
Estrogen, Breakfast of Champions.
In answer to one question, “What if the UK had moved to the Euro?”
I think the Euro would already have failed.
It has been my belief that the EU will ultimately implode resulting in no or few members.
The countries that leave will then revert back to legacy currency and run the presses day and night, paying back German and French banks (maybe US banks) in worthless paper thereby causing those banks to implode.
I always felt the EU was a giant vendor financing program for Germany et al,…in other words, lend and lock members into euro and then control Euro so it cant be debased…..with little thought for ultimate consequence…of members leaving and therefore German and other banks are screwed…see “Charles Poor Kindleberger”, “the World in Depression, 1929-1929”.
Different era, same game, “beggar thy neighbor part ………..?
“So…will the EU manage to issue its own sovereign bonds”
That has been the ongoing battle for decades. It is not legally possible.
And for the first time ever, the German Constitutional Court this year is showing signs of nervousness against creeping debt mutualization schemes of the EU Nannycrats.
I read a Eurointelligence article on that subject a few months back. I will see if I can find it.
Bottom Line: Unless Germany changes its constitution to allow it, it will not happen.
One way or another, however, Germany will pay.
A crisis looms.
Germany is heading to the Greens and no way it will do anything but go deeper into EU/Euro support.
My take is they will try to compensate for costs by looking for more export market capture – Russia & China – and will pull away from US influence.
Tension will come as they will want their cake and eat it. Cosy up to Russia and China but maintain US protection.
The EU won’t break or collapse, the sheeple will go along with the Industrial elite and politicians vested interests.
Germany s getting used to the evolving situation….Reminds me of the frog and the boiling water ….
People are slowly forgetting what the idea of their own countries means. Instead it is endless show and distraction to replace or occupy what was previously national agenda. Half the countries in europe couldn’t govern themselves again if they tried, because themes are so diverse now and society so atomised or dispersed. If they put up with the last twenty years then they aren’t likely to have any better idea. It’s just depressing to watch, countries and people who had a strong meaning and place having to re-invent themselves (into what?) to try to regain that, if they even remember how that was. Eventually I guess they will see and know no other way but what is proposed to them by EU.
How can Estonia pay back a debt of €357K per person?
ES is Spain, Not Estonia
EE is Estonia
So…will the EU manage to issue its own sovereign bonds, using subterfuges like the “Green Bond Program”……..or will German citizens vote in right-wingers who will pull the plug on the Euro in the middle of the night some night and issue new Marks?
I’ve thought for a while the 2021 elections would be one of those “pivotal moments”..but most of the people I talk to from Europe think the center left will hold. But I didn’t think the US could elect a Trump, either, so who knows?
I stand by my previous statement….if Germany leaves, the EU won’t last long at all…it will turn into a race to see who can get out the fastest….but it won’t matter. It will likely spark a global crisis that won’t end well.
Germany is going nowhere. Only the Swedes are bigger worry guts. They won’t do anything but go along.