Blain's Morning Porridge - Europe's political and policy failures will export recession!
Mint – Blain’s Morning Porridge – Feb 1 2017
“Roll up that map, it will not be wanted these ten years…”
As predicted, Donald has declared Germany to be a currency crook! Shock, Horrow, Quel Surprise.. Helpful? Not.
So begins the second month of 2017 and I indebted to my pal Anthony Peters for introducing me to two new concepts: The Trump Jump and The Trump Dump! Far from wondering just how spectacular global recovery is going to be, rising uncertainty means there is now a serious debate kicking off on just how vulnerable the global economy is to renewed downturn.
The Global Financial Crisis 2007-2021?
On the basis the IMF recently increased estimates for global growth, and Europe has been posting improbably better numbers, my inner-sceptic finds myself increasingly beset by a contrarian sense the bears are massing to over-turn the rally we’ve seen post US election.
Recent numbers across the globe have been better, but markets remain profoundly vulnerable to Trump driven-uncertainty. In Trump’s protectionist driven dream, he’s increasingly becoming aware the strong-dollar is an issue – so what chance rate-hikes when the rest of the globe is myred? And how long before he throws further temper-tantrums about the rest of the world also being currency cheats!
Yet, Trump is Trump. Jump or Dump?
Europe may be the nexus of the real ongoing economic crisis… Yes, I know you keep reading Europe is in crisis, but it hasn’t collapsed and the Euro remains functional.. But, but and but again.. The fact Europe will carry on breathing doesn’t mean it’s healthy! Take a look at French and Italian bonds (plus the sell-off in Greece) and you will sense the same old déjà vu all-over-again..
I’m struck by the growing number of serious market watchers now focused on Europe as a prime driver of global recession. Bond markets should love it: recession in Europe keeping global rates low, thus avoiding the Gotterdammerung of the bond market crash we’ve been expecting for years.
The simplistic arguments predicting Europe will remain depressed and a deeper source of recession focus primarily on looming crisis points through this year: these include the familiar threat of elections in the Netherlands, France and Germany, the ECB’s taper schedule, and the fact the IMF will shortly walk away from Greece. However, these are “events”, and as such more likely to trigger market spikes and troughs rather than fundamental shifts – 2016 demonstrated “shock-events” like Brexit or Trump did not cause the crisis market analysts confidently predicted.
Potentially more troubling and longer lasting are the ongoing and unresolvable policy failures that remain at the core of the single currency path to a European Superstate.
My chum Mark Blyth, Professor at Brown University (and a fellow Scot), has repeatedly pointed out that Europe lacks solutions to the current “one-size fits none” problems of stagnation and unemployment while fiscal solutions have been declared illegal. He warns of the “second-best strategies that lead to second –best outcomes in both politics and economic to further stress the already stressed economies and polities of Europe.”
Even more damagingly – EU policy initiatives are stalled and will continue to struggle to respond to negative forces.
Structural reform is simply not happening. Lending is blocked because “credit channels” depend on essentially unfixed banks. Monetary experimentation to drive growth and increase inflation has failed – but is the only option legal for the ECB. European initiatives to drive simpler closer markets, such as Capital Markets Union are hollow, and mired in bureaucracy.
Sadly, in the face of current politics like Brexit, Frexit or whateverexit, There are short-term political incentives for European politicians not to fix Europe. Electorates are unhappy with further Union – although are generally far more favourable to the concept of Europe than the Anglo-Saxons believe!
The point is – Europe will probably not collapse, and the Euro will remain its currency – but nothing is likely to fundamentally improve growth, inflation and employment prospects across the benighted continent. While we are seeing Policy and Politics moving into a new fiscal space in the UK and US, it aint going to happen in Europe. Just like the wound on my chest, Europe remains a festering sore!
I’ve attached a recent article from The European Journal of Economics and Economic Policies by Professor Blyth – “Policies to overcome stagnation the crisis and possible futures, of all things Euro”. Well worth a read!
Meanwhile… out of time..
Bill Blain