Blain's Morning Porridge - Europe? Yes or No? Probably Yes...
Mint – Blain’s Morning Porridge – March 8th 2017
“We cannot all succeed when half of us are held back.”
Short porridge this morning – lots going on!
Yesterday’s porridge on the ultimate prospects for the Eurozone attracted lots of client comment. I was firmly put in my place by one European who asked what I really think: Is the Eurozone a buy or a sell?
Despite the slew of electoral mayhem coming our way in Europe, my conclusion is the Euro will probably survive.
Does that make me a contrarian?
We’re all very aware the European Common Market was founded to foster peace – to demonstrate to the fraxious tribes of Europe trade beats war. It worked. Europe’s political dreamers and visionaries perceived a glorious future for the United States of Europe – conveniently forgetting the differences underlying why we Europeans all dislike each other so much.
So… the single market morphed from a trading alliance towards a single polity –critically without a clear electoral/political mandate to do so. Creeping federalism and the lack of a democratic accountability scared the UK into Brexit, and is now blamed – probably rightly – for holding back European recovery.
What was planned as a peace project is now caught in the economic nightmare of the Euro. The austere financial discipline now required under the half-baked monetary union has caused electoral discontent – no surprise that following recession it’s proved nearly impossible to create jobs in less competitive economies. It’s the politics and the likelihood of electoral surprises stemming from the Euro that so scares the markets.
The Euro project is caught in a curious limbo. Timing was unfortunate in terms of the longest period of sustained global recession and economic uncertainty. Monetary union is now proving vulnerable to electoral backlash. But, this problematic monetary union phase was supposed to be a short period on the route to grander fiscal and eventual political union. Whether the current recurrent crisises blamed on the Euro (economic, political discontent, refugees, and the rest) and now facing the Eurozone can be overcome while the union project continues is the question.
At this stage the Euro project will likely prove just be too difficult to unwind.
Euro Zone states are caught in a maze of Target 2 imbalances and economic co-dependency meaning issues such as redenomination would trigger even great seismic shocks. So expect the ECB to continue to do whatever is needed to keep the illusion going – don’t worry about Europe’s Central bank tightening tomorrow. Even the Germans know they have to keep it going…
What we are betting on re the Eurozone is politics: Can the current democratic deficit towards closer union be overcome by the imperative for fiscal, monetary and eventually political union?
A German told me yesterday – “The Second Greatest Mistake we ever made was the Euro. The Greatest Mistake would be to unwind it.”
My guess – and I stress it’s a coin flip - is the project will continue.
On the other hand, I wonder just how difficult an unwind might be?
One of the things I read yesterday is that nearly half the current Target 2 imbalances are due to the ECB’s QE programme. Each national ECB branch (the former central banks of Eurozone members) bought back its own country’s bonds. (I’m still trying to figure how that works from an accounting perspectives.. but.)
So if the Bank of Italy holds 400 bln of Italian Government Debt, and the Italians decide to exit the Eurozone… what’s stopping the Bank of Italy just writing off that debt, thereby reducing Italian debt to a more manageable level?
And finally this morning, let’s raise a toast to International Women’s Day – life is so much easier when shared equally.
Full service again tomorrow… but in the meantime..
Fastnet Race Charity: http://www.sail4cancer.org/fastnet-2017-bill-blain