I don’t know if many people heard it go whizzing by, but international markets dodged a bullet last week. We’re safe for now, but that madman with a gun is still standing there…
Whizz.
That was the sound of a bullet with Europe’s name on it. It came within a hair’s breath last week of felling the economic giant, but this story’s not over yet.
For those who missed it (and judging by the media’s reaction, that’s most people), the German constitutional court decided that the European Central Bank’s ‘whatever it takes’ policy (similar to the money printing bonanza in the US) could continue.
Well, not exactly. Basically they said, “we don’t like it, it’s probably illegal, but there’s nothing we can do about it. Only the European Court of Justice can strike it down.”
If they had struck it down themselves, markets would have freaked. Troubled Euro countries – how long’s the list now? Greece, Italy, Spain, …France? – could have been in serious trouble. As it was, it was happy sailing on international waters…
… for now.
To give a bit of background, basically Germany is unhappy with the ECB being the buyer of last resort for Eurozone government bonds – basically propping up any incompetent government. Germany, who has a competent government, isn’t happy their hard earned money being fritted away like this.
The ECB announced its bond-buying program in mid-2012, as Europe teetered on the brink of outright crisis. And it is probably fair to say that that move saved Europe, and prevented borrowing costs in Italy and Spain from soaring to back-breaking levels.
But the problem with policies like this (as America is finding out) is that once you put them in place, they’re hard to reverse. Germany would like to see the policy unwound. Others would like to see it go further – to follow the US, Japan and the UK into Quantitative Easing and tackle deflation head on.
Until this decision, it had seemed like such a move would have been illegal. Now, that’s not so certain.
So the Germans who wanted to muzzle the ECB have ben thwarted, and it’s happy days for the market. Sure, we dodged a bullet. But the madman with the gun is still standing there.
This issue is far from dead, and in the long-run could come back to haunt Europe – with a vengeance.
The worst case scenario is that this will go down as one of the first steps towards the self-destruction of the euro.
Because we now have two of Germany’s most respected institutions – the constitutional court and the Bundesbank – on the record as being seriously opposed to the policies that are now a foundation of the euro itself.
As long as the German economy is strong, this shouldn’t be such a problem. Most citizens don’t normally spend much time worrying about what their central banks are saying.
But if things get tough – and all economies go through rough trots – then we have the makings of an anti-Germany conspiracy theory. And it plays upon the idea that hard-working Germany is propping up the free-loading Mediterranean.
And the surpa-nationalist EU and euro make for easy political targets, as the struggling European economies already show. The EU’s own polls show the popularity of the union plummeting in core countries such as France, Italy and Spain.
In that sense, May’s European elections will probably be a demonstration of strength for anti-EU parties across the continent. Anti-European or borderline racist parties, such as the French National Front, could make serious inroads in France, the Netherlands, Greece, the UK and Austria. If that happens, it will be a real shock to markets and could make it hard for centralist politicians to get anything done.
The real danger though is that the euro and the Euro-experiment have taken a fatal hit. The crisis, and the following response have stripped the project of support and legitimacy and exposed the design flaws in the single currency. The biggest flaw remains the lack of a large central budget and a transfer union of the sort that makes other federal currencies, like the US dollar, work.
They always knew it was a problem, but they hoped they could “get away with it”. If it’s one thing my car’s taught me is that “get away with it” strategies rarely work. You need a new head gasket, but you could probably get away with gaffa tape.
Europe is learning that lesson the hard way.
And the only thing that could save it from here is a more powerful, central European state – like a United States of Europe. But support for that kind of concept is in free-fall across the continent – even in Germany, one of big Europe’s long time champions.
The outlook is bleak.
And so where does that leave us?
Well, in the short term, Europe may soon be adding its tap to the gusher of global money. Interest rates have already hit rock bottom, and the only move from here is a US-style quantitative easing.
There are few bright points in Europe’s economic data pack, and the sagging economies in Italy, France and Spain will be particularly keen to see something drastic.
So we may see hot money from Europe taking the place of US money as the Fed pushes on with its taper strategy. This will see the continued spectacle of hungry money looking for a home anywhere stable and paying decent returns…
Like Aussie property.
The other thing to consider is just how likely another Euro-shock is in the near term. We got away with it in 2012, but the underlying problems haven’t gone away.
If the tensions break to the surface again, and you have to think it’s only a matter of time, it will hammer global share markets. It will spark a flight to safety.
… like Aussie property.
And so, it looks like it’s a double win for property… provided of course Europe doesn’t throw the whole world into chaos.
But if that happens, nothing will save us.
Graham J. Bradbury says
The UK can thank its lucky stars that they had a Government that refused to sacrifice the pound and the independence of its people. The Irish know what that means now. The Scots can thank their lucky stars also and start to rethink their seperate country referendum.
The Australian people can thank the mining industry for their safe ride not the stupidity of the Rudd Government simply handing out the government money that was saved by the Howard Goverment. I hope by July we will have an economically productive Federal Parliament installed.
Tom says
If we hope hard enough, pigs might fly too!!!
Simon Roberts says
For a long time now (in fact, since its inception) I have seen a unified European currency as a policy desined to fail. The only remaining questions seem to be when it will be officially announced as a failure and how the countries fool enough to buy into it will withdraw from it.
I suspect your suggestion of national elections in many of the member States deciding their individual withdrawal is close to the mark. Countries which have seen the Euro make their exports and infrastructure unaffordable and given them no financial flexibility to improve their outlook will surely vote to remove themselves from the EU. This will be the start of the “orderly retreat”.
However, if public swell is great enough in those countries which are seen as fundamentally funding the poorer or worst economically managed European countries in the EU and they, too, abandon the Euro, then all bets are off. I suspect this will see European stocks fall as the US stocks did in the 2007 GFC. And then how do they print money which retains any value when they are not the International Standard and their owners are one by one abandoning it?
I think if I was in the EU I would want to be abandoning the Euro as quickly as possible! (Don’t be the last one holding the Euro as it becomes a hot potato similar to the US financial “assets” which were really unaffordable loans given to high risk borrowers and/or housing estates built well beyond demand, nicely packaged together and sold by an “institution” as a “portfolio”.)
Germany is probably the only country which has the capacity to retain some value in the Euro as the other EU members sequentially revert to their previous currencies. Even the Germans won’t “get away with it” but they might just be able to recover from the damage the Euro has done and is doing. Many smooth talking bankers and politicians have made a lot of money from this experiment. But noone of any intellect thought it would really work. And those who suffer most are the middle and lower class. Those who will suffer longest are today’s European youth. Hopefully, many of them make their vote count as soon as they are able.
Frank Iwanowski says
You are right when you identify that the major flaw with the Euro is the total lack of a centralised budget or economic strategy. I would suggest that the north v south (approximately) divide is also a huge problem.
I believe that the northern countries assumed (hoped?) that they could drag-up the back-sliding southern countries by their boot-laces to adopt the relatively hard-working (and THEN reap the benefits) attitude of most northern Europeans. Conversely, the southern countries lay back and were happy that they could continue with their very relaxed lifestyle secure in the knowledge that they would be supported by the economic strength of the northern half. One example – Greek public servants virtually have a job-for-life. Work? What’s that?
I am only surprised that the results we have observed for the last few years took a while longer to eventuate than might have been anticipated.
Michael Fordyce says
I love the last line…nothing will save us!!! Who we going to call??
Diesel says
Egypt1875
13/2/2014 1.55pm
Beware – “the Ides of March”.
If you study the history of the 19th & 20th century of Europe and going further back into the history of Europe, many parallels to the current situation can be recognised – albeit in a different guise. The USA was not a dominant force at that stage and we – the masses (through our masters) – did not have the ability to wipe away almost an entire generation with weapons of mass distruction.
Now this is alarmist talk – and in this rational 21st century we the masses could never entertain such a possibility. But stranger things have occurred. Remember the “cold war” detente of the 1970’s.
What is happening at present (apart from greed and self-absorption by many people) is the inevitable coming together of the disparate groups on this planet.
The northern Europeans + Germans and probably British vs the southern mediterranian countries/ The Arabs of all persuasions / the USA (and Japan) and Asians (i.e China – by and large)
At the moment this is being played out in an economic arena – but so was the situation after the 1st world war and that situation led to the 2nd world war. There are no “real” winners in war – but lots of losers.
There are no easy answers to greed/selfishness/self-absorption etc. etc. etc…………
Now I am NOT suggesting war is possible. I hope we are smarter than that
But what we do not appear to have worked out yet is the need for “smart negotiation” between different ideas – especially at the highest levels of government. As an example – the mediterranian countries vs Germany – as discussed in the article.
Go and read any book about what happened after the 1st world war that led to the 2nd world war. The main players are still present – but the interesting point is the game has expanded to include Asia in a big way and of course the Arab issues.
Lack of money does strange things to seemly rational people – when they see their life or their loved ones lives threatened by lack of money and its ability to satisfy wants, however meagre they may be.
Godspeed.
Tom says
One can question the assertion that there is no winner in war. The military Industrial Complex and the financiers do EXTREMELY well. During the fighting, the Public Purse finances their research and development costs and pays through the nose for their expendable, wasted products, leaving them in even more powerful positions for the subsequent period of peace.
The worrying fact is that currently, these two forces completely control the US & European Governments. (How powerful are they in China? Their army is very influential.) At the drop of a hat, they can drag the world into war. Democratic institutions, pawns in their games, are powerless to counter their wishes.
With the prospect of a nuclear catastrophe having been averted in the second half of the twentieth century, the real power brokers have instead drawn most of the major economic powerhouses into limited localised conflicts, sucking the lifeblood from their own communities. The Germans have been lucky because since WW2, up until recently, they have only been allowed to have domestic military expenditure. Freed from the burden of arms races, and keeping up with the Joneses, they have successfully applied themselves and their resources to economic and manufacturing developments. Hence their current position of power and influence. The Allies won the war, but lost the peace – well & truly!!! The Germans have the only healthy Western, manufacturing economy.
Garrybreezmann says
Thank you Jon for this thought provoking article.
It seems to me that the German Constitutional Court in Karlsruhe has thrown down the gauntlet to the ECB. Kalsruhe has insisted on German constitutional supremacy in this matter. This is a final showdown: The German Constitution may not comprehend the crisis-management strategy pursued by the ECB. There has been significant mutterings in Germany every since Mario Draghi announced in 2012 that the ECB would embark on unlimited sovereign bond purchases. In fact, even if the ECB wins its court case, a majority of the German Justices on the Constitutional Court are now in agreement that Draghi’s bond purchases are unconstitutional for Germany.
The Constitutional Court has the power to forbid Berlin from contributing to efforts to save the euro and also has the power to force Germany to leave the currency zone entirely. The Court is independent of government and will not be persuaded. The Court has ruled by a 6:2 decision that actions taken by European institutions which are not comprehended by treaties are ultra vires; ie, they violate the sovereignty of affected EU member states.
There are three conditions set by Karlsruhe to ensure that a bond-buying program not be ultra vires: An upper limit to the bond purchases must be set; debt haircuts for the countries in question must be excluded; and the same conditions that apply to recipients of European Stability Mechanism (ESM) aid must apply to those countries benefitting directly from the bond purchases. In short, the American model will not be acceptable to Karlsruhe.
Constitutional Court President Andreas Vosskuhle made the following point very clear during oral arguments last summer. The court, he said, is focused on establishing “legal boundaries to the ECB mandate” and seeks to “strengthen the guarantees provided by our constitution.”
If Luxembourg ignores Karlsruhe, it will, in my opinion, be a very short ride downhill for the Euro zone.
Jejoreli says
Are you kidding me? Did everyone miss the plug: “and paying decent returns…Like Aussie property”. Ke? Like stuff all growth and net yield below a term deposit?
Let’s check back in 12 months and see how much Europe has grown and how flat Australia has been. If unemployment ticks up a bit, along with interest rates – Aussie property will simply result in more defaults, lower or flat property prices and bigger profits for the banks.
OneWorld says
In many ways the Balkans represent the disparate groups of the world in miniature. In Bosnia & Herzegovina for example, the masses are now so fed up with corrupt governments, lack of every description caused by unemployment / no economy to speak of and social, ethnic and religious turmoil that they are out in the streets protesting every day.
How long will it take before this deep frustration becomes a wildire spreading and intensifying into something more sinister? People need work, food and hope in order to be able to build a future. The majority of Europe’s youth today is denied hope for the future because the EU has failed to build a thriving European economy. Instead it has forced smaller countries and economies to the edge of the abyss of oblivion because the formula is deeply flawed. The EU is destined to fail because inevitably citizens of the new, second-class EU countries abandon their own failing economies and flee to Germany for a better life, while those unable to leave become more and more desperate.
This outcome does not lead to union, it creates a stark contrast between the haves and the have-nots in Europe, which can only lead to social turmoil, chaos and anarchy, if not war.