The Unfolding Economic Crisis in Europe

By: Christopher M. Quigley

B.Sc. (Maj. Accounting), M.I.I. (Grad.), M.A. www.wealthbuilder.ie

Since October 24th, the German newspaper Der Spiegel has been running a fascinating series of essays on the unfolding economic crisis in Europe.

The scope and detail of the series has caused a bit of an online stir since this bastion of German mainstream journalism painted a very negative view of the future; accordingly, many are wondering whether the German elite are finally beginning to question the sustainability of the current monetary paradigm.

The main issues addressed in the articles were the lack of economic inclusion, the instability of contemporary European economic policy and the increasing wealth disparity among European social groups. One example with regards to the latter outlined how, in the Swiss Canton of Zürich, the 10 richest residents own as much as the poorest 500,000.

Surprisingly, Der Spiegel was very critical of the European Central Bank. The paper went to pains to point out that despite years of easy monetary policy the Euro was still very much a vulnerable project and highlighted the fact that while many problems still remained there was “no more ammunition” left in the ECB’s arsenal of “weapons”.

[Read: ECB Policy Misstep Poses Biggest Risk to Markets]

This “conclusion” perturbed a number of Irish politicians because vary rarely has such a negative German spin been placed on European monetary policy. Upon reading the four articles, one is left with the distinct impression that Euroland is a failing entity exhausted from years of fighting ongoing crises ready to finally roll over and die when the next recession hits.

Thus, despite the glam and glitter surrounding the memorial celebrations for the fall of the Berlin wall, things are not so rosy in the European garden. Next year the British go to the polls to pick a new parliament. The English Prime Minister David Cameron has publically stated that if he wins he will hold a referendum to take Britain out of the European Union. Many believe that such an event might just be the catalyst to push the EU over the edge. 2015 could prove to be a momentous year for Europe and it is my view that Der Spiegel is beginning to see the writing on the wall.

European Deflation Raises Its Ugly Head

Apart from the issue of economic, social and political exclusion, Europe’s other major problem is that of deflation.

To combat a serious collapse in the circulation of money the ECB has embarked on the drastic policy of negative interest rates. Here is what Simon Black of Sovereign Man had say on this matter:

It Begins: German Bank ‘Charging’ Negative Interest To Its Retail Customers

Central bankers today have a delusional view of the world. Just three months ago, Mario Draghi (President of the European Central Bank) embarked on his own folly by taking certain interest rates into NEGATIVE territory. Draghi convinced himself that he was saving Europe from disaster. And like Don Quixote of Spanish lore, everyone else has had to pay the price for his delusions.

On November 1st, the first European bank has passed along these negative interest rates to its retail customers. So if you maintain a balance of more than 500,000 euros at Deutsche Skatbank of Germany, you now have the privilege of paying 0.25% per year… to the bank.

We’ve already seen this at the institutional level: commercial banks in Europe are paying the ECB negative interest on certain balances. And large investors are paying European governments’ negative interest on certain bonds. Now we’re seeing this effect bleed over into retail banking. It almost seems like an episode from the Twilight Zone… or some bizarre parallel universe. That’s the investment environment we’re in now.

In my opinion the main reason why this deflationary banking policy is spreading throughout Europe is the fact that stratospheric structural unemployment rates exist among European youth in Cyprus, Greece, Portugal, Spain and Italy. Seven years and no strategic initiative has emerged from Brussels to tackle this serious human catastrophe. How long it can continue without social breakdown is anyone’s guess but it is this factor which is behind regions such as Catalonia and Scotland seeking to “go it alone”.

Many believe that the only long-term solution to Europe’s economic malaise is reversion back to a union of sovereign states within an economic union rather than a political and monetary one. Such a move would allow the inefficient southern European states devalue their currencies and thus achieve economic competitiveness. However, it would appear the powers that be will not countenance such a move. Sometimes it requires fate to take a hand. I am sure in 1989 the politburo of the Soviet Union did not wish to see their hegemony diminish but their Empire collapsed, not due to desire but due to the sovereign power of economic truth.

Is the Market Preparing to Go Hyperbolic?

Despite the recent run up in the markets since the 17th of October, when you look at the S&P 500, the Dow Industrials, and the NASDAQ, there is no evidence to be seen of real momentum breakdown.

Yes the market advance has lost some power over the last week but this looks to me like the market is merely catching its breath in preparation for a strong rally into the New Year.

Such price action allows the main indices to wear down their overbought positions through time rather than through price retraction.

Thus while, ideally, I would like a nice pullback to give some technical support to new long positions entered into I do not think it is going to happen. Thus, any major moves up should be taken advantage of as I believe the market has a higher probability of going hyperbolic in early 2015 than contracting.

Chart: S&P 500: Daily