Yet again I find myself wondering about what’s really happening in Europe.
In a conventional world, the fact that European stock markets are hitting record highs while European bond markets are at record low yields suggests we are in the ultimate Goldilocks environment – where everything is just right, we’ve got no inflationary wage pressures and producers are seeing steady and growing demand for their products. It sounds like the perfect perfect world – and utterly unlike the reality of political dissent, 10% plus long-term unemployment and deflation that is the real Europe.
We all know that Europe is (in some case literally) a complete box of frogs. We’ve got mixed signals across the continent as Germany’s economy finally shows some signs of growth, expanding at a staggering 0.7% in the last three months of last year. (In case you were wondering – I was using “staggering” in a sarcastic sense.) Spain also posted positive signals and is even creating some jobs.
On the other hand, France is economically flat-lining, and the government doesn’t have a clue how to use the emergency economic defibrillator! Its sclerotic economy is riddled with red-tape and bureaucracy – and its been ignoring the health warnings for decades. Italy might appear to be a happy plump elderly chap, but its economy is shutting down bit by bit.
Yet, the European Sovereign Debt Crisis which began in 2009 now seems years behind us.
Although we still hear anguished warnings from German Bundesbankers about nations sticking to GDP targets and debt ratios, no-one is particularly worried. Since 2012, when ECB President Mario Draghi promised to do “whatever it takes”, European bonds have rallied spectacularly. Italian bond yields have fallen from 7% to 1% – more than doubling the money of investors.
The ECB achieved that dramatic tightening of bond spreads by persuading private markets that European sovereign bonds were safe, and it didn’t spend a penny of QE money to achieve dramatically lower interest rates that together with low wages, low energy costs, and low inflation, are finally spurring economic activity. Now QE is about to happen, which will cause the Euro to fall further!
But we’ve reached a new danger moment.
Lots of factors look vulnerable to unravelling – Greece, for instance. Everyone is very aware of the impasse and who knows how it will end? We don’t know what the effect of a GREXIT (Greek exit) or a default or outright refusal to pay EU and IMF debts will be. I’ve been watching the bond price of the Europe Financial Stability Fund and am amazed it has widened – 80% of the fund’s assets are Euro 142 bln of Greek bonds, 44% of the total debt. If that doesn’t frighten investors, what will? The EFSF is an entity of the European Union, and clearly challenges the assertion that European debt has not been mutualised – France and Germany together are on the hook for about 80% of its debts!
But it’s not just Greece.
What would Europe do if the UK elections in May result in a referendum on membership? BREXIT won’t just hurt the UK, but will leave many other partners wondering what that means. We’ve just been treated to Angela Merkel single-handedly banging the heads of Ukraine and Russia together for peace with barely a nod towards the paraphanalia of the EU’s “diplomatic service” or claims to represent Europe. That will leave Scandianvia and Benelux wondering what a Europe strong-armed by Germany with a subserviant France hanging on its coat-tails means for the supposed United and Equal Nations of Europe. Traditional German allies in the Baltics and East will love the idea of stronger German hegonomy, although I suppose the Poles won’t be very happy…
And then there is the rest of peripheral Europe – where austerity is increasingly a political nightmare – especially in Spain where Podemos could repeat the Greek tragedy…
Although Europe has scraped by, I wonder for how much longer… Maybe it’s time to take profits – Sell Europe and Buy Germany?
What’s the trade of the week? I’m never entirely convinced when the auguries are so mixed, but I think it’s buy Apple and Sell the Euro.