The EU Is Again Close to A Meltdown
BY TYLER DURDEN
The Ukraine conflict is taking a toll on the EU, and it could result in finally pushing it over the edge. Everything flowing from Russia's incursion poses a big negative for the region, which is already struggling.
The EU has a recipe for disaster, with:
1) High 8.6% inflation in Euroland, in June 2022, 4x the EU Central Bank target; 9 of 19 euro countries have over 10% inflation; the 3 extremist Baltics about 20%
2) Soaring energy prices, and raw materials prices, and increasing interest rates, yielding stagnant economic growth
3) A growing trade deficit with China
4) A growing trade deficit with Russia, because Germany, France, Italy, etc., are selling almost nothing to Russia to offset the high cost of oil and natural gas imports from Russia.
5) Less of a trade surplus with the US, due to increased oil and natural gas imports (which has a blowback effect of increasing energy prices for US consumers, and increasing US inflation to 8.6% in May 2022, 4x the US Federal Reserve target.
6) Greatly increased defense costs, due to providing weapons and training to Ukraine, and increased defense spending to enable additional NATO power projection.
7) Spending at least $50 to $60 billion per year dealing with 5-plus million Ukraine refugees
8) A looming world food shortage due to 1) fertilizer sanctions on Russia and Belarus, and 2) Ukraine mining its Black Sea harbors so no ships can come in or out, may lead to millions more refugees from elsewhere to the EU.
9) A greatly weakened competitive position in world markets. See below.
10) Zelensky wants $5 billion PER MONTH from the US/EU to finance on-going economic and war efforts.
11) This does not cover the $750 BILLION for rebuilding Ukraine in future decades, per Zelinsky-government’s estimates. The UK, Ukraine, etc., wants to illegally expropriate Russia’s blocked assets to pay for a part of it.
12) The European Investment Bank estimates it would take $1.1 TRILLION to rebuild Ukraine
13) The euro exhibits the competitive decline of Europe; the euro was worth $1.58 in 2008, and $1.03 on July 4, 2022, as EU Brussels bureaucrats imposed expensive, uncompetitive energy systems, such as wind, solar, battery, etc.
14) EU Brussels bureaucrats, in cahoots with the UN, are trying to shame/force the US economy into the same uncompetitive status, which would further strengthen the BRISC+ countries
NOTE: Almost all of the above also applies to the US.
According to Reuters, the Euro-zone inflation rate surged to yet another record high in May. Inflation accelerated to 8.1% in May, from 7.4% in April. A big part of the problem, it is no longer just energy pulling up the headline figure.
Looking past the headline figure, we find, excluding food and energy prices, inflation rose to 4.4% year-on-year from 3.9%. This puts pressure on the European Central Bank to further increase interest rates. The timing of such a move is horrible in that Europe's dust-up with Russia has brought to the forefront just how weak Europe is.
Lurking in the background is the strong possibility that the Ukraine conflict will drag on, and Russia could completely cut off gas to Europe. Currently, it appears, Russia intends to keep Europe from filling storage, which would substantially increase Russia’s leverage in the winter months.
Already, talks of gas rationing are being floated, if we see further cuts to Russian gas supplies. In the past three months, Russia has cut off supply to several European countries that refused to pay for gas in rubles, and has also substantially reduced the flow through the Nord Stream. This has cut off supplies to France, and has reduced flows to Germany, by 60 percent.
With inflation running at 4 times the ECB's 2% target, ECB policymakers are facing the toxic mix of raising rates at the same time the economy is shifting into reverse. The choice between galloping inflation, and political instability due to economic misery, is difficult.
Hoping to tame inflation and thread the needle, ECB President Christine Lagarde is moving to raise rates. Some policymakers and economists doubt small moves will be enough, especially since underlying inflation is showing no signs of abating.
Due to supply chain disruptions due to COVID and Ukraine, prices have been soaring across Europe. This suggests a new era of rapidly rising prices is now sweeping away a decade of ultra-low inflation.
What many economists tried to blow off as “a transitory jump in prices” is now becoming embedded into the economy. The fear is that once high energy prices flow into the economy, inflation will get entrenched and eventually perpetuate a price-wage spiral. A jump in negotiated wages will increase core inflation
Data from the EU statistics agency, Eurostat, is only adding to the euro-zone's woes. It shows the euro zone's trade balance has swung to a record deficit in January, 2022, from a surplus a year earlier, as the cost of imported energy sharply increased. The euro-zone's trade deficit in goods, the difference between exports and imports, was 27.2 billion euros in January, 2022, compared with a 10.7 billion euro surplus in January, 2021.
The EU has already endured a lot of costly problems. It does not need is another refugee crisis, this time caused by food insecurity across North Africa, or the emergence of an energy-scarce winter, as 2022 comes to a close.
The EU abandoned all structural reforms in 2014, when the ECB started its quantitative easing program (QE), and expanded the balance sheet to record levels.
Considering the above, it is difficult to remain optimistic the EU is on the right track.
Volkswagen CEO Herbert Diess told the FT in a recent interview a prolonged war in Ukraine would be "very risky" for the European and German economies. Diess said the economic damage from the war could be "very much worse" than COVID. A slowing economy, combined with inflation, produces stagflation. If the economy crashes, it will crush savings, and cause European corporations to default. I fear many economists are ignoring the EU simply isn't competitive on world markets. The EU lacks technological and intellectual property, and is falling further behind the U.S. and China. Germany, the regions manufacturing powerhouse continues to skirt along, narrowly escaping recession, while France, Spain, and Italy face years of high unemployment levels. The ugliness is exacerbated by the fact that roughly 80% of the EU’s real economy is financed by a banking sector that carries more than 600 billion euros in non-performing loans.
The EU Competitive Position
As of 2017, not a single European company ranked among the top fifteen technology companies in the world and only four of the top 50 global technology companies are European. Skeptics are concerned, if the politically directed "Green New Deal" agenda doesn't boost growth, or does not reduce debt, the EU will remain economically stagnate.
China and the EU
At the beginning of last year, to generate the impression of hope, EU leaders in Brussels tried to pull a rabbit out of the hat by strengthening ties with China.
The EU-China comprehensive investment agreement clearly signifies a significant shift in EU policy towards Asia. The proposed deal dovetailed with Beijing's "One Belt, One Road" (OBOR) initiative, and follows the signing of an agreement made with bankrupt Italy,
China and Italy
Last year, in what was considered a bold move, the Italian Prime Minister signed a historic memorandum of understanding with Chinese President Xi Jinping in Rome. The agreement made Italy the first founding EU member, and the first G-7 nation, to officially sign on to OBOR in hopes it would shore up its weak prospects.
The ramifications flowing from Italy's deal with China may, in the end, prove to be a deal with the devil. The key motivation behind China working to reach a deal with poor, weak Italy was China’s desire to exploit Italy, and use it as a backdoor into the broader EU market.
The deal China and Italy inked contained development deals covering everything from port management, science and technology, e-commerce, and even soccer. China gained control of entry points of the EU that can be lawfully expanded upon, which does not bode well for the EU.
EU Trade Position
According to data from Eurostat, the EU has for years enjoyed a trade surplus with the U.S. (meaning it exported more to the U.S. than it imported) in 2019.
The EU imports far more from China than it imports. Imports from China to the EU were 472 billion euros in 2021, 20% more than in 2020.
This increased the EU trade deficit with China to 249 billion euros. The deficit with China is not an outlier, but highlights a trend that has been growing. Expect the surplus with America to drop in the near future (due to increased oil and gas sales to thew EU, which increases prices in the US), and expect the deficit with China to furthergrow.
It could be argued the EU is leading itself into an ambush.
The EU cannot hold its own against China.
The US and EU have a long history of complaining China wants free trade without playing fair.
To think of China as a tiger that has suddenly changed its stripes, borders on insanity.
The EU is likely to find this is not the first time China signs an agreement without respecting it.
The EU, which has seen its manufacturing sector debased by cheap knockoffs from China, and other low-wage countries, will gain nothing by bringing more of these goods into the EU market.
China exploits its trading partners by exporting goods at slightly below competitor prices, to draw manufacturing jobs from other countries. This has the potential to hasten the demise of Europe.
This image shows the EU central bank has been excessively creating money out of thin air, aka Quantitative Easing.
The ECB’s balance sheet grew from 1.0 trillion euro in 2005, to 8.7 trillion euro in 2022.
The EU biggest problem remains its massively flawed currency and banking system. Because many countries and economies share the same currency when a country, such as Italy, Greece, etc., fails to keep its budget in line, or falls on hard times, they become a burden the other countries are forced to carry.
The EU abandoned all structural reforms in 2014 when the ECB started its quantitative easing program (QE), and expanded the balance sheet to record levels.
Making matters worse, the ECB has come up with several schemes over the years to kick the can down the road by adding liquidity to this insolvent system.
European Households Tend to Hold More of Total Assets in Currency and Deposits
In short, not only are many of the EU people politically opposed to Brussels exerting more power, on top of that, the banks are up to their eyeballs with bad debts and holding worthless paper.
Simply put, the whole system is rotten to the core.
The ECB has little choice, but to raise rates in lockstep with other central banks.
The US Fed rate hikes are toxic to both the euro and the yen.
The people of Europe and Japan face losing a great deal of their wealth, if the euro and yen continue to fall.