EU to pay a dear price if the next crisis catches Eurozone stagnant and deflationary; dire statistics from Eurostat

Wolfgang Schäuble, German Federal Minister for Finance, 1st from the left; discussion between Jeroen Dijsselbloem, Dutch Minister for Finance and President of Eurogroup, 2nd from the right, and Valdis Dombrovskis, Vice-President of the European Commission in charge of the Euro 1st from the right. The most important Eurozone dignitaries favoring economic ‘orthodoxy’ are pictured here. Date: 14/08/2015. Location: Brussels - Council/Justus Lipsius. © European Union, 2015 / Source: EC - Audiovisual Service, Shimera/ Photo: Etienne Ansotte.

Wolfgang Schäuble, German Federal Minister for Finance, 1st from left; discussion between Jeroen Dijsselbloem, Dutch Minister for Finance and President of Eurogroup, 2nd from right, and Valdis Dombrovskis, Vice-President of the European Commission in charge of the Euro 1st from right. The most important Eurozone dignitaries favoring economic ‘orthodoxy’ are pictured here. Date: 14/08/2015. Location: Brussels – Council/Justus Lipsius. © European Union, 2015 / Source: EC – Audiovisual Service, Shimera / Photo: Etienne Ansotte.

Amidst the historically worst first week of a year since stock exchange records exist, the Eurozone economy remains stagnant and appears clearly unable to offer itself and the rest of the global economy a sigh of relief. All along the first week of the New Year Eurostat kept airing quite disappointing statistics for the Eurozone economy.

On Tuesday, 5 January came the confirmation that inflation remains always trapped in the zero region. Last Wednesday, Eurostat announced that industrial producer prices fell by 0.2% in the euro area. On Thursday, 7 January it was revealed that the volume of retail trade decreased by 0.3%. Last December the EU statistical service had found that GDP growth in Eurozone remained as anemic as ever. Let’s take one thing at a time.

An aggressive selloff

All the major capital markets registered last week unprecedented losses, fueled by persisting selloffs of stocks and commodities, with oil prices plunging to as low as $30 a barrel. The Chinese stock exchanges fallout (Shanghai , Shenzhen) which is held responsible for the global selloff was a good reason explaining the global shivers, but doesn’t fully clarify the causes of last week’s crisis in all major stock markets, euro area bourses included.

This newspaper on Thursday 7 January commented that behind the capital markets selloff were the financial moguls, who were sending a message to monetary authorities. The message says that the US central bank, the Fed, should continue its super quantitative easing monetary policy by keeping its $4.5 trillion afloat in the markets all along this year for the bankers to usurp. European Central Bank’s accommodative monetary policy with €1.44tn supports the banks but is not enough.

Insatiable greed for money

Regrettably though, there is a dangerous Cach-22 here. On the one hand it’s a fact that the financial sharks – with their insatiable greed for abundant and zero cost money from central banks – are ruthlessly sucking the blood of the real economy. Nevertheless, the alternative seems equally dreadful. If the major world banks are not well fed with abundant and free cash they may default. A new financial Armageddon may then destroy what is left standing from the previous catastrophe of 2008-2010, if the central banks stop injecting free trillions to banks. This is the main built in contradiction of our brave new global financial system.

The truth is that the much needed strong global growth is not in the horizon, and without it the financial universe may collapse dragging the real economy down again with it. The misty financial constellation of hundreds of digital trillions in derivatives cannot stand upright, without real growth paying some real interest and producing some real profits.

Now that the Chinese locomotive is taking a deep breath, the developed world and more precisely the European Union is unable to take the relay, thus introducing a large dose of uncertainty in the world financial system. Regrettably, the EU didn’t manage to revive its real economy during the last five years and currently is in a quite tricky position, much worse than the US or China. In short, it’s either growth in the real economy creating new real wealth for the sharks to feast on or the central banks have to inject trillions in order to keep up the banking system going. This is what happened after 2010.

A short history lesson

Both the US and China handled much better the previous crisis than the EU and they managed to achieve an enviable upwards path during the last few years. Nonetheless, the world economy now shivers with the prospect that China’s annual growth rate may decrease below the world record highs of 7% this country has been achieving so far. In the US the overall unemployment rate is presently as low as 5.5% and decreasing further.

Explaining the above attainments, in China the source of growth was a cheap and huge labor force and in the US it was the $4.5tn the Fed injected to banks. At the same time, the corresponding variables of the Eurozone are deplorable because Eurozone failed on both accounts; stiff labor markets and stingy central bank.

Eurostat tells the truth

According to Eurostat, the GDP in the euro area rose by 1.6% in the third quarter of 2015 compared with third quarter of 2014 and by a meager +0.3% in relation to the previous quarter. And this, despite the efforts of the European Central Bank to support growth by injecting €60 billion a month into the euro area financial system and through it to the world markets. Unfortunately, that kind of quantitative easing proved largely insufficient. We will see why.

Incidentally, ECB’s President Mario Draghi last year managed to put together a €1.44trillion extraordinary monetary easing program aimed at reviving the stagnant Eurozone economy. In contrast, the US didn’t hesitate to pump much more freshly printed trillions into the economy thus managing to accelerate real growth. Of course, the Fed did it through the bankers, but there was no other way.

The ECB at least tried

On the contrary, in the ECB, all along the past few years President Mario Draghi had a very difficult time in confronting the stubborn opposition of Germany. Berlin has been monotonously rejecting any monetary boosting of the economy. This country doesn’t want the central bank to undertake monetary policies aimed at supporting employment and growth, despite the fact that every other major central bank vies to help the economy create more jobs. Berlin’s ideology is stuck in the shallow waters of financial and fiscal orthodoxy, insisting that only hard labor can lead to growth.

…But it’s not enough

Regrettably, the meager 0.3% growth in Eurozone is currently the only variable still remaining above the zero line. Retail sales and industrial producer prices were found to have fallen below the waterline, in the suffocating part of the graph. No need to underline the importance of retail sales in the overall performance of the economy.

Then it’s the industrial producer prices that have persistently followed a negative path. In difficult times this variable can be of more importance than headline inflation. The reason is that if the industrial sector, constituting the beating heart of any advanced economy, is obliged to sell its products at continuously falling prices then the economy is undermined where it hurts more, at the heart.

Germany condemns the Eurozone

All in all, Eurozone is now clearly in a much more difficult position than its competitors. It’s certain then that in a possible unfortunate event of a new financial crisis, Europe will pay a much dearer price than the US or China. Obviously, the guilty party is Germany, the leading euro area economy and main political force of the EU, by obstinately denying any monetary and fiscal measures to support job creation and growth.

By the same token, Berlin is depriving the rest of the euro area from any substantial and effective anti-stagnation action. ECB’s 1.44tn is quite insufficient, compared to Fed’s $4.5tn injection into the US, and through it, to the world economy.

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