Historically, the European and North American economies have always been closely linked. The figures show comparable growth rates and living standards, even if the United States has always kept a lead over “old Europe”. The current crisis, with the return of inflation and the war in Ukraine, crystallizes tendencies at work for a long time, and it is rather a decoupling which is announced, to the detriment of Europe. Two structural phenomena are involved:
1) Europe’s energy dependence
The current inflation is primarily that of raw materials, and it dates from well before the invasion of Ukraine by Russia, even if this coup has exacerbated tensions on the markets. The ECB and Fed money printing presses have long convinced commodity producers to raise their prices, in order to cope with this currency devaluation. But in recent weeks, the European Union’s sanctions against Russia have had above all, it must be admitted, a boomerang effect, embarrassing Moscow little but embarrassing the nations dependent on Russian gas and oil. Their prices are exploding, because of decisions whose impact has been poorly assessed by politicians. Putin has just virtually cut off gas to European countries and reserves may be dry next winter. In addition, the EU imposes an untenable timetable for its energy transition, which is very costly to implement (we must subsidize wind turbines, electric cars). Worse than inflation are the shortages, as we explained last March, and these seem to be looming.
2) The fragmentation of the euro zone
The euro is a special currency: “Certainly for the first time in monetary history, here is ONE currency which is managed by SEVERAL central banks!”, we wrote in 2013.
This baroque construction is materialized by the imbalances of the TARGET2 balance, between the different central banks precisely, which are constantly increasing. They are also reflected – this is what interests us today – by interest rate differentials on sovereign debts. And precisely, the rates on the 10-year debt of the countries in difficulty are increasing dangerously, whether with Italy, at 4%, or France, at 2% after having been at zero in December 2021, i.e. a very strong progress. The gap in relation to the benchmark debt, that of Germany (the “spread”), continues to widen, which in the long term can only lead to a crisis comparable to that of 2011 (which concerned at the time that Greece, we recall, and the euro was threatened with explosion…).
The main consequence of point 1) is the lasting weakening of growth compared to the energy-independent United States, and even a lasting recession. That of point 2) is the inability of the ECB to really tighten its monetary policy, at the risk of endangering the euro zone. There is also the risk of devaluing the euro against the dollar and thus increasing imported inflation (commodities are paid for in dollars, we remind you). The euro zone is therefore heading straight for stagflation, or worse, for an inflationary recession…
The ECB is stuck, it knows it. After an “emergency meeting” on June 15, the central bank decided to do nothing except confirm that it would continue to buy Italian debt, to reassure the markets. The surprise of the press release was the announcement of the creation of an “antifragmentation” tool, without further details on the contours. According to Reuters, this tool would aim to “cap the borrowing costs of the most indebted states” such as Italy, Spain, Greece, or France, also in bad shape. In other words, the ECB could buy back sovereign debt without respecting the volumes defined by the usual distribution keys (defined by the weight of GDP), but by favoring countries in difficulty. This is likely to upset the virtuous countries of northern Europe and increase political tensions within the EU…
A Europe lagging behind, largely deindustrialized, very dependent for its energy (and which refuses to exploit its shale gas and to relaunch nuclear power), which imposes an unsustainable energy transition (stopping the production of cars with thermal engines in 2035), this is what appears starkly since the invasion of Ukraine. With printing money as the only recourse, hyperinflation threatens. It is urgent to react.
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