Last week, Mario Draghi, who runs the European Central Bank (“ECB”), took action to lower the Euro exchange rate.  Interest rates will be cut to 0.05% and money held by the ECB will attract -0.2%. The ECB will also start purchases of asset-backed securities and bonds. The objective was to improve European competitiveness, – also known as a “race to the bottom”. It worked – a little.

The European Union (“EU”) was formed with good intentions, but the structure was poorly thought out.

Some points on the state of play today in Euroland

  • The banks are broke and economic growth is virtually non-existent.
  • The Euro is a dysfunctional currency. It is a little like the gold standard of the 20th Century, it benefits some but penalises others.
  • Democracy has all but disappeared.
  • The zone is run by unelected technocrats/bureaucrats, with little or no real world experience. Their main aim is to protect themselves and the structures they have built.
  • Unemployment in the south is appallingly high.
  • It has insanely excessive regulation. It has been estimated that it would take a month every year to read all that year’s regulations alone.
  • The EU is effectively a vassal state of the US, which adversely affects decision-making. For an example, think of France’s cancellation of a Russian order for two navy ships.

More pain is coming down the track

  • Russian sanctions will hurt the EU much more than the US.
  • Annoying Russia and its gas, with General Winter about to arrive, could see some cold times ahead.
  • While there is a ceasefire in Ukraine today, the US-backed neo-fascists of Kiev are not likely to give up easily. It appears that the US is deliberately destabilising various areas of the world to protect the petro-dollar and help access to oil.
  • Economies world-wide are under pressure, making it very difficult to see any meaningful growth prospects for the EU, irrespective of its current structure.

There appear to be only two outcomes for the EU

  • Federation along the lines of the US. It took the US a long time and much loss of life in several bloody wars to unite all the states. This could be possible in the EU.
  • Breakup. Even Mario Draghi has said this is a distinct possibility if unemployment remains intractable in the southern states/countries.

One thing is for sure, the EU cannot continue with its current structure for much longer.

An aside. Last month, after the Central Bank gabfest at Jackson Hole, Wyoming, Draghi said inflation in the EU is too low at 0.8%, excluding food and energy. What planet is this? On Earth, food and energy are ALL that is important to life. Still, I am not a Central Banker so what would I know.

06 September 2014 Macro