Best of the Week
Most Popular
1. Will Gold Price Breakout? 3 Things to Watch… - Jordan_Roy_Byrne
2.China Invades Saudi Oil Realm: PetroDollar Kill - Jim_Willie_CB
3.Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - Nadeem_Walayat
4.The Stock Market Trend is Your Friend ’til the Very End - Rambus_Chartology
5.This Isn’t Your Grandfather’s (1960s) Inflation Scare - F_F_Wiley
6.GDX Gold Mining Stocks Fundamentals - Zeal_LLC
7.US Housing Real Estate Market and Banking Pressures Are Building - Chris_Vermeulen
8.Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - Buildadv
9.Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - Nadeem_Walayat
10.Warning Economic Implosion on the Horizon - Chris_Vermeulen
Last 7 days
How Long Does it take for a 10%+ Stock Market Correction to Make New Highs - 21st Apr 18
Sheffield Ruling Labour Party Could Lose 10 Council Seats at May Local Elections - 21st Apr 18
Crude Oil Price Trend Forecast - Saudi Arabia $80 ARAMCO Stock IPO Target - 21st Apr 18
Gold Price Nearing Bull Market Breakout, Stocks to Follow - 20th Apr 18
What’s Bitcoin Really Worth? - 20th Apr 18
Stock Market May "Let Go" - 20th Apr 18
Overwhelming Evidence Against Near Stock Market Grand Supercycle Top - 20th Apr 18
Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - 20th Apr 18
The Incredible Silver Trade – What You Need to Know - 20th Apr 18
Is War "Hell" for the Stock Market? - 19th Apr 18
Palladium Bullion Surges 17% In 9 Days On Russian Supply Concerns - 19th Apr 18
Breadth Study Suggests that Stock Market Bottom is Already In - 19th Apr 18
Allegory Regarding Investment Decisions Made On Basis Of Government’s Income Statement, Balance Sheet - 19th Apr 18
Gold – A Unique Repeat of the 2007 and How to Profit - 19th Apr 18
Abbeydale Park Rise Cherry Tree's in Blossom - Sheffield Street Tree Protests - 19th Apr 18
The Stock Market “Turn of the Month Effect” Exists in 11 of 11 Countries - 18th Apr 18
Winter is Coming - Coming Storms Will Bring Out the Best and Worst in Humanity - 18th Apr 18
What Does it Take to Create Living Wage Jobs? - 18th Apr 18
Gold and Silver Buy Signals - 18th Apr 18
WINTER IS COMING - The Ongoing Fourth Turning Crisis Part2 - 18th Apr 18
A Stock Market Rally on Low Volume is NOT Bearish - 17th Apr 18
Three Gold Charts, One Big Gold Stocks Opportunity - 17th Apr 18
Crude Oil Price As Bullish as it Seems? - 17th Apr 18
A Good Time to Buy Facebook? - 17th Apr 18
THE Financial Crisis Acronym of 2008 is Sounding Another Alarm - 16th Apr 18
Bombs, Missiles and War – What to Expect Next from the Stock Market - 16th Apr 18
Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold - 16th Apr 18
Will Bitcoin Ever Recover? - 16th Apr 18
Stock Market Futures Bounce, But Stopped at Trendline - 16th Apr 18
How To Profit As Oil Prices Explode - 16th Apr 18
Junior Mining Stocks are Close to Breaking Downtrend - 16th Apr 18
Look Inside a Caravan at UK Holiday Park for Summer 2018 - Hoseasons Cayton Bay Sea Side - 16th Apr 18
Stock Market More Weakness? How Much? - 15th Apr 18
Time for the Gold Bulls to Show their Mettle - 15th Apr 18
Trading Markets Amid Sound of Wars - 15th Apr 18
Sugar Commodity Buying Levels Analysis - 14th Apr 18
The Oil Trade May Be Coming Alive - 14th Apr 18

Market Oracle FREE Newsletter

Trading Lessons

Europe Is Crumbling Into Economic Collapse

Economics / Euro-Zone Oct 02, 2014 - 09:27 AM GMT

By: Raul_I_Meijer

Economics

For me, the quote of the day is this one: “If there’s a periphery of the eurozone’s periphery, that’s Naples.”. The city of Napoli hosts ECB boss Mario Draghi and the heads of Europe’s central banks this week in some very posh former Bourbon family royal palace, and the contradictions involved couldn’t be more striking.

Napoli is home to an immense amount of poverty and misery, and the advent of the EU and the euro has done absolutely nothing to make life in the city any better. Quite the contrary. And there’s not a single thing in sight that holds any promise of alleviating the deepening Italian downfall. Therefore things can, and will, only get worse from here.


And that’s not just true for Italy, or Napoli. It’s true for all of Europe. That is not because Mario Draghi hasn’t spent enough money, or too much of it, or that he’s spent it in the wrong places. It’s because Napels is not Berlin or Frankfurt, or even Milan in the much richer north of Italy. And because Italy is not Germany, and Greece is not Finland, and trying to force all of them into one and the same economic mold can only possibly end in the poor getting poorer.

Unless there would be a massive wealth transfer from rich to poor, from north to south, but that’s never been in the cards. The intention was always to make the EU a tide to lift all boats, or even, in the wildest dreams, a boat to lift all tides. That intention has failed in dramatic fashion. But not one single one of the architects and present day leaders is ready to fess up to their failures.

Almost 15 years after the euro was introduced, the battlefields are littered with dead and wounded bodies. And the only answer that comes from Brussels is to strengthen the – financial and political – army. The only answer that comes from Brussels is that Europe, including Italy, Greece, Spain, needs more Brussels, more centralized control.

And Napoli is not the only place that can lay claim to the title “periphery of the eurozone’s periphery”. Spain and Greece have unemployment numbers just like Napoli, only for them it’s in their entire countries. All have had youth unemployment at well over 50% for years now, a sort of real life version of throwing your babies away with the bathwater. And all have regions and cities where things are much worse still.

Oh well, at least Bloomberg has a poetic headline for once:

Draghi Takes ECB to Land of Gomorrah as Naples Prays

As Europe’s central bankers gather in Naples to discuss the state of the region’s economy, the city stands as a stark warning of just how bad things can get. “If there’s a periphery of the eurozone’s periphery, that’s Naples,” said economist Riccardo Realfonzo, a former councilman of the Southern Italian city. “The gap between the debate at the Royal Palace in Capodimonte and everyday life can’t be filled with just monetary policy.”

In Naples “there is a hunger for bread and justice, hope and future, work, legality and planning,” local Catholic Archbishop Crescenzio Sepe on Sept. 19 told the faithful gathered in the city’s medieval cathedral for the ritual of the so-called miracle of San Gennaro, the patron saint.

Last year, Naples scored the highest among Italy’s main cities on the misery index, a gauge which combines unemployment and deflation. With a reading of 26.7% it stood above Greece. Much like Greece, Naples, hard hit by Italy’s longest recession on record, risked default this year after a court rejected plans to cut municipal debt of about €1 billion ($1.3 billion). [..] Naples’ 2013 gross domestic product per capita was one-third less than Italy’s average and its unemployment was more than double the national average at 25.8%.

The outlook for the future is far from rosy after Italy entered a new recession in the second quarter and the government was forced to cut the country’s growth forecast. Finance Minister Pier Carlo Padoan said yesterday 2014 GDP is seen shrinking 0.3%, compared with an April forecast of a 0.8% expansion. The government also sees GDP growing just 0.6% next year, compared with a previous estimate of 1.3%.

In that setting, or rather overseeing it from a heavily guarded and inaccessible palace, enjoying the best food and wine freshly printed money can buy, Europe’s central bank bosses are planning their next moves.

And still the only answer is more Brussels. Where Mario Draghi now wants to start buying up Greek and Cypriot junk loans, simply because that’s all they have left to sell. That’s where we stand today. We’re back to toilet paper as the only thing that represents any value.

And, you know, if a country like Spain, with 25% unemployment, can get investors to nevertheless buy its bonds with real yields below zero, maybe there is some – although doomed – logic somewhere in Draghi’s ideas. If you distort and pervert values enough so nobody knows what anything is worth anymore, and you still have all these big funds needing to roll over their ‘investments’, you have them trapped, or at least temporarily.

The question is, for how long?

European Bond Yields Go Negative

Record-low interest rates in Europe have flipped bond investing on its head. Some bond buyers, typically paid for lending out their money, have begun paying borrowers to look after their cash. In September, yields on two-year Irish government debt dipped below zero for the first time, just four years after the country needed a €67.5 billion ($85.6 billion) bailout to avert a banking-system collapse. At the height of the eurozone’s debt crisis, Ireland’s two-year bonds were yielding more than 14%.

Now, they are yielding about minus 0.01%. Yields move inversely to prices. The sharp drop in Ireland’s borrowing costs marks a rapid return of investor confidence, but the recovery is also part of a wider theme in Europe: central-bank policy pushing interest rates ever lower, and in some cases, turning bond yields negative.

[..] “We think negative yields will spread, because the impact of the ECB’s rate cut is ongoing,” said Mr. Bayliss. Yields will continue their decline as short-term debt matures and cash is reinvested, he added. “You’re going to see more countries and longer maturities in the negative-rate camp,” he said. Given that backdrop, one way investors can boost returns is by buying longer-dated bonds. Spanish government debt maturing in July 2017, for instance, yields roughly 0.5%, according to Tradeweb.

By instead lending to Spain for 10 years, yields jump to about 2%. Another way to snag higher yields is to buy riskier bonds with lower credit ratings. Ben Bennett, a credit strategist at Legal & General Investment Management, says that with investment-grade corporate bonds yielding so little the only way to get a reasonable return in Europe is by lending to junk-rated companies or by buying junior bonds that are first to take a hit if a company defaults on its debt. “This should work out fine if the ECB’s policies kick-start the European economy, but they don’t have a very successful track record in recent years,” Mr. Bennett said.

They sure don’t. And that’s not even Draghi’s fault, he’s just a clown. The entire structure of the EU is to blame. Draghi won’t be able to buy any toilet paper unless Merkel gives in. But the EU economy has now started to drag down Germany as well, so she will have to choose to protect her own people first. Which is precisely where the EU fails, that that is still possible.

In the US California can’t say screw Kansas. In the EU, that is an option. The richer nations only signed up to the project to get richer off it. The same as the poorer. Nobody ever gave any thought to what should be done is everybody got poorer, and if they did, it certainly wasn’t put into written words. So Germany CAN elect to put itself first, and try to boost its economy at the expense of Spain. And that’s what it’ll do, especially after the recent rise of anti-euro sentiments.

Sentiments that will crop up and grow in ever more places in ever stronger ways. Because there is no way to save the pan-European ideals within the settings laid out inside the EU. You can’t turn Spain into Germany overnight, for the same reason that you can’t demand the Spanish turn to beer and bratwurst from one day to the next.

There is not one reason why Europe couldn’t be a looser organization of nation states, each with their own currency if that works better for them, but still with many ties defined by those things that do indeed bind them. The thing is, France has close ties to Spain, they share the same border, and France has similar ties to Germany, but Germany and Spain don’t have those ties.

It’s much easier to resolve regional differences within a country the size of France or Spain that it is within a 28-member EU. The differences have become too overwhelming. People from Finland vote on issues in Greece, but they have no idea about those issues. While the Greeks sink into desolation:

60% Of Greeks Live At Or Below Poverty Line

Three in every five Greeks, or some 6.3 million people, were living in poverty or under the threat of poverty in 2013 due to material deprivation and unemployment, a report by Parliament’s State Budget Office showed on Thursday. Using data on household incomes and living conditions, the report – titled “Minimum Income Policies in the European Union and Greece: A Comparative Analysis” – found that “some 2.5 million people are below the threshold of relative poverty, which is set at 60% of the average household income.” It added that “3.8 million people are facing the threat of poverty due to material deprivation and unemployment,” resulting in a total of 6.3 million people.

In the medium term, Europe will fall to bits. It’s inevitable. The crumbling of the walls could only be prevented by overall increasing wealth, but the very structure of the Union doesn’t allow for that to happen. And neither does the global economy.

As for the cheap loans and the yields on peripheral sovereign bonds, the money that investors have out there will flee in a massive move to the global financial center, the US, as soon as interest rates there are raised. Which is another major reason why they indeed will be raised. Come to daddy.

And the EU will go from the lofty ideal of a peacemaker to the reality of being a cause for unrest and then war. It has already made that switch, but nobody notices yet.

By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2014 Copyright Raul I Meijer - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
Raul Ilargi Meijer Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules