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The Euro – Monetary Strangulation continues (one year on)

Exactly one year ago today I was with the family in the Christensen vacation home in Skåne (Southern Sweden) and posted a blog post titled The Euro – A Monetary Strangulation Mechanism. I wrote that post partly out of frustration that the crisis in the euro once again had re-escalated as Greece fell deeply into political crisis.

One year on the euro zone is once again in crisis – this time the focal point it the Italian banking sector.

So it seems like little has changed over the past year. After nearly eight years of crisis the euro zone has still not really recovered.

In my post a year ago I showed a graph with the growth of real GDP from 2007 to 2015 in 31 different European countries – both countries with floating exchange rates and countries within the euro areas and countries pegged to the euro (Bulgaria and Denmark).

I have updated the graph to include 2016 (IMF forecast).

Monetary Strangulation Summer 2016.jpg

The picture is little changed. In general the floaters (the ‘green’ countries) have done significantly better than the peggers/euro countries (the ‘red’ countries).

That said, I am happy to admit that it looks like we have had some pick-up in growth in the euro zone in the past year – ECB’s quantitative easing has had some positive effect on growth.

However, the ECB is still not doing enough as new headwinds are facing the European economy. Here I particularly want to highlight the fact that the Federal Reserve – wrongly in my view – has moved to tighten monetary conditions over the past year, which in turn is causing a tightening of global monetary conditions.

Second, if we look at the money-multiplier in the euro zone it is clear that it over the past nearly two years have been declining somewhat due in my view to the draconian liquidity (LCR) and capital rules in Basel III, which the EU has pushed to implement fast.

Furthermore, given the increase in banking sector distress in the euro zone recently the euro zone money-multiplier is likely to drop further, which effective will constitute a tightening of monetary conditions. If the ECB does not offset these shocks the euro zone could fall even deeper into a deflationary crisis.  If you are interested in what I think should be done about it have a look here and here.

Concluding, the monetary strangulation in the euro zone continues. Luckily, again this year at this time it is vacation time for the Christensen family so I will try to enjoy life after all.

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If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com

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The end game or a new beginning for Greece? We have seen all this before

Ever since I started my blog in 2011 Greece has been on the verge of banking crisis, sovereign default and euro exit. It now looks as if we might get all of that very soon and very quickly.

This is from CNBC today:

Talks fell apart between the Greek government and its creditors, and European officials said Athens’ bailout program will expire on Tuesday.

Euro zone finance ministers met to try and thrash out a reforms-for-rescue deal for Greece after the country’s prime minister threw a curveball of a referendum on the deal late Friday night. During Saturday’s meeting, the finance ministers rejected Greece’s request for a one-month bailout extension, meaning that Athens could soon face very serious economic issues.

“It’s not a question to see what might happen on Monday. In terms of a crisis (for Greece), the crisis has commenced,” Irish Finance Minister Michael Noonan said after the day’s second meeting.

Greece is due to pay the International Monetary Fund 1.5 billion euros Monday and without a deal this weekend risks missing that payment.

I can’t say I am surprised we are here now – maybe I am surprised that it has taken this long – but the rest is unfortunately not that surprising to anybody who has studied economic and monetary history. We have seen all this before.

I wrote about that already back in 2011:

The events that we are seeing in Greece these days are undoubtedly events that economic historians will study for many years to come. But the similarities to historical crises are striking. I have already in previous posts reminded my readers of the stark similarities with the European – especially the German – debt crisis in 1931. However, one can undoubtedly also learn a lot from studying the Argentine crisis of 2001-2002 and the eventual Argentine default in 2002.

What this crises have in common is the combination of rigid monetary regimes (the gold standard, a currency board and the euro), serious fiscal austerity measures that ultimately leads to the downfall of the government and an international society that is desperately trying to solve the problem, but ultimately see domestic political events makes a rescue impossible – whether it was the Hoover administration and BIS in 1931, the IMF in 2001 or the EU (Germany/France) in 2011. The historical similarities are truly scary.

I have no clue how things will play out in Greece, but Germany 1931 and Argentina 2001 does not give much hope for optimism, but we can at least prepare ourselves for how things might play out by studying history.

I can recommend having a look at this timeline for how the Argentine crisis played out. You can start on page 3 – the Autumn of 2001. This is more or less where we are in Greece today.

I wrote that back in 2011. It has been four more years of economic and social pain for the Greek population so you got to ask yourself – just how bad can the alternative be?

And finally a – highly speculative – note: If we in fact get Grexit then my forecast is that we will have a couple of quarters of negative GDP growth (as a result of the bank run we already have seen), but then Greece will see the mother of all recoveries as the New Drachma plummets (likely 70-80%).

This will be the positive result of ending the monetary strangulation of the Greek economy. However, structurally and politically it is hard to be positive – and hence Greece will then again within the next decade face another crisis likely in the form of weak growth and this time around high inflation as public finance problems will likely remain unsolved. At least this is how it played out in Argentina…

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If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com or roz@specialistspeakers.com.

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