Which will be the winner,

the market or the central banks

Further musings not as an economist but as a simple amateur, not burdened by economic theories but just looking at the facts and thinking about them in amazement.

In March 2016 the European Central Bank will have been creating 60,000,000,000,000 euros in new money  (or call it purchasing power, if you want) every month and made them available to euro zone banks in exchange for national bonds, covered bonds and asset backed assets, then in all 720,000,000,000,000 euros and will continue doing that till March 2017 or even much longer until inflation has reached the objective of all this money creation, the level of nearly 2%.

What is the value of national bonds, covered bonds and asset backed securities, in reality.
They just represent the value of the organizations that have issued them.
The national bonds of the euro area member states are moreover covered by the promise, Draghi, the president of the ECB made, to support the euro whatever it takes. This means that the ECB itself guarantees the value of the euro area bonds, which it buys up from the banks.
That is to say also the bonds of euro area member states with a public debt of over 90%.
What is the value of the other assets bought.
If we take into consideration that the bad loans of the Italian banks, so loans that have to be written off entirely, amount of 201 billion euros and the non performing loans (which do not produce any revenue)  to 360 billion, or that Greece has had to supply a state guarantee for the sale of bundled bad loans which are not entirely hopeless, while Greek national bonds, with a public debt of nearly 200%,  would not have any appreciable value at all without the guarantee of the ECB.

Then again I wonder where all those hundreds of billions of euros Quantitative Easing have ended up which have not been invested in the euro area economy and have not been used to bolster up the liquidity of the banks themselves.

Not only ECB money.

The FED has printed 3.5 trillion dollars. Where have they all gone? Not into the USA real economy.
The same goes for the Bank of England with 375 billion pounds sterling and the Bank of Japan that is still going on printing 800 trillion yen per year.
The argument was originally that the additional money printed would be taken out of circulation when the bonds etc had matured. Then that extra money would be symbolically burnt, was gone and the supply of money would be at its original level again.
But, if the capital released at the maturity of the bonds is then  used again to buy new bonds, as happens in reality, it remains in circulation. Then it really is additional new money.
Good intentions rarely come to fruition.

As a result of all these injections of capital there was a spate of money and in addition to that a very low ECB bank rate coupled with a negative interest rate for banks parking money at the ECB.  Besides that interest rates were pushed down by the simple abundance of credit.

So lending money was made very attractive for government, business and private persons. Excessive debt was accumulated but so far kept sustainable by the low interest rates.

All this was done to raise the inflation to the 2% level by making money available to banks for investment in the real economy, produce greater output, greater employment, higher wages and consequently higher prices, raising inflation to  those 2%.

But enterprises only borrow money to invest if on the other hand there is an attractive demand for their production.
And because of the austerity policy in the euro area and in addition lowering wages in the weak euro member states to bolster up competitiveness in the export markets purchasing power and thus demand has been weakened, and more so during every new austerity wave.
So the special loans banks could obtain from the ECB at extremely low rates of interest on the condition the money was invested in the euro area economy were no great success.
And the 60 billions of euros printed for the QE every month which went to the banks en exchange for those assets could not be earmarked for investment in the euro area.
The banks are free to choose the way to use them.
And the ECB could not force the euro area economy to invest  either.
And, finally, the QE did not end up with the consumers which would have boosted their purchasing power and have stimulated the economy into stronger growth.
QE is sometimes called Draghi's bazooka but to me it seems to be more like un unguided missile, for a bazooka can be well aimed.

And what about the inflation that it as all about. It did not rise and shows no inclination at all to do so in the near future.

QE in combination with the low or even negative interest rates causes a flight of capital into the stock markets, causes state loans at negative rates of interest, a negative interest to be paid by the lender.

On account of this extremely low rate of interest added to the more rigid banking regulations trading for banks has been made more difficult and caused their profit to plummet.
Moreover the ECB  buys up the state bonds and other assets leaving insufficient supply for other investors   (and as is feared by some, for the ECB itself as well).
Saving has been made unprofitable and with negative interest threatening will only lead to losses for savers.
Investing in shares, a flight to the stock markets, was nearly the only way to profit which exposed the stock markets to  the danger of bubbles.    

Every time the stock markets faltered or  prices fell, the ECB came to the rescue with the promise of stimulating  measures and prices rebounded again for some time only and then needed another ECB measure or promise.

Market forces started to prevail as a result of plummeting oil prices, falling demand for oil and commodities with a decreasing Chinese miracle economy  and stagnating Emerging Markets.
A further push downwards was given by the infinitesimal rise in the FED bank rates forced by the labour market growth and fall of unemployment, seen by the IMF as a danger to the global economy, which was already showing signs of a slowdown.
The IMF expected that the slightly higher interest would make the burden of over indebtedness in the global economy less sustainable.
Market forces started to outweigh the Central Banks.

The fear that in a threat of a recession the Central Banks will have run out of ammunition to stem it is more overtly expressed.

Or, even further, whether all these measures by the Central Banks have had the success they were supposed to bring about.
How else was it possible that we have landed in the present turmoil.
For it was exactly QE and the interest weapon that were meant to prevent that.
And apart from the mainstream economy advocating quantitative easing and interest management there are other views by other economists.
Economics is no mathematical science  and human behaviour cannot be caught in computer models, however sophisticated.
It is especially  banks now that are targeted by investors but all stock market prices have plummeted.

Is it a correction for overvaluation, does it portend a global recession, is it a flight into gold away from stagnation. Is confidence slipping away. Who knows.

And then yesterday on the unconfirmed slight rumour that the ECB might in future start also buying bank bonds and shares  besides the other assets made prices go up again.

But this morning already gloom had set in again.

Euro Area Member States and non-Euro Member States

searching for the lost cords

How to tie the knots in the cords necessary to make the Euro Area a winning team and get the others to join. My very personal views.

Yesterday I mentioned that unemployment was higher in de Euro member states than in the non-member ones and that this was remarkable.

Why remarkable? Well, the euro area member states were the ones that met the requirements for entering the euro area, the 3 and 60% rules and the others had not achieved that yet. So you would expect them to be below the achievement euro area member states. But they are not as far as unemployment is concerned.

The following table shows the data of those non-euro member states and of the prospective candidate members (forgive the spelling error in the  table).

  

Mind that the GDP and debt figures in this table are in millions of euros (converted to euros from the national currencies), whereas in the euro members table they are in British billions (equivalent to EU miljard).

From Bulgaria to the UK they form the group of non-euro member states, Albania to Turkey are possible future member states.

It is apparent that the public debt of the non-euro members is far lower than those of the euro members in yesterday's table.

Three states have a deficit  distinctly higher that 3% and only two a public debt higher that 60%. One of them, the UK, both.

Also as regards unemployment do they score better that the euro area members.

In fact five of them meet the euro area requirements.

But as I said, there is no great desire to join the euro area.

Not inexplicable comparing the two tables.

Yesterday I wrote that only structural money transfers could level the financial situation of the Euro area.

That is true, of course, but first of all it does not solve the underlying problem,  the economic weakness of the southern member states which is principally due to their lower economic potential.

It is supposed by the Euro Area management (mind you, not government) that reforms of labour laws and streamlining of bureaucracy and cuts in government expenditure would diminish and finally  put an end to the differences. Lowering wages would enhance competitiveness and so promote export. Liquidity problems could be met by loans, bail-outs, and further cuts in expenditure.

Fifteen years of Euro area have shown that this approach does not work and that even stronger economies ended in deep water. See yesterday's table for confirmation.

But there is another fundamental reason why these structural financial transfers would not work. In the Euro Area there are nineteen different sets of labour laws, tax laws, pension laws. In order to make these financial transfers reasonable all these law systems would have to be homogenized in order to prevent inequalities. Take e.g. the different retiring ages and pension schemes.

That would mean a political union of part of the European Union. Unacceptable.

It has been proposed to create a separate Euro Area parliament with a Euro area finance minister. But that would not solve the differences in legislation and consequent unequal treatment.

And that gave rise to the objection that weaker countries would refrain from essential reforms because the money would be there anyway. And it is true that a number of Euro member states have shown a persistent avoidance of reforms.

In fact,  today the German president of the German Central Bank has again rejected such a scheme as perhaps possible in the far future.

And the stronger northern countries are unwilling to give the weaker brothers a blank cheque though Brussels would like that.

So that leaves the Euro area between the Scylla and the Charybdis or if you wish  between the devil and the deep blue sea.

Only stop gaps are possible.

  

That is the way I see it.

Europe, the European Union, the Euro Area  and their Peoples

There is a lot of misunderstanding  about what these names really stand for.

There is the continent of Europe with  its 41 nations (Russia, by the way, being one of them)

Then the European Union with its 28 European member states, and 7 possible future member states
Finally the Euro Area with 19 of the EU member states.

When the British speak about Europe they usually mean the European Union, and quite often people think that the European Union and the Euro Area are the same. But they are not.

It is mostly specialists that write about the EU from the  point of view of their discipline.
What I try is to give my layman's view of what the European Union and Euro Area means to me. A personal non specialist view of the various sides of the European Union An interested amateur.

For years I have been wondering if there exists a consistent vision at all on the future of the European Union.

In Brussels I see a kind of expansion urge with only a view for geographical situation and even that taken very broadly.
Whether these prospective new member states fit in the economic structure of the European Union, which has for its objective the acceptance of the euro by all member states, or even in the cultural  structure of the EU seems not to be taken into consideration at all.
I wonder why this issue has never been discussed.
For when I consider this I am faced with doubt if the European Monetary (and Economic) Union, the EMU,  can ever be given real shape.
How can the conditions be created which are essential  for the formation of such a all embracing Euro Union.
Maybe my doubts are justified maybe not. But I am afraid there is an image of an "ever closer union" but only in the sense of management, not content.

In the financial management of countries Central Banks have assumed an ever stronger directional role. This is also the case in the European Union an even more intensively in the Euro Area.

From time to time it even seems to me that Central Banks treat the people like a kind of instrument to keep the State on the right track.
To that effect they play about with interest rates, create money to secure for their State the best possible position in that world of other States.
The people are their pawns which have to provide the ammunition. Production at the lowest possible price. The fight for price stability. If it works the people profit too, if not they have to pay the price.
A precarious balance between the stability of the State and the prosperity of the people.
As is apparent in Japan, the USA and China the Central Banks are walking the tightrope of exchange rates and interest rates with the  great danger of compensating deficits with loans not to fall off.

In the European Union and the euro area, however,  the situation is far more complex than in those countries.

The European Union consists of two sections , the Euro Area and the non-euro countries, the result of a fatal decision to introduce the euro as the only EU currency before the EU was ready for it. Before it had grown out into a political union with a fully empowered parliament and a normal government and, if needed, a ceremonial president. For at the time that was unthinkable. But hasty decisions rarely bear fruit. For at this moment it is close to being even more unthinkable.

The non-euro group is made up of member states fully independent with their own Central Banks which guard their price stability, print their own traditional currencies, so determine the monetary policy.

With their parliaments and governments fixing the budgets, taxes, expenditure, the fiscal policy, the two can be brought in harmony.
They are only obliged to keep their debts and deficits within certain limits, in theory that is.
So they find themselves in the same situation as Japan, the  USA and China.
But in the future, as soon as they meet the conditions for entry into the Euro Area they will have to join the euro group , the vanguard of the European Monetary Union, as laid down in the EU Treaties.
These conditions are mainly a budget deficit of 3% or lower and a public debt of 60% or less both of the Gross Domestic Product.
But  for reasons that will be clear from the table showing the financial situation of the Euro Area member states they are not very keen to join.

The Euro Area group, the vanguard, consists of member states which have already accepted the official currency of the European Union, the euro. They share one Central Bank, the ECB, European Central Bank.

The ECB is responsible for the monetary policy of the euro area as a whole, guarding the Price Stability of the euro area member states, the money printing and establishing the banking interest rate.
But each Euro member state retains its own parliament and government that determine  its own budget, taxation and expenditure and public debt with the provision that the budget deficit is limited to 3% and public debt to 60% both of the Gross Domestic Product.
In the euro area there is consequently a central monetary policy combined with  19 different fiscal policies. A hybrid situation which causes more and more tension among the Euro member states.
For a construction like this might be sensible if this central monetary policy were suitable for  all nineteen Euro member states, so if they constituted an Optimal Currency Area, an OCA.
Unfortunately that is not the case and will most probably not be.
Germany e.g. in order to function optimally would need a completely different monetary policy than Portugal.
For Germany a totally different exchange rate for the euro would be beneficial than for Portugal.
For Portugal the euro is too expensive, for Germany it is alright.
The European Central Bank cannot serve both and must make choices.
The result is that the financial stability of the euro area member states differs considerably as you can see from this table.

financial stability of the Euro member states.

As the table shows the Euro Area member states are a motley crowd. Percentages of public debt vary widely but are nearly all over the 60% limit, there are hardly any budget surpluses and too many deficits over de 3% limit. Average unemployment is high (though today diminished to 10.4 percent), growth in some countries negligible and generally low so that public debt will get even worse.

Of course these data are not up to date, as is usual. But the final 2015 data will not show any great progress.
But the financial aspect is only one side. The welfare of the population is another. Unemployment, poverty, mimimum wage, Gross Domestic Product Per Person, these are the things that matter to the people.

First of all unemployment.

table showing unemployment in non-EU member states and euro area states

This table shows the unemployment in the  EU, euro area and at the far right  as an extra Norway and Iceland, two non-EU states.

Ideally it should be a straight line at about 5%. On the contrary it varies from 24,5% in Greece, a bailout state to 4,5% in Germany. The average in the euro area has gone down to 10.4%, still far too high.

unemployment compared between non-euro are and euro area

Funnily enough the unemployment in the euro area  (shaded red) is higher than in the total EU (shaded blue), a strange thing, the euro area being the vanguard, to be followed by the other states that have not yet met the conditions for entry into the euro area. At the same time a warning. Why is the euro area lagging behind. It should be ahead.

poverty table

This table shows the level of poverty in the EU with Norway, Iceland and Switzerland added as a comparison. They show the lowest level of poverty.Green circles indicate states where poverty has decreased since last year, red circles indicate an increase.

Here, too, differences between 45% poverty and in other states  just a few percent. The differendes between the eastern and southern states of the EU and the northern ones strike the eye.

But even in Germany and in the UK there is an increase.

minimum wages

One more indication of the oversized differences between the EU economies is represented by the minimum wages. There are countries where no minimum wage has been set and countries where wages are paid lower than the official minimum ones. Non-EU contries are indicated by a lighter shade of yellow. In this table too I see the grave difference between easterly, southerly and northern states reflected.

Finally a table with the Gross Domestic Product Per Person

This table also contains the data of prospective member states and the EFTA states together with the EU member states

The GDP PP roughly shows the total income of a state calculated per inhabitant. This gives a good insight in the economic achievement of each country and the differences among them. Here I see the vast gap between east, south and north.
When I peruse these tables on unemployment, poverty, differences in minimum wage, and GDP Per Person a number of question crop up.

How could it be feasible to bring together all these countries with their fundamental differences in poverty, unemployment, income and economic potential in one great European Monetary Union.

For that is one of the aims of the European Union, as Mr Juncker again said the other day when discussing the Cameron proposals on the British position in the EU.
Denmark and Great Britain excepted all EU member states must introduce the euro when they meet the requirements. Then the EU and euro area will be synonymous with Britain and Denmark as a kind of strange appendix.
And these differences are still strongly in evidence twenty years after the EMU was decided on. They have not diminished in those twenty years, have even made bailouts for four member states necessary with not much of a success.
The efforts to get the euro member states into line with a rigid Growth and Stability Mechanism,  made even grimmer by later amplifications and   forcing member states  into austerity by lowering wages, cutting back expenditure and reforms of labour laws and bureaucracy have evidently failed and have occasioned a growing demand for greater flexibility and looser deficit and debt concessions.
Bailouts and a European Stability Mechanism to support member states in liquidity difficulties have mainly led to still greater debt far above the limits set.
This leads to the conclusion that a further integration of the euro area and later the whole of the EU with the euro as the only currency can only be achieved if a levelling system of structural money transfers is agreed upon. A redistribution of the total GDP of the euro area and later EU among the member states. The argument in favour of this is the money transfers of North Italy to South Italy and Flanders to the French speaking eastern region.

The argument that a more or less similar construction is found in the USA does not hold water.

In the USA labour mobility is unrestricted and feasible because there is one universal language and identical educational certificates. This has in fact led to a vast  mobility of labour over great distances.
But the EU counts 24 official languages and a vast multitude of different educational systems and certificates. That constitutes a extensive brake on labour mobility.
There is no inclination at all of  deciding on one common European language nor of adopting a common educational system.
Even the European Parliament has to meet in two different member states in order not to have to make a choice.

The underlying cause is the refusal of member states to relinquish their own identity and that,  if their governments should be willing to do so, they would estrange their own population.

Even now there is a strong and fast growth of nationalist parties which resist any further integration, transfer of power to Brussels. On the contrary they demand a return of power to the national parliaments. A clear reaction to the inclination of Brussels to enlarge its power.

Europe, it is true, is united in the wish for free trade, free movement of goods, services and inhabitants.

But most certainly not by a desire to transfer ever more political power to a central EU government.