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The Real Economic Crisis Will Start In Europe And It Will Be Triggered By The Global Recovery

Zoltan Ban profile picture
Zoltan Ban


  • The EU is not only one of the hardest-hit by the COVID-19 pandemic, but also the weakest, most problematic economy due to pre-crisis problems.
  • The pandemic is not the cause of the impending crisis, it just accelerated trends that were already in place. The entire Eurozone is set to fall into a debt trap.
  • The trigger of the crisis will be the global recovery, as was the case with the Greek crisis a decade ago.
  • Inflationary pressures and a return of higher interest rates will overwhelm over-indebted countries and the magnitude of the problem will be too big to bail out.

If it would be just me saying it, perhaps it would carry very little weight. When the likes of George Soros will declare that the EU may not survive this crisis, perhaps it is time to take it seriously and much of the MSM did. He is advocating for the passing of the EU recovery fund, but I do not believe that the $826 billion bailout will make any difference in this regard because the EU's economic problems predate the COVID-19 crisis. All that is happening now is just an acceleration of events, not a cause of the events that are about to unfold.

EU problems are much deeper and predate the current crisis

Even before the COVID-19 crisis, the EU was struggling with economic and institutional dysfunction with very deep roots, which were only getting deeper. The 2008 global financial crisis may have been sparked by the US sub-prime mortgage fiasco, but in the end, it was the EU that saw the worst outcome of all major economies, because it led to a Eurozone debt crisis, mostly because of Greece. Now that we have another crisis this time originating from a viral outbreak in China, it seems the EU is once again set to bear the brunt of the economic damage.

The main dysfunction of the EU, which is directly responsible for the bailout dilemma faced by its members stems from the deeply flawed monetary union of a number of countries with different needs. As I explained many times in previous articles, the Euro currency benefited the likes of Germany, not so much because of its social policies, budget discipline and other such factors that are too often invoked. It benefited because it is home to powerful global brands, which are benefiting in terms of global competitiveness due to a Eurocurrency that is perpetually weaker than

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Zoltan Ban profile picture
My name is Zoltan Ban,  I have a BA in economics. I am a personal investor with over a decade and a half of active trading experience.

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Comments (101)

James Hanshaw profile picture
Excellent article. It adds to points I have made recently about the euro in seekingalpha.com/... and seekingalpha.com/...
The ECB like the Fed is committed to do what it takes. I think the ECB will save the EU.
TheDabbler profile picture
I cannot see a convincing case here. The central tenets of the author are either dated or based on flawed assumptions and distorted facts. Conclusions are not compelling. In any case they are unrelated to Covid-19.

Discussing some major points:

1. [Flawed system of Euro currency system]
>>> The main dysfunction of the EU, which is directly responsible for the bailout dilemma faced by its members stems from the deeply flawed monetary union of a number of countries with different needs. [...] It [Germany] benefited because it is home to powerful global brands, which are benefiting in terms of global competitiveness due to a Eurocurrency that is perpetually weaker than it would be if it were to only reflect the German economy.

The same reasoning could be applied to the Dollar, California [highly competitive economy, home of powerful global brands], and the collective of Midwestern or Southern states ( Texas and Florida excluded from the latter ). There would be no obvious difference to the (Euro, Germany, 'Club Med').

It has often been argued that the Euro has deprived the (unquestionably) disparate national economies of the last - in the face of the Interior Market - method of adjusting their competitiveness, namely devaluation of the national currency.
However, this is not a convincing claim here: The US is much more integrated politically and culturally than the Eurozone, so if the reasoning was sound it should apply to the US to a greater extent.

2. [The measure of national industrial output]
>>> the Euro is not responsible for the underperformance of Italy compared with Germany, but the industrial production data for the decade of the 1990s, before the Euro was introduced shows that Italy was doing just fine before the common currency came into force.

It is unusual, to say the least, to measure the well-being of a national economy by its industrial output. After all, it does not account for the _efficiency_ of industrial production. The same could be said about the GNP but at least it comprises all sectors - and for the period of 2000-2008 Italy's GNP doubled (in fact it grew slightly more than Germany's).

3. [EU stimulus package]
>>> The 750 billion Euro rescue fund is currently opposed by a number of prominent countries as well as a few of the newer members in the Eastern part of the union.

This is true. However, the opposition is targeted against a relief package without obligation to repay and to implement structural changes to the economy. There is no such opposition (by EU heavyweight, at least) against loans from a rescue fund.

4. [EU debt trap]
The limit that the author seems to set to distinguish between sustainable and trapping debt levels (ie. 100% debt/GDP) is mostly arbitrary. There are other factors that must be considered, eg. composition of debtor pool ( bonds held by domestic households are less critical than debts abroad ).

5. [Industrial production as a proxy for the economy as a whole]
That's dubitable methodology at best. One would rather expect the tertiary sector, in particular high-tech services and digital products, to be complementary to industrial output. Thus the evolution of industrial production has little predictive value.

6. [Climate change action]
>>> There is also the matter of an ideological issue in relation to the drive to unilaterally continue reducing EU emissions, which is causing the EU to self-inflict a net competitive disadvantage on its industry and other economic activities.

First let's state that the issue is scientific and socio-political, not ideological. The putative competitive disadvantage may quickly turn in to an advantage when it comes to the leadership in innovative environmental tech. There is the precedent of the regenerative energy sector, a dynamic sector originating with a 'competitive disadvantage' of stricter environment protection regulation that has generated growth and several hundred thousands of quality jobs throughout the past 2 decades (not to mention the improvement of quality of living).

7. [Automotive sector / EV]
>>> While the luxury car makers absolutely need to get their act together on EVs the likes of Volkswagen (OTCPK:VWAPY) need to preserve their people's car brand, in other words, cater to Europe's middle class as well as the growing middle class of the developing world.

This is precisely what they are doing in their move towards EV. The well-educated middle class and their growing concern about the future of the planet in the short run (which translates into concern about the future of their children) drives the adoption of environment-friendly(/ier) products and behavior by the customer base. While the effect is hard to quantify, it is certainly

>>> Yet it is betting its entire future on EVs. It has announced that it will cease development of its ICE and related technologies by the middle of this decade. The main problem with its strategy is that EVs that can be priced at a level that the global middle class can afford simply do not have the range utility needed to be more than just a city car.

How much more range than 250 mi / 400 km do you need for most if not all car journeys? In particular from a non-US perspective with smaller distances in everyday live. Moreover the argument ignores technological progress as much as economies of scale. Granted, both bets are inherently unsafe, but even with improvements in the near future (ie. at lab stage / under construction) range should not be an issue.

The article talks a lot about impending economic and social crises, comparing the US and the EU. The US baseline, however, seems quite unstable to me. Let's wait for another half year and reassess ...
There is not one Europe. You should start to make a difference between North and South Europe. Recovery time , debts, financial problems are extremely different. I do not know how long the "North" is going to stay any more with the rest of Europe.
But also in the US will get into financial and debt problems but main problems will get the developing countries.
What about the North and East divide?
I think this will be of less difference. Both want to be economic successful, at least the Northern East European countries.
Little, Einstein profile picture
In markets, whoever takes the words of others as a source of investment, they never go anywhere.
Don't say never.
Little, Einstein profile picture
If the black swan CV19 finally strengthened the economies, as you can see, mainly in the American indices, where it was the epicenter of the swan.
How can you have such a gloomy vision of the future of the markets ....
Everything that is depressing news stops here, but in the end the markets do everything differently from these crystal balls.
My crystal ball shattered on the swimming pool deck.
I can remember when ideological children were not allowed to comment on SA.
Now they can.
"What this means is that these countries will never be able to tolerate an increasing yield curve on their debt again": What about the US? What is the level of public debt for Central Government plus the individual states? Even worse than Europe? And don't forget the pensions.
You are right. The situation is not rosy in Europe. But I doubt the situation in the US is any different. And what about China?
For Europe I can imagine a split between the North and South due to the difference in culture which also expresses itself in economics. Hopefully for the north, if this happens, it will happen soon enough.
A North and South split just like was in the US at one time.
Zoltan Ban profile picture
Thank you for your comment AsdvdV. Keep in mind that the US cannot be compared with the EU average. The EU average number in terms of Debt/GDP looks alright. But with countries like Italy headed for a debt/GDP ratio of 160% or higher, Greece over 200%, these countries cannot tolerate any significant increase in interest rates. Especially given their economic growth prospects. US could still grow out of the debt trap, with perhaps some wise leadership, some discipline and so on. My personal opinion is that the same crisis will come here as well eventually. But Europe will be first.
grim. the us is not the centre of this mess!
Who is at the center of this mess then @anonysubscribe ?
AEGISBMD profile picture

That would be me. I'm the center of the world.
I believe you are @AEGISBMD . Happy stock picking!
@Zoltan Ban

All Europe needs to do is raise interest rates. Counterintuitive? Of course. The US enjoyed success after 2008 because it did raise interest rates. Changing interest rates changed the flow of capital into our debt markets, ultimately into our equity markets. It really is that simple. Europe and Japan have both languished in little to no growth all because they don't get a strong flow of capital. Germany is a great case for this. They have high savings rate, financially strong as a country, a robust manufacturing industry contributing to thier gdp, but have negative rates. Negative rates keep them from growing. When the world has laggards like Europe and Japan, it suppresses every countries gdp growth.
I disagree @mahagen , all Europe cannot afford to raise interest rates.
*"A Bright Shining Lie*" indeed. Would you believe me if I said there was no War going on for the past 20 Years?

We are nothing but peace and love and this is the 1960s!
long $tsla Tesla Motors
Strong buy
Tesla has been as high as $1,027 per share @Lotsdawg . Yikes!
Ahh, just reading this made me more tired than the day's work. the world's population and those that count beans and those that push the idea that the cart is ready for liftoff need to take a deep breath, as in yoga, and spend the next half decade believing that this is Nirvana and it's OK to not expect a V-recovery and some sail wind economic boom.
Does all happiness depend on a V recovery?
leeo268 profile picture
EU Monetary system is designed to export deflation from wealthy members to the poor members, cause economic decay there. The poor member that kept their own currency like Poland continues to thrive. Italy, Spain, Greece need to restore their own currency to revive its economy.
Will the system ever change @leeo268 ?
leeo268 profile picture
If the people of those countries raise up and demand to restore their currency and reduce EU regulations, then they got a chance to change it. However, a lot of these countries are under the EU debt trap. If they get out, they will be put under tons of debt like the Germany Weimar Republic. People won't be able to enjoy the cheap Euro loan and welfare anymore. The new currency might not be able to handle the stress short term. If they get through the initial tough period and maybe bankruptcy, then their new competitive export will bring back lots of jobs, investment, and talents.
How are the people going to raise up @leeo268 when they are tired and love their couches and beds?
slashinvestor profile picture
“ The EU is not only one of the hardest-hit by the COVID-19 pandemic, but also the weakest, most problematic economy due to pre-crisis problems.”

When the article starts off like this you know the extreme bias the rest of the article will have. For if you add the numbers the hardest hit area is the United States and it is now having a second wave. The second wave has thus far failed to materialize in places like China and Europe.

The rest of the article simply states hyperbole... btw what is really galling is the lack knowledge wrt to Greece. Their economy is doing relatively well. They only shrank a bit less than 2%.

The US is not as tourism- and fashion industry-dependent as the Mediterranean coast of the EU.
slashinvestor profile picture
And on June 15 the borders open up for the tourists. Your point being? I did not make this a Europe vs USA thing. I pointed out that the USA has a higher covid problem.
Thanks you for clarifying yourself @slashinvestor .
Interesting and thought provoking article, thank you. Marred slightly by citing Soros and the MSM, neither of whom have any credibility with me. Soros has his own agenda (globalism, immigration) and the MSM just parrot what the three main news sources (Reuters, AP and Bloomberg?) dish out.

The EU started as a centralised (i.e. globalist) project - called the European Coal & Steel Community. I assume the aim is to either have the project complete i.e. one European Govt with the Euro or it will fail and break up. However, the intervening period, which your aticle deals with, will be very interesting times.
Yes it will be interesting.
Bullshit. Sorry for being rude... But bullshit.

Bullshit? Soros, MSM or the EU bit or all of it..? Please expand your comment/thinking here.
European Opportunities profile picture
Good article with lots of food for thought!
Does thought feed on food?
Jonathan Loewer profile picture
I think you hit the nail on the head. This is very likely to be the next 'black swan event' that will cause a snowball effect pulling down on the whole world economy.
We have already had a black swan event.
Jonathan Loewer profile picture
You are correct. I guess I was thinking "the COVID outbreak is the catalyst for the black swan event", but you're right a pandemic is a black swan event.

As a side note to that, if we do have a global debt catastrophe, I hope the history books do not blame it on COVID-19. That would be wrong. With regards to debt, we've been "kicking the can down the road" since before the end of the Cold War. We've used debt as the band-aid for every recession, to invent and fund countless social problems, and even to pay for wars in the Middle East, and almost none of the countries in the Western World have really dealt with their debt situation in a meaningful way; even the countries that were negatively accused of 'austerity' after the 2008 recession were not even paying down their accumulated debts.
FutureOK profile picture
Global financial collapse will eventually happen, no matter how many band-aids are placed and how much QE or stimulus added. The world(US and Europe) has lived way above it's means for decades. When the economic failure occurs, the US will likely be the tallest economic midget in the room. It will be better to be in the US than most other countries when this happens, except Norway, Switzerland, and a few other small countries. Southern Mediterranean countries will continue to drag Europe into a black hole.
A wall of money will meet any financial collapse.
jack kreg profile picture
When you mention: "the likes of George Soros", I think of Karl Marx and Mao. just saying!
Zoltan Ban profile picture
Thank you for your comment Jack. He recently transferred $18 billion of his wealth to his political activism institutions. It is understandable why he tends to carry a much bigger reputation in that regard. But he is nevertheless someone who needs to be respected in terms of his understanding of economics. That is who he made those $18 billion and a lot more.
Simont profile picture
@jack kreg : Nonsense!
@jack kreg When you think of a hedge fund billionaire, you think of a dictator who outlaws the private ownership of capital? What is it like to live with a big hole in your brain?
ger kort profile picture
The EU is already a corpse. Only the leaders of the EU pretend that they don’t know this.
The leaders are living well above the others.
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