We are so accustomed to financial crises being born in the United States and spreading out to the rest of the world that we can’t envision any other development. But we should get rid of this mental mindset, even if history supports it: from the 1929 Crisis to the 2000 Internet Bubble to the sub-primes episode, the world’s largest economy was responsible for the biggest financial crises on the planet. Being at the vanguard of financial innovation can bring its rewards... and sometimes it can also bring some setbacks.

However, what are we seeing today? As we know, central banks are now at the core of the financial system, thanks to their gigantic arsenal and interventionist policies, but we now see a major divergence between the ECB and the Fed – the European Central Bank is still printing money freely, whereas the Fed has stopped doing so and is now trying to reduce its balance sheet. The gap is now enormous, as tweeted by a German journalist from Welt, since the ECB’s balance sheet is now nearing double of the Fed’s, in GDP percentage!



ECB’s balance sheet represents 41.4% of the Euro zone’s GDP, whereas the Fed’s represents 22.7% of U.S.’s GDP. Just as there is apparently a gigantic black hole at the center of our galaxy, the European economy is circling around a “black hole” which is absorbing growing amounts of bonds and getting larger and larger...

This deluge of liquidity has totally flattened the rates curve: savings no longer yield anything, “zombie” businesses survive by borrowing on the markets, and banks can hide the misery of toxic loans (over €1 trillion in the Euro zone). European banks now show much higher levels of risk than their American counterparts, as we had shown with regards to French banks. So yes, the next financial crisis may well start in Europe – and probably in the banking sector, rather than in the stock markets.

But we’re not saying everything is rosy in the United States: derivatives (just like in Europe) are reaching astronomical numbers, their banking sector could be hiding several risks, their budget deficit is still very high, and the stock markets are very high as well. But growth seems more vigorous, and the fiscal cuts program that Trump has succeeded in passing brings optimism (something we’d like in Europe!). It seems the American economy could withstand a severe correction on the Dow Jones, whereas a new sovereign debt crisis or a banking crisis would jeopardize European Union’s stability.

Clearly Europe is fragile – this is where one has to look for risks of price slips, sudden interest rates hikes, overblown balance sheets... 

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