The Worrying Decoupling of the Eurozone and the United States

Historically, the European and North American economies have been closely linked. The figures show comparable growth rates and standards of living, even if the United States has always kept a lead over "old Europe". The current crisis, with the return of inflation and the war in Ukraine, crystallizes trends that have been at work for a long time, and it is in fact a decoupling that is being announced, to the detriment of Europe. Two structural phenomena are at stake:

1) Europe's energy dependency

The current inflation is first and foremost that of commodities, and it dates from well before the Russian invasion of Ukraine, even if this coup de force has exacerbated the tensions on the markets. The ECB and the Fed have long convinced commodity producers to raise their prices in order to cope with this currency devaluation. But in recent weeks, the European Union's sanctions against Russia have had a boomerang effect, causing little inconvenience to Moscow but embarrassing the nations dependent on Russian oil and gas. Their prices are exploding, due to decisions whose impact has been poorly assessed by political leaders. Putin has just cut off gas to European countries and reserves may run dry next winter. Moreover, the EU is imposing on itself an untenable timetable for its energy transition, which is very costly to implement (we have to subsidize windmills and electric cars). Worse than inflation are shortages, as we explained last March, and these seem to be looming.

2) The fragmentation of the eurozone

The euro is a special currency: "Certainly for the first time in monetary history, here is ONE currency that is managed by SEVERAL central banks!", we wrote in 2013.

This baroque construction is materialized by the imbalances in the TARGET2 balance, precisely between the various central banks, which are constantly increasing. They also translate - and this is what interests us today - into interest rate differentials on sovereign debt. And in particular, the rates on the 10-year debt of countries in difficulty are rising dangerously, whether it be with Italy, at 4%, or France, at 2% after having been at zero in December 2021, i.e. a very sharp increase. The gap with respect to the reference debt, that of Germany (the "spread"), is widening all the time, which in the long run can only lead to a crisis comparable to that of 2011 (which at the time concerned only Greece, as we recall, and the euro was threatened with implosion...).

The main consequence of point 1) is a lasting weakening of growth compared to the energy independent United States, and even a lasting recession. The consequence of point 2) is the inability of the ECB to really tighten its monetary policy, at the risk of endangering the eurozone. At the risk of devaluing the euro against the dollar and thus increasing imported inflation (raw materials are paid for in dollars, remember). The eurozone is thus heading straight for stagflation, or worse, for an inflationary recession...

The ECB is stuck, it knows it. After an "emergency meeting" on June 15, the central bank decided to do nothing, except to confirm that it would continue to buy Italian debt, to reassure the markets. The surprise of the press release was the announcement of the creation of an "anti-fragmentation" tool, without any further details on its content. According to Reuters, this tool would aim to "cap the borrowing costs of the most indebted countries" such as Italy, Spain, Greece, and France, which are also in a bad way. In other words, the ECB could buy sovereign debt without respecting the volumes defined by the usual distribution keys (defined by the weight of GDP), but giving preference to countries in difficulty. This is likely to upset the virtuous countries of Northern Europe and increase political tensions within the EU...

A Europe that is lagging behind, largely deindustrialized, highly dependent on energy (and which refuses to exploit its shale gas and to relaunch nuclear power), and which is imposing on itself an untenable energy transition (stopping the production of cars with internal combustion engines in 2035), is what has become clear since the invasion of Ukraine. With money printing as the only recourse, hyperinflation is the threat. It is urgent to react.