Europe Is Still Broken: Evidence & Commentary

clokey's picture

Over the past few months, the perception has been that the risk of a meltdown in Europe (characterized by the loss of market access for Spain and Italy) has grown increasingly remote. The relative calm comes courtesy of the ECB which conventional wisdom has it, began acting "like a real central bank" in September when it announced it was willing to throw eurozone taxpayers' wallets behind theoretically unlimited purchases of Spanish and/or Italian bonds. This promise of course, was meant to discourage so-called "bond vigilantes" (otherwise known as investors who know a bad deal when they see it) from "speculating" on rising periphery bond yields. As it turns out, the effect of the as yet untested Draghi put has been dramatic. Spanish and Italian 10s have tightened by a ridiculous 240 basis points since late July. 

The problem is that a theoretical promise to purchase unlimited amounts of bonds in the secondary market does absolutely nothing to fix the bloc's myriad and endemic structural problems. As Diapason's Sean Corrigan recently noted,

"...nothing much has been done there beyond persuading traders that the line of least resistance lies in not calling Draghi's bluff when he insists that sovereign spreads must not widen."

All of this of course ignores the fact that widening sovereign spreads are the market's way of punishing the fiscally irresponsible in the same way short sellers serve as a kind of check on corporate recklessness. 

In any event, the gullible investing public gets duped by headlines touting "successful" Greek debt buyback programs and "robust" Spanish bond auctions (nevermind the foreboding CACs) and as such, the eurozones ever-present laundry list of problems has been papered over. Make no mistake, the crisis is still alive and well.

In Greece for instance, it should have been abundantly clear from the time the recent debt buyback was proposed, that the program put the country's banks in an absurd situation: if they participated, they would lose the future stream of interest payments on the government bonds they owned, but if they didn't participate, they risked jeopardizing the program and, in the process, their own recapitalization by throwing a veritable monkey wrench in the long-delayed next tranche of international aid.

Sure enough, earlier this month, Ekathimerini reported that as a result of the buyback, the country's four systemically important banks are facing a capital shortfall 1.5 billion euros greater than would otherwise have been the case were it not for the buyback scheme. Relatedly, Reuters said Saturday that the IMF now expects that between 2015 and 2016, Greece will need somewhere between 5.5 billion and 9.5 billion euros to avoid bankruptcy. The problem: as usual, no one knows where the money is going to come from. 

Elsewhere, the ECB's policies have failed to correct the myriad disparities between the core and the periphery, a point made clear in a recent presentation from a Goldman conference in London. For instance, while the ECB's policies have succeeded in increasing the money supply (M3), lending volumes to the private sector have failed to respond:

Similarly, monthly flows data shows corporate borrowing is especially weak:

More specifically, the following charts show a persistent divergence between the core and Spain/Italy in terms of both overall financial conditions (a combination of real 3-month interest rates, real long-term rates, and real trade-weighted value of the exchange rate and equity market capitalization of GDP) and interest rates on business loans:

Lastly, note that Germany is still funding the periphery as illustrated by the fact that TARGET 2 (everyone's favorite bailout mechanism masquerading as a settlement system) claims of the Bundesbank on the rest of the euro have begun to rise again after a brief respite. 

All in all, the ECB has failed to correct or really to even amerliorate the deep, persistent imbalances that are so pervasive across the currency union. Don't expect this situation to improve anytime in the near future. It would seem that a broken monetary policy transmission channel may turn into an EMU mainstay, hindering credit expansion and generally curtailing Mario Draghi's ability to effectively arrest the crisis for the foreseeable future. If you still have doubts as to the intractable nature of the crisis, just look at Goldman's projections for GDP contraction in Spain and Italy in 2013: -1.7% and -.08% respectively. Ignore the parroting of the mainstream financial media... nothing is fixed in Europe. 

Charts: Goldman

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steveo77's picture

I tried a new Survey tool, Survey Monkey. Even the free version looks really good, head and shoulders above everything else I have ever seen. 
So I made an entertaining survey on the inflationists versus the Deflationistas (TM), check it out here: and don't be bashful about kliking some adz survey.html

Herdee's picture

They couldn't get the money from communist China when Frenchman womanizer Sarkozy went begging so now there's probably a hope that Abe from Japan is coming to the rescue with billions of Yen in order to take on Europe's bad debts.The Chinese are a lot smarter.It's demographics plain and simple for Europe and Japan.The Chinese will wait and pick up everything cheap when the two of them go bust.

From Germany With Love's picture

TV debates here in Germany show first signs that the verbal groundwork for a transfer union is being laid. There are calls for Germany to share more with their poorer fellow Euro countries.

THE DORK OF CORK's picture

Italian M3


Look at the pointless rise  (all wasted on grot) during the euro years /tears

Yet they call it a fiscal crisis in was a free banking crisis just as everywhere else in Euroland - even Greece.

All that bank credit production extracted from the capital base. (increased the $ price of oil post 1998)

This is in fact the greatest free banking crisis in the history of free banking crisis (and thats saying something)

Made worse by the banks issuing money /credit in the governments unit of account.


Italy not only has a lost decade , it a lost 2 decades............. 

The Fiscal austerity of the mid /late 1990s acheived nothing other then a transfer of the declining wealth base.

falak pema's picture

Witness the growing divide between MSM and contrarian internet media like ZH, à propos the future of the world economy :

Why The Coming Few Years Could See A Brutal Turnaround For Gold - Business Insider

Barclays: Either A Consumer Slowdown Will Hit The Market, Or Growing Concerns Of Fed Tightening - Business Insider

We Are Now So Close To The End of The Era Of Crisis... - Business Insider

They, the Squid cabal of TBTF,  are hitting the gold bugs where it hurts most!

Snakeeyes's picture

Excellent points! But while Europe is still SOCIALIST, it will remain broken. Just like the former Soviet block satellites Romania and Bulgaria.

Pity that the USA is becoming more like Bulgaria.

Darth Rayne's picture

'three major problems...the euro zone debt crisis, faltering competitiveness and declining public support.' - says Mr Cameron, or will when he gets round to his Euro speech.

Actually, that is just ONE problem. MONEY. To be absolutely accurate, the problem is the creation of money.

In our digital age, more than 97% of our money exists in an electronic format. This electronic money is CREATED when we BORROW it. 'We' being individuals when we finance cars or purchase homes. 'We' being specific clumps of individuals when businesses borrow money. 'We' being everyone when our Government borrows money to deficit spend.

Do you actually understand the implications of the above paragraph? If you do, you truly are one in a million.

Some of you will nod and say, 'Well yes, it's fractional reserve banking.' You are WRONG. This is the digital age. Very few people carry much cash. Do you keep £20 in your wallet? Fifty pounds? £100? Less than 3% of societies currency is in the form of cash. So for every £1000 you have, on average you will only have £30 in cash. £970 of it will be digital.

Banks love digital money. They are allowed to create as much of it as 'we' borrow. (Central banks then create whatever they need to to back this creation. To give an impression of a fractional reserve system working as intended.) So banks create 97% of our money electronically. We borrow this money, we pay it back. We also pay back the interest requirements too. Banks decide whether or not to lend money and for what purpose. If they restrict lending across all sectors, we get a recession. If they flood money into one sector, perhaps housing, then house prices will rapidly increase. They can decide how easy it is to borrow. There is a massive difference between setting a minimum 20% deposit for a mortgage or loaning 20% more than the house is worth. One doubles the price of houses every four to six years and the other doesn't.

I mentioned interest payments. Is it ethical to demand interest payments on money that DID NOT EXIST until you borrowed it? Can you actually borrow something that does not exist?

Following this train of logic through to its bitter end, we are Economic Slaves of the Banks. Banks 'extend credit' to us, lets say £10,000. The bank effectively types £10,000 into our account. We then earn money to pay back the £10,000. So eventually, this extra £10,000 in the economy gets paid back. Everything is as it was except you have then paid back interest, taking money from the economy. Slavery. We work for something that they get as interest payments on money that they created electronically when we borrowed it.

Now, what do you think happens if the government continually deficit spends for decades? Easy, lots of additional money comes into the system which dilutes the value of the money already in the system. This is how inflation is created. Notice how used to inflation we are? The government can borrow without limit. The banks can lend without limit. The game continues for as long as the people want it too.

It is a good game and provided the banks don't abuse their position intentionally or not and provided the Government doesn't abuse its position intentionally or not, everything is fine.

I suggest that house prices rocketing up from 1990 to 2007 from around £28,000 to £122,000 as a strong indication that the banks have not acted in the public's best interest.

I suggest that continuous inflation is also not in the public's best interest either, hence the Government deficit spending is not in the public LONG TERM best interest. By LONG TERM I am thinking of your grand children.

'We' need to understand the entirety of this brief response.

'We' being you, Mr D. Cameron, Sir M. King and Her Majesty.

This is not just a UK problem, it is a developed world problem. Or to be more accurate, an electronic money creation problem.


For US readers :

£ = $

D. Cameron = Obama

Sir M. King = Bernanke

Her Majesty = Dimon

We are all in this mess together. We are all Slaves to a system devised by one man hundreds of years ago. This man got governments on board with fractional reserve banking and Government bond issuance. His descendants are doing marvelously. However, this electronic money farce will blow the system up far faster than anyone but ZHers can imagine.

tango's picture

I maintain that simply blaming banks is a huge copout.  People did not have to buy things they could not afford.  Plus, there were constant warnings from almost every soure about the danger of sub-prime mortgages.  But no, we fell for the fairness illusion, that everyone "deserves" a house whether they could afford it or not.  This idea went from social to politial to financial and the outcome was what anyone with an atom of sense should have foreseen. 

falak pema's picture

Super Mario couldn't have said it better. A perpetual roller coaster of electronic fiat. 

It hits the asymptote the day those who hold real commodities pull the rug under the feet of the electronic money Czars.

That day first world meets the OTHER world...which explains WHY Saud and OIL patch have to stay part of first world; Russia???

hmmm...That is Cameron's TRUMP CARD; those ruski Oligarchs have their money in City. Maggie's farm has reaped good dividends. 

They must be praying for one thing in City: Oh God, don't let us thieves fall out; like we did in 1914!!

smacker's picture

That's a case for dumping fractional reserve banking and fiat currencies. Right?

etresoi's picture

As a thought experiment, let us cede the point that Europe is broken. I say this is not much of a long term problem.

If one reviews the history of Europe over the past 220 years, one will see that every country of Europe has changed form, size and type of government several times and many have disappeared and reappeared many times.  The European people know this.  It is in their genetic memory and they subconciously realize that something new will come from something failed.

The European Union is a recent experiment.  If it fails, there are the original countries and governments to restart.  In other words Europe has a fall back option.

In contrast, if the USA is broken, what is the fall back option?

smacker's picture

50 individual states? ...or perhaps small groups of states.

etresoi's picture

Is that before or after the coming civil war?

smacker's picture

Oh, definitely after. But it wouldn't be necessary if the political elites had the balls to admit that they've completely wrecked everything and now have to step aside and allow more competent people to take the decisions.

Mr. Hudson's picture

: "In contrast, if the USA is broken, what is the fall back option?"

Perpetual, indefinite global war.


etresoi's picture

Perpetual, indefinite global war is what you have had for the pat seventy years.  Thanks to the USA

shovelhead's picture


Invade Canada to liberate the minority Quebecois.

etresoi's picture

yes, the Canadians hate you for your freedoms!

MFLTucson's picture

There is no way back without a revolution, return to the consitution, and a return of the goverment to the people and free enterprise meaning the EPA is gone. One mans opinion, there may be others but I cannot envison one without a dismantling of the hand out state.

etresoi's picture

A return to the US constitution?? It is the seminal document of your tattered republic, an instrument of legal ambiguity so susceptible to multiple interpretations that it makes the Bible look like a science textbook. It is hailed and hosannahed as a sacred and inviolable text, even though amendments have been made and unmade. It is used to support every position under the sun, from upholding the property rights of slavers to denouncing the consummate illegality of the south's "peculiar institution".

falak pema's picture

resuscitating the APache and Comanche tribes! 

With a zest of Algonquin and Iroquois shenanigans. 

Cheyenne spring and Blackfoot rampage.

Sitting Bull comes to reality show with a vengeance with his ole friend Crazy Horse! 

are we there yet's picture

Lance Armstrong should join the FED where doping the system and lying about doing so is legal and expected.

zilverreiger's picture

Dutch bank SNS Reaal can't pay back 0.5B euro bailoutmoney, tax payers take one for the team.

Joe A's picture

The source is Goldman and I am sure that as a solution to Europe's problems they would suggest Europe's countries to hire more Goldman people.

q99x2's picture

Time for households and non financials to take their pound of flesh.

Cast Iron Skillet's picture

I'm not a pro, but I read somewhere that Japan is busy buying European bonds in order to drive the Yen lower. That might also be helping drive the periphery yields down maybe.

bank guy in Brussels's picture

And maybe in general the central banks are just buying everybody's bonds via black hedge funds in the Cayman Islands using fake printed money

It's all so manipulated it seems clear they would do that as they get desperate

Son of Loki's picture
Seven years after the riots, the suburbs of Paris still simmer with resentment


This article is from 2 months ago but I wonder if anything has changed?

InvalidID's picture

 Ahh, the new normal... I say go long lithium as I do believe we have an epidemic of bipolar... I mean, buy more ipods bitches!

disabledvet's picture

How 'bout that hostage rescue! "just in time for the Sunday news." What amazes me is how quickly the news flow stops once it's reported here. immediately there's some Government person as if standing up in court shouting "i strenuously object! that is truth i tell you! and what we need in America are even BETTER lies!" i'm telling ya' "the chickens are conspiring." and as funny as that movie was "Al Qaeda in Europe" is no joke.

OpenThePodBayDoorHAL's picture

Algeria was always a pariah state. The generals needed to update their military hardware, and after 9/11 they saw their opportunity. They went to G.Bush and said "oh oh we have terrorists here", GW sent $620 million in arms & training to a variety of governments and groups in the region. Of the 4 main groups we financed and armed, 3 turned around, did military coups, and then lined up with the bad guys. Oops serious blowback.

So now the media want everybody to believe the simple story: al-Qaeda is in the region. But no mention of WHY they are there, and WHO financed them, trained them, and armed them to the teeth to begin with.

We kicked the hornet's nest in the region by throwing out Gaddafi, just because Unicredito didn't want to pay the $4 billion they owed him. Now the entire region is a giant shitstorm...which is just what the US wants.

tango's picture

OK, lets say that Mali is partly due to Libyan interevention but how to explain Al Qaeda's presence throughout the continent - Kenya, Morocco, Nigeria, Angola, Chad, Somalia, etc?.   It is possible to criticize US foreign policy and still not go enbrace the crazies or assigning every Islamic attack to Western provocation.  Fundamentalist Islam's rise is directly proportional to its encounter with the modern world.  It cannot cope with modernity.   Thus the constant calls for a return to past glory, Sharia, harsh illiberal traditions, rejection of the arts, gender equality and other Western "evils".  There are no pat answers for complex situations. 

mvsjcl's picture

You're looking at the wonderful embroidery needled onto the curtain, a distraction from perceiving the presence behind the drapery.

Matt's picture

The problem is that the West removed a stabilizing force in the region (Gaddafi) and in doing so, let his arsenal of weapons fall into the hands of the Jihadists. The Jihadists have been in the Megreb since at least the 90s, so it is not anything new at all.

bank guy in Brussels's picture

Also, excellent coverage of 'Africa's Afghanistan' by Pepe Escobar in Asia Times Online

As well as the Libya connection -

Describes how the US supported the radical Islamists against the local, more secular Tuareg insurgents - the Tuaregs a people like the Kurds, in several countries and with a strong identity but no country of their own

Thanks to all the US fostering and actively seeking more 'terra-rism', the Tuareg rebels have been pushed aside by the radical Islamists now much better armed thanks to arms supplies they have received from US-Nato or carried over from Libya

It is the shame of Europe and France to be involved in supporting all this war-mongering alongside the US and Nato


« According to the UN Office of Drugs Control, 60% of Europe's cocaine transits Mali. At Paris street prices, that is worth over $11 billion. »

pauhana's picture

I'm watching Barrett Jackson and I see no evidence of any inability to pay any price anyone might desire and these buyers come from all over the world.  I don't think more than 4 cars have gone off without reaching their reserve price.  What recession?  There are definitely two economic worlds at work out there.  Thank you, Central Banks of the world, for making this such a wonderful place for rich people!  sarc/on

Dareconomics's picture

Good call. Rich people markets in collectible cars, art and high end real estate are at record setting levels.

knukles's picture

Somebody please make a fucking decision.
One day it's fixed, the next day its broken, then its fixed again, then broken, fixed, broke...
A man can go plum crazy listening to all this shit!


(I wanna see that movie of Brittany shaving her head again, honey.)

Tom_333's picture

Who cares.All those graphs and figures are worth exactly....nothing.

There´s still a cornucopia of resources to be emptied.Increased deficits,moneyprinting,rate manipulation,higher taxes,outright confiscation,forced labor,camps,government directed genocide.You name it - Big Brothers are no way near running out of "measures" and other GDP multipliers to be implemented.

For now and the next ten years it´s all bull market.This can easily last another 70 years or so.

tango's picture

I am still that mind for the US (the creativity of the can kickers is incredible).   But Europe is so much worse.  Energy resources are vanishing, taxes are nearing their limitand despite slashing defense spending to record lows debt continues to pile up.  Worse, practically every insitution (pension funds, etc) have committed the ultimate folly and invested heavily in sovereign debt.  At this rate the continent will fall to a gang with bb guns. 

Tom_333's picture

Dear Tango,

You have just summed up -socialism. That´s what it is.And that´s what the U.S. rapidly is turning towards