Guest Post: Europe Is Now Sinking Fast

Tyler Durden's picture

Authored by Alasdair Macleod; via Peak Prosperity,

With the Eurozone having being displaced from the financial headlines by the American presidential election, you might have briefly thought that its problems had gone away. They haven’t.

It’s just that the public is expected to absorb one major story at a time. And now that the presidential election is done and dusted, Europe is rapidly returning to the headlines. This is not desired by the powers-that-be, who desperately need us to believe things will get better with a little patience.

Behind the scenes, in order to prevent a systemic crisis, the authorities (through the European Central Bank) have been hard at work keeping a lid on interest rates for Spain and Italy, which act as everyone’s market bellweather. Their strategy focuses on the hope that high bond yields are just a lack of 'animal spirits' – and if only they can be reignited!

Time is working against all countries in the Eurozone because the good are being dragged down by the bad.

You don’t have to be an economic genius to understand that the perpetual uncertainty over the Eurozone’s future has led to a widespread freeze on industrial investment and development. Industrial production is collapsing at an accelerating rate, falling 7% year-on-year in Spain and Greece, 4.8% in Italy, and 2.1% in France. The downtrends for industrial production are readily apparent in the chart below:


The businesses that are doing well (and there are some) are those businesses with strong balance sheets and solid export order books for non-Eurozone markets; unfortunately, they are concentrated in countries like Germany, Holland, Finland, and Austria. They are not located where they can contribute to economic progress in Spain, Italy, Greece, or France, and so they are not adding to the tax revenue desperately sought by those governments.

Despite the recent deal worked out with Greece, the old cliché about kicking the can down the road is close to becoming no longer possible. Deferring the inevitable is only a political option so long as there is no immediate damage from doing so. But this is no longer true in the Eurozone, where political procrastination is now identifiably responsible for social unrest. It’s not just the trade unionists in revolt; now it is the middle classes as well. Doctors and teachers in Greece do not get paid anymore, and it is going that way in Spain, with regional governments surviving by simply not paying their bills. Government is destroying society, proving the falsity of the heretofore accepted belief (in Europe, anyway) that government makes society better. But then, anyone who has bothered to read Hayek’s The Road to Serfdom will not be surprised.

What was not anticipated in Hayek’s masterpiece is the divided state that is emerging. Greece is part of a larger EU and Eurozone bureaucracy and cannot achieve statist ends by turning her citizens into serfs. The government itself is subservient to higher authorities and is now having that medicine applied to it by its peers. Every visit by the Troika (collectively the European Central Bank (ECB), International Monetary Fund (IMF), and the European Commission) screws the Greek government further towards its own serfdom.

Keep in mind just one thing: Greece is utterly broke and cannot escape that fact. All of the posturing by the three Troika members is designed to avoid facing this reality. The political elite drive this party line and rigidly conform to it. However, there is increasing unease among powerful elements in the background, and in particular, sound money advocates in the Bundesbank are deliberately pushing for different solutions than those pursued to date.

Jens Weidmann, who is the Bundesbank’s chief and its representative on the ECB’s Governing Council, is remarkably outspoken on this issue. In a recent interview with the Rheinishe Post, Weidmann pointed out that the ECB and other national central banks in the Eurozone are now Greece’s largest creditors and cannot take a haircut on Greek debt. Furthermore, they cannot write off this debt, since that would amount to monetary financing, which is forbidden under Eurozone rules. So, he concludes, the ECB is trapped.

This intervention is important, because – unusual among the world’s central banks – the Bundesbank is viewed by the German public as the protector of the currency against the politicians. The German economy is traditionally driven by small savers, who are secure in the knowledge that the Bundesbank won’t let them down by printing money. While this is perhaps a stereotypical view, a hangover from the days of the deutschemark, it is still true with respect to public attitudes. And this is important because there is greater public trust in the head of the Bundesbank, Jens Weidmann, than in any politician, including Chancellor Merkel. We must listen to Weidmann, not Merkel.

Returning to Greece, forward-looking markets have already written it off, but getting there is not easy. On 11 November, by a slender majority, the Greek Parliament agreed to the latest austerity demands from the Troika, in the belief that the Troika will come up with urgently needed cash. This is cash for an economy that is tanking with its industrial production collapsing. Deposits have flown from the banks, which, without the ECB’s recycling of funds both through the TARGET2 settlement system and by taking in yet more worthless Greek debt as collateral, would themselves default. Tax revenues, insofar as they can be collected, are simply vaporizing. In the words of the classic Monty Python sketch, this parrot is dead, expired, and everyone knows it. Despite this, the Troika caved in (to ironic laughter from the press) on 13 November by giving Greece a further two years to get its government debt to GDP under 120%.

The concern, obviously, is that Greece is a dry run for Spain and Italy. It is also, as I argue below, a dry run for France, which is in terrible shape and deteriorating rapidly. This is why the protector of German savers, Herr Weidmann, is worried. He is signalling that the precedents set in dealing with Greece will ultimately destroy Germany.

In my last article for, I argued that Germany, not Greece, should and will leave the Eurozone, perhaps taking Holland, Finland, Luxembourg, and Austria with her. It has always been clear that this is the last thing the political elite would consider, but unless Mrs Merkel reconsiders her position, she will be overruled by the Bundesbank, and perhaps also her own finance minister, Wolfgang Schäuble, who is known to be extremely concerned.

Anyway, let me throw in a little ray of sunlight for Germany (or is this the light an oncoming train in the tunnel?) For some reason that's not entirely clear, the outstanding TARGET2 claims by the Bundesbank on the other Eurozone national banks actually fell in October. The updated chart is below:


That's the good news. The bad news is that the previous down-tick (in December 2011) was in the wake of a drop in Spanish bond yields from over 7% in mid-2011 to a low of under 5% last January. This time, Spanish yields fell from 7.5% three and a half months ago to 5.4% a month ago. Italian government bonds have followed a similar pattern, as shown in the chart below:


It is perhaps logical to link changes in TARGET2 balances with changes in sentiment in Spanish and Italian bonds. These bond yields show signs of bottoming out, which is clearly visible on the chart. The only reason these bond yields have fallen to these low levels is because the ECB forced them there. But when these yields rise, which they probably will because there is little doubt the ECB’s manipulation cannot succeed for very long, the accumulation of TARGET2 imbalances on the Bundesbank’s book will quickly exceed €1 trillion.

And there is a further problem. One of the reasons French ten-year government bond yields are only 2.1%, and have even been briefly negative for her six-month bills, is that some of the capital flight out of Spain and Italy has been deposited in French banks, only to be then lent on to the French government.

But France, as I argue later in Part II of this article, is itself a basket case, only not yet widely recognised as such because it has benefited from this capital flight from Spain and Italy.

At some stage, probably in the next six months, these accumulated deposits in the French banks will, in turn, seek a safer home elsewhere – and where else but in the German banks? And so the Bundesbank faces the prospect of a second wave of capital flight and escalating TARGET2 imbalances.

Of course, this would not matter if it was certain that no one was leaving the Eurozone, and the TARGET2 system was constructed on the assumption that no one ever would. One could argue that Greece leaving would not be too much of a problem, other than the precedent it would create. This is why it is so important to keep Spain and Italy in the system.

In Part II: Europe's Mexican Standoff we explain why the answer to the question of Who will ultimately pick up the tab? when a Eurozone member leaves is not at all clear. In fact, the "stability" of Europe right now hinges completely on no one leaving (or defaulting).

After all, TARGET2 is a settlement system with offsetting cash creation and destruction carried out by the national central banks on delegation from the ECB. But nonetheless, it is understandable that the sound-money guardians at the Bundesbank are increasingly alarmed at the progression of events.

To borrow from Dirty Harry, it leaves those tied to Europe's future pondering a seminal question: "Do I feel lucky?" Well, do ya?

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Shizzmoney's picture

Enjoy the Holidays, fellas.  Because the REAL shit starts in January, 2013.

LawsofPhysics's picture

Maybe.  Mind if I see the collateral behind those balance sheet "assets" first?  Margin call bitchez.

dracos_ghost's picture

What is this word "collateral" you speak of? It's not nice to make up imaginary words.

NotApplicable's picture

Rehypotheticated unicorn feces (Skittle flavored).

HoofHearted's picture

So why would Germany want to take Hollande with it? Is this some sort of Vichy government type of thing. Oh, Holland. As Rosanne Rosannadanna would say, "Nevermind."

NotApplicable's picture

Interesting how I beat your post, yet you've an earlier time-stamp.

ZH wormholes, FTW.

Stock Tips Investment's picture

It is clear that Europe's economy is being destroyed. I think the next country to be in the picture will be France. President Holland has tried to minimize the effect on their country, but the economic situation in France is rapidly deteriorating. In addition, this socialist government is taking all measures to tackle the crisis wrong. Consequently, we shall certainly many bad news in France from now. Interestingly, the Government of Spain seems to be the European country that is facing the crisis more decisively. This despite many Spaniards do not want to accept the new economic reality. The most likely, is that from now on, let the Germans, more concerned with "shield" its own economy, fill orders before the rest of Europe.

1100-TACTICAL-12's picture

I'm goin with Max Keiser..April or sooner..

molecool's picture

Whatever - that's exactly what they said at the end of 2009, 2010, and 2012. One of these days the perma bears are going to be right. Not to argue with this article - that's not my point. But never underestimate the capacity of governments to kick the can down the road. They truly excel at that.

If I had read my own message a few years ago I would have scored it as idiotic. After all the shit just HAD to hit the fan any day now, right? But despite thousands of posts like this they somehow still keep it going with scotchtape. 

Offthebeach's picture

"Lots of ruin in a country"

Adam Smith

CH1's picture

Yes, but not infinite ruin... and we've already had several ocean's worth.

FrankDrakman's picture

Two nuggets I've learned:

Markets clear.. eventually.


Markets always do what they're supposed to do, just never when.

francis_sawyer's picture

Hey ~ that picture looks like the boat I used to have with all my former gold in it...

falak pema's picture

I love the title; sinking fast. Sounds like the house of the setting sun! 

forwardho's picture

More like the fall of the house of Usher.'s picture

Don't worry tanks will fix everything

pragmatic hobo's picture

economic genius? given economy is all about common sense, economic genius implies common-sense genius. Since no such thing exists economic genius can not exist. On the other hand there are plenty of economic alchemists who claim to be economic experts.

Yen Cross's picture

 What is the deal with the DAX? That thing has been parabolic, and Germanys macro numbers suck! Is it just the continuing circle jerk over giving Greece more money, in an election year?

Orly's picture

I am thinking it is the Euro pump-and-dump.

The EURUSD pair touched on the Fibo-level at 1.283 and failed to make new highs in the next H4 candle.  It seems they've thrown everything at it and nothing has stuck.  Ramp in risk, even trying it today in US equities but it's going nowhere fast and probably on vapourous volume.

I have my robot looking to short EURUSD to about 1.252, the next level of major support.  Something tells me it's risk-off time again.


Yen Cross's picture

 I tried to hit a little aud/jpy short this morning , when usd/jpy hit the top of it's move. Thought it might be good for a small intraday(retrace) trade. Now not looking so much so. I'm on your page though. :-)

Orly's picture

Have a look at EURAUD.  It just broke through the bottom of a rising channel after a major, major overnight ramp-job.  Last time this happened, the pair came straight back with a 220-pip move down.

Dr. Engali's picture

It's nothing a little propoganda from the media and printing from the fed can't fix. It's done wonders over here, our ship is sinking fast and the sheeple have been lulled into believing we have a booming economy. I saw something I've never seen in this town until yesterday. A local church was passing out food and there was a line for blocks..people of all ages. Tells me the food stamps just aren't cutting it any more. People need to open their eyes to what is going on around them.

Vince Clortho's picture

" ... the sheeple have been lulled into believing we have a booming economy"

Add to this the great Real Estate Boom of late 2012 and there is abundant fuel to accelerate the Believe-Train even further towards the Horizon of Prosperity.

tuttisaluti's picture

EU is still better then the US when I take in consideration that the EU statistics are not manipulated like the US ones

LawsofPhysics's picture

Maybe, everybody's lying and using "mark to fantasy" accounting.  I strongly urge you to consider the physical assets and natural resources within the boundaries of the EU and the Corporation of the United States of America as well in your future analysis.

THE DORK OF CORK's picture

Break it up please..............

The BRics will be in very deep trouble but it has been a failure for everybody but the bankers.


When European countries gave up their nation state status in 1986 it was and is a very dark period.

Europe can no longer afford to export its capital base (as now so little remains) so that its bankers could earn a wage / slave arbitrage from their global operations.

Some countries such as France will be able to capture the new base money flow while others not so much...............but we have got to get out of this place.

France has indeed been on the receiving end of capital flight but it simply does not have enough domestic money tokens to utilise its previous capital investments.

What the point of making capital investments if you can't use them because of near static money supply growth ?

Quinvarius's picture

The big print is upon us.  More of the same...only more.

Jonas Parker's picture

Looks likme the financial turkeys have taken control of the Eurozone economy. I hope they have a happy Thanksgiving. Next year won't be, and only the banksters will be happy then...

knukles's picture

RTRS  Brussle, November 20, 2012

   Ameye Quizless Cluezo, the EU's mute Inspector General and Minister of Raw Wheat Huskings in Months Beginning in F, announced through a quadriplegic interpreter assisted by a peripatetic transsexual sign language expert, waving its arms and hands about wildly making no sense at all to an empty auditorium, that within the next few weeks, he had been assured that Ms Merkel and Mseur. Hollande would once again meet in some sumptuous palatial place over a feast fit for Versailles, come to no conclusions whatsoever and in fact toss food at one another to be later followed by shiny rainbow colored unicorn Skittle shit announcements, followed by an agreement to increase Raw wheat Germ Subsidies French farmers located in the 17th Androissment by 309% annually over the next 18 subsequent years.

Terp's picture

I lol´d.


That is the EU for ya.

kaiserhoff's picture

Brings back memories.  I lived on the left bank and never quite figured out what androissments were used for.  Probably, as you say, for more fucking frog subsidies that don't translate into any sane language.  I was too busy with cheap wine and cheaper women.  A moveable feast.  A man who is bored with Paris is bored with life.

kralizec's picture


Not fast enough...

gaoptimize's picture

Please see page 10 of for the reason the Government would prefer you not use "Maxican Stand Off" in your articles ;) .

youngman's picture

If they would have just let things fall as they may...Greece would have had to cut expenses on their own because they could not sell anymore debt....then they could only blame they can blame the Germans or the ECB.....its not their fault they think now

Financial Cold Fusion's picture

I'm amazed that the people that are suffering in the name of the Euro/prosperity havent come completely unglued.  What more needs to happen before its obvious the Euro is fatally flawed?  I hope this experiment doesn't end in war or ten more years of pain and suffering, but if it does, I hope the people strongly consider rolling out the large cigar cutters again. 

Chief_Illiniwek's picture

"Europe is sinking...", the dollar is doomed, Japan is on economic (...if not literal) life support, etc., etc., etc.

While I agree with these assertions, did anyone think that the respective collapses would take THIS LONG?  As someone noted in the replies to a story about Treasury Bond collapse from yesterday:  put a date on it - otherwise, these types of stories are just sitcom-repeats.

Offthebeach's picture

Who would of thought in 1917 Lenin, Stalin would go on to murder tens of millions, slave 100 million for 3-4 generations. Ditto Mao.

Were just starting.
This is the beginning of the beginning. Think England, only we have way way more wealth to strip. What's left of productive America is like a great beast that refuses to die. Poisoned, starved, stabbed and still it rises ....

DanDaley's picture

It takes a long time to melt an iceberg, but rest assured that we are still on course for the equator.

catacl1sm's picture

Could somebody smooth that chart for me? It looks way too up and down.

Seasmoke's picture

If not careful a drowning man will take down a lifesaver, drowning them both

Madcow's picture

The Eurocrats will not rest until there is rampant cannibalism.

But this will cleanse the gene pool.  Anyone who is still living in Europe qualifies for a "Darwin Award."

Joe A's picture

That Billy Joel's song comes to my mind (and sticks to it): "and we will all go down together..."

augustus caesar's picture

The only way Europe can save itself now is colonization of Africa, and given their military resources compared to the US, Russia, and China who all would contest such actions they might as well go down to the wine cellar and at least be pleasantly buzzed for the end.

Lord Peter Pipsqueak's picture

Augustus,you have it completely backwards.There is no way the Euro and the EU are going to break up, the Euro is the safest curency in the world right now, backed by Saudi and arab oil money,there has been over forty years of corruption,treason and deceipt behind the betrayal of the entire continent of Europe trying to sell it a trading zone for future growth, but inreality turning it into an Islamist state via corrupt/naieve/weak politicians using uncontrolled immigration and the historically high birthrate of muslim immigrants to ethnically cleanse the indigenous population.

Try this for starters:

augustus caesar's picture

Hi Peter,

So things are so bad for the Europeans that not only can they not rely on being able to colonize foreign lands to pilfer their resources and depopulate the mother land of rambunctious elements,

but that Africans and Middle Easterners are actually colonizing them.

Sounds about right.



Bastiat009's picture

Europe is not sinking, it is not Detroit or California. It is always weird how people feel better when they think other people feel bad.

Europe sucks as much as the US but is certainly not sinking faster than it.

augustus caesar's picture

If you're going to make a statement like that, you have to at least tell us what country you live in.