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Blain: “If Trump Is Reason The Dollar Remains Weak, Why Is Euro So Strong When Europe Is So Wobbly?”

Courtesy of ZeroHedge. View original post here.

Submitted by Bill Blain of Mint Partners

“Stand up ye victims of oppression, for the tyrants fear your might..“

It’s supposed to be a holiday in Yoorp this morning, and I was expecting a nice quiet start to the day. Instead, I found myself mired in deal stuff from the moment I stumbled into the office – so this morning’s porridge might be bit late, and shortish.

As Europe is supposed to be out, maybe it’s safe to talk about the continent behind its back – tee hee! The big debate is whether Europe is growing or isn’t. Many folk have remarked the current “recovery” in the US is the second longest ever (bar one,) and certainly the least energetic recovery ever – its been a very gentle new-normal upwards curve. In Europe, the up-path is even more difficult to discern, to the extent many observers think it petered out completely during the first quarter. However, why should not Europe post the same kind of stock market gains, and business advances as the US?

More recent European numbers thru April have been much stronger – especially PMIs – and yesterday a number of European Cheerleaders sent me articles highlighting the positive prospects for Europe highlighted by rising PMIs and stronger GDP posts. I found myself actually reading economic reports from French and Italian banks y’day about the positive prospects for growth across Europe.

Analysts are looking at rising PMIs as a very strong indicator of growth to come. One very good note (from Unicredit) points out US data tends to overestimate, while European numbers lag – the result being US outperformance over Europe is significantly underestimated. Hence, it’s a good argument that European stocks are massively undervalued: while US stocks are some 20% higher, Europe posted about 6%! European analysts believe US is unlikely to outperform the Eurozone per capita over the longer 5-10 year term. Others point out the current US recovery is fuelling bubbles across the markets. Since we Anglo-Saxons are always talking Europe down, I suppose it’s only fair they point out the inconsistencies in US and UK markets.

Other analysts point out the “UK shooting itself in the foot” as another reason to buy Europe. I guess they were talking about Brexit. Yawn. Let me digress a moment: Sir Patrick Minford – (yes, the same one who frightened me when I was a baby economics student back in the 1980s) – published a paper: the Economics of Brexit “Getting the Best Deal for the UK”. It’s wonderful foaming at the mouth Brexiteering, but contains some important truths:

  • Only 12% of the UK’s GDP is involved in selling to the EU – yet our economic base (they way we do things) is entirely aligned with it: production methods, labour rules and regulations, energy and financial markets. All they need to do to sell to Europe is meet EU product standards. Minford says EU protectionism within the single market could add as much as 20% to the best prices available in the developed market. Anything except a Zero Tariff agreement with Europe is sub-optimal for both Europe and the UK. That should be easy to achieve in goods (production standards) and in services (especially finance) through an equivalence regime

A pragmatic Brexit will be good for Europe and the UK, but no need to rehash all these arguments again. The best hope for Europe is the UK getting out, and stop interfering in uniting the continent. Then they can put their own shop in order – and that’s where the problems really start.

Should Europe aim for becoming a superstate, or remain a group of closely affiliated but separate entities? The answer goes back to the imperfect introduction of the Euro – which never solved the basic questions of monetary union without fiscal and economic union. It's much the same question the infant USA faced in the 1790s onwards – how to become a sovereign state. They solved it – but basically they were one people.

I suppose my real worries about Europe boil down to my fear of what’s not happening the other side of the English Channel – in Brussels and across the continent. I still don’t believe Europe, as currently structured, will simultaneously sort out the regional policy requirements and of the South vs the economic goals of the North, the looming problems facing the rule of law in the East, and growth in Germany in alignment with the rest of Europe under the current Euro umbrella. I’m not anti-Europe, I just don’t see how all these policy conundrums are reconciled.

There are so many conflicting tensions. These could probably be solved if Europe was a homogenous group of shared goals, culture and history – but they are not. Since they are not, perhaps the previous model of multiple cooperating European states was the right one – but sovereignty was surrendered to the mighty Euro. Countries that are not free to solve their internal problems need release. Hence the ongoing political impasse across Italy is likely to continue to breed continuing populist politics, while the Greeks will retain a long-term resentment to Europe for generations. Right wing racism will continue to fuel electoral dissent – and becomes easy for rable-rousers to focus.

What are the solutions? While Macron has a blue-print for a united Europe, its got a limited shelf-life: while I read the support from Germany’s left, I don’t detect strong buy-in across conservative Germany  - they are not going to buy fiscal union. And that’s without the looming budget crisis Europe will face post Brexit.

Bottom line – if the real reason the dollar remains weak is doubts over Trump, why is the Euro so strong when the underlying structure of Europe is so wobbly? Perhaps because I’ve got it completely wrong. Willing and hoping to be convinced I have…


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