The EU Is Headed For A Fall

Angela Merkel has essentially functioned as the defacto president of the EU for nearly a decade, and Germany has heavily influenced most key fiscal and monetary decisions. Merkel and her top aides, and the Bundesbank, have pushed the German agenda to help Germany remain the preeminent leader of the EU, and one of the top exporters in the world. Unfortunately, she also pushed her liberal social and foreign policy agenda, and that has resulted in a growing pushback from not only other EU nations, but within Germany itself. When Merkel forced the refugee program on the EU, the pushback began in Hungary and Poland, and has now encompassed many parts of Germany and other EU nations as well. The flood of refugees with no skills and no money was far too much for most other nations to handle, and has led to increases in crime in places like Stockholm and other major cites in Europe. Part of what is driving the politics of Italy is the refugee situation, and now the new government is planning to deport refugees. Muslims will be a majority, or a large voting bloc in some countries in ten years, and that will upend the politics and cultures of the region.

The EU requires unanimous decisions, and that makes it very hard to accomplish some of the things that were required to fully recover from the crash.  The banking sector remains far from fully cleaned up, and far from strong, and in some cases the banks continue to hold bad loans. The continued ultra low interest rates, which will continue into next year, has kept zombie companies and real estate alive, instead of cleaning out the failures in some cases. It is bad policy to let these things go on for a decade or more. Eventually the problems fester, and the system remains weak.

Although the EU had a surge of improved economic statistics for the past two years, it was much more likely only due to a combination of negative rates and pent up demand, along with unsustainable fiscal policies. Unemployment is still 8.5%. Capital was almost free, and fiscal stimulus has been substantial. Pent up demand always happens after a serious economic downturn, but sustained economic growth then needs policies that sustain it.  Germany has had declining growth rates the past three months, and while still on the positive side, the increases are less and declines in production are beginning. Macron has done a good job of moving in the right direction on labor laws, taxes and other economic policies, but the political pushback has begun, and it is unclear how much more reform he will be able to accomplish. He is far from doing what is needed to make France a strong economy, and a place to invest. Italy is still in crisis, and the new government does not appear to be qualified to fix the problems. Instead of fiscal restraint, which is what is needed, they will be spending money the country does not have.  They are unlikely to really make the reforms in labor and tax law, and in other business laws that will really begin to clean up the mess. Greece has done a lot, but is still in crisis.

Now with all of these issues, we add Brexit about to happen in less than a year, and Trump forcing trade reforms that will harm German and other nations exports. His cancelation of the Iran nuke deal will put material economic pressure on Germany and France by forcing the cancelation of multi billion Euro contracts in Iran. Merkel and Macron push the Iran deal because they see it as a way to help their economic recovery, but they are ignoring the terribly destabilizing actions of Iran which will likely lead to either an all out war in the Mideast next year, or a full scale revolution inside Iran. Merkel chose trade over peace in the Mideast, and that was a decision analogous to Chamberlain, and will end in a similar bad way. The Sunni nations and Israel now have formed a united position to stop Iran, and with Trump imposing sanctions, Iran’s economy is again sinking.

Israel has essentially wiped out Iranian bases in Syria. Now Putin has begun to push Iran to get out of Syria. The Saudis are about to take the key port in Yemen, and that will lead to Iran being pushed out of there. Trump is very likely teaming up with Israel and the Sunnis to foment unrest inside of Iran. Bottom line is Iran is being pushed back on many fronts, and this will all end in some sort of war or internal uprising, and that will mean and end to German and French trade with Iran. That is a multi-billion dollar hit.

The EU has pressures building up on many fronts just as their leader, Merkel, is on the verge of being unseated, and a key member is exiting. The economy of the EU is going to falter again, and while it is not going to crash, it will not be where you want to invest. Although several US based funds have made good returns over the past couple of years, the risk is now that they will see declining returns, and potentially losses, as things turn worse again. I have written several other articles over the past two years suggesting the EU was not worth the risk reward vs the US, and now I believe we will see what I have been concerned about coming to pass. Risk adjusted returns on long term investments will be far better in the US.

The views expressed here are the author’s own and not that of ALM’s Real Estate Media