Monday, January 21, 2019

Yellow Vest Protest Add To Euro-zone Economic Misery

The Yellow Vest Has Become A Symbol Of Unrest
The Euro-zone faces huge social and economic problems before the Brexit issue is even factored in but with so many other events taking place throughout the world this slow boiling pot of trouble often is placed on the back burner where it is ignored and allowed to fester. The social issues tend to play into the economy because when people are unhappy work gets disrupted and productivity drops. This is one of the reasons Daniel Lacalle, Chief Economist at Tressis GestiĆ³n, during a recent interview with CNBC warned that Mario Draghi’s successor at the ECB will face enormous challenges managing the Eurozone’s monetary policy.

Before going deeper into that let's look at two very real problems. First, reports are that despite freezing temperatures and rain, tens of thousands of "Yellow Vest" protesters still took to streets across France on Saturday in the tenth consecutive week of anti-government demonstrations. They have ignored attempts by President Emmanuel Macron to channel their anger into a series of town hall debates aimed at stopping the movement. The president's counter-offensive this week with the launch of his "grand national debate" and spending hours in rural France debating with disgruntled mayors is yielding little. The fact is many of those demonstrating are calling for Macron to step-down and we can add his latest scheme to end "the madness" to the pile of failed gimmicks already tried.

Many Europeans Reject A Tighter Union
These protests are not getting a great deal of airtime or coverage, much of the mainstream media has ignored both the size and scope of the protests, independent journalists, select foreign news outlets and others have been documenting the mayhem. This is not the first time we have seen this trend of blacking out news negative to "the state" and it is a reason for lovers of freedom and free-speech to be concerned. This fits into the idea mainstream media's role has become to feed the propaganda loop that plays a huge role in shaping public opinion and in the end continues to erode and ultimately results in the government being able to slowly hack away at our rights for what appears to be "the greater good."

The rally in Paris, as well as those in several other cities, ended in clashes where the police using tear gas and water cannons to dispersed hooded protesters who threw paving stones and bottles. Clashes were also reported in Bordeaux, Toulouse and the western city of Rennes. The only promising sign was that for the second consecutive week there was no evidence of the chaos and destruction seen over several successive weekends in the capital. An estimated 84,000 demonstrators took to the streets on Saturday, including about 7,000 in the French capital. Paris deployed 5,000 police notably around government buildings and the Champs-Elysees shopping area. About 80,000 police fanned out nationwide. Protest turnouts are now being closely watched for signs of possible fatigue in the movement as it enters its third month. According to the Interior Ministry, there were 27,000 protesters across France by early Saturday afternoon, down from 32,000 at the same time the week before.

French police have been criticized for using rubber projectiles that have caused several serious injuries to protesters. At the Invalides, protesters carrying a banner that read "Citizens in danger" marched at the front of the procession and held coffin-shaped boards in memory of those killed. "It's not normal to treat people the way we are being treated. We have injured people every Saturday," said Juliette Rebet, a demonstrator in Paris. While much of France has endured weeks of protests over economic demands by French workers and students that at times descended into violence. The grass-roots protests starting months ago over fuel taxes is a broader revolt against economic problems and the top-down ruler which many of the French is as arrogant and aloof.

Angela Merkel Has Seen Better Days
Another rift is apparent in Germany where Chancellor Angela Merkel, decided years ago, Germany and all of the euro-zone should throw open their arms and welcome in immigrants from war-torn areas. Merkel’s decision rapidly impacted all of Europe with the other countries never being allowed to weigh in. Now, we see that just last November she started offering cash to refugees to return from whence they came, and since then she has stepped up her game, now offering to pay their living expenses for one year if they return home. Billboards are appearing all over Germany making this latest offer yet more than 20,000 refugees have vanished when they were going to be deported.

One take on the current mess in Europe is that the entire refugee crisis was created by Merkel to take eyes off of Germany being viewed as the harsh enforcer of loans structured to hide what Goldman Sachs had instituted in order to get Greece into the Euro-zone. After Chancellor Merkel’s poll numbers collapsed following her refusal to yield to Greece in the debt crisis. Basically, Merkel allowed the Greek people to be strip-mined of their assets to pay for their corrupt politicians. It is said, her own poll people, which she employed to make sure she makes political decisions that keep her popular thought she could use the "open immigration" issue to rapidly change the subject from Greece to Syria.

Those touting this version of the "politics" behind the scene cite a July 2015, Time Magazine article pointing out that Berlin’s role as the enforcer in negotiations over Greece’s debt could cause lasting damage to Germany’s global image and that by welcoming refugees to Germany they could stem the damage. So, it is possible, the watershed event driving the immigrant crisis that has unleashed so much pain and grief upon Europe is rooted in Merkel's efforts to reshape her global image from that of an evil loan shark to the caring Mother Merkel. Simply put, Europe is now paying a huge the price because Merkel was concerned about her polls.

Central Bank Balance Sheets (click to enlarge)
Circling back to the Lacalle interview, he cited the fact the ECB balance sheet is 41% of GDP of the Euro-zone while interest rates are at zero. Calling the situation "insane" Lacalle noted that Draghi’s successor will find it very difficult to justifying injecting more liquidity into the system. This comes at a time when the Eurozone is likely to grow only 1% this year and not 1.6%. as expected. Like many of us that have watched the Euro-zone, he indicated many of their the problems are structural and due to the massive level of government spending, very high taxation, and obviously demographics.

The idea that the next ECB President will be given the task to "normalize" the economy while facing the negative consequences removing the current policy is going to unleash without any real tools will be daunting. The current political climate in both France and Germany will make even more difficult. Thinking Germany will be willing to assume the role of bailing out all the weak sisters of Europe by putting it's government spending at the forefront and spending like a drunken sailor will not work but is akin to asking it to take the same failed path worn bare by countries such as Spain, Italy, France, and Portugal which are still spending way above their means. While the Euro-zone governments have been spending freely southern Europe’s economy hasn’t grown since 2006 when adjusted for inflation but its government debt has ballooned 70%.

Further a dramatic plunge in German industrial activity late last year not only raises the risk that Europe’s largest economy will slip into recession. Recent data shows that production fell for a third month in November posting its worst year-on-year drop since the end of the financial crisis. It appears that weakness is creeping into all parts of the economy from consumer goods to energy, this drop has repercussions for the euro area, where separate numbers on Tuesday showed economic confidence has slipped to its lowest point in almost two years. Just last month Mario Draghi said the 19-nation economy has enough underlying momentum to justify a decision to stop adding monetary stimulus. What next you might ask, the answer is, now we wait.

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