This special guest commentary was written by Daniel Lacalle.
This week we have read that Brussels has certified “the end of the crisis”. In an uncomfortably triumphant statement, the group welcomed the fact that Europe had emerged from the crisis and returned to growth “thanks to the decisive action of the European Union”.
Really? Thanks to the “decisive action” of the European Union the “economy is back in shape”? It is true that the communique says that “much remains to be done to overcome the legacy of the crisis years”, but if we can say something about the European crisis is that the “decisive” action of the European Union has not helped to end the crisis, but has perpetuated and silenced it.
The European economy is not “in shape”.
According to the Bank of International Settlements and Merrill Lynch, Europe has more zombie companies today than before the crisis (read here ), 9% of large listed non-financial corporations are considered walking dead, ie generating operating profits that do not cover their financial costs, in spite of all-time low-interest rates and an unprecedented monetary stimulus.
And that is among the big companies, where the business results of the Eurostoxx remain below 2008. If we go to SMEs, the European Union has higher rates of bankruptcies and losses than in 2008, yet the tax burden on companies has increased.
In fact, if anything can be said of the European business fabric is that it has been devastated by taxes. The European Union has continued to hamper the high-productivity sectors to support the so-called national champions and zombies, that large amount of low-value added conglomerates, ridden by high debt and poor margins. While the United States saw the astronomical takeoff of technology giants and corporate profits growing at double digit rates, the EU decided to put obstacles to growth, and today, in the Eurostoxx 100, we have the same collection of dinosaurs that we had a decade ago.
European banks, at the end of 2016, had more than 1 trillion euros in non-performing loans, a figure that represents 5.1% of total loans compared to 1.5% in the US or Japan. Europe has gone from financial crisis to financial crisis, and recently we have had new episodes in Italy, Spain and Portugal.
That European Union, which in November 2008 boasted of having the most regulated and most solvent banking system in the world, has proved to be a normative and hyperregulated monster that does not prevent any crisis. While in the US, banks repaid with interest the bailout (TARP), leaving profits to the Treasury of more than $15 billion , Europe continues to maintain a hypertrophied, semi-nationalised bank system whose assets weigh more than 300% of the Eurozone’s GDP, with very low margins and completely subordinated to the public authorities through a regulation that penalizes lending to private companies with many more capital requirements, and almost none to public funding.
What about employment and growth? The European Union “certifies” the exit from the crisis with an unemployment of 9.1%, maintaining all its labor market rigidities , and the rate is more than double that of countries with flexible work legislations and dynamic business environments, such as the United States or the United Kingdom.
And what has this decisive action left in financial terms? A debt of almost 90% of GDP and poor growth which, at an estimated 1.7%, is almost half its potential.
Many blame austerity. Austerity? The big winner of the crisis in Europe has been the bureaucratic system.
With public spending averaging over 46% of GDP, an annual deficit of over 1.7% on average, and 90% debt, talking about austerity is like eating two boxes of cakes and calling it “diet”.
The tax burden in this period has been raised throughout the EU (with honorable exceptions, such as Ireland) with an average tax wedge of 45% on workers and 40% on companies.
Many will tell you that the United States pursued public spending policies. The United States, at the peak of the crisis, spent 43% of GDP (the EU, 50%) and dropped it to 34%, and that with 21% of the budget in 2009 dedicated to defense.
Lack of stimulus? The EU has been a Keynesian dinosaur before, through and after the depression. All this alleged “success” of “decisive activity” of the European Union has been “achieved” with:
- A huge stimulus in 2008 in a “growth and employment plan”. A stimulus of 1.5% of GDP to create “millions of jobs in infrastructure, civil works, interconnections and strategic sectors”. 4.5 million jobs were destroyed and the deficit nearly doubled. That’s after the crisis, because between 2001 and 2008, money supply in the Eurozone doubled.
- Two massive sovereign bond repurchase programs with Trichet as ECB President, interest rates down from 4.25% to 1% since 2008. Poor Trichet. Some accuse him of “creating the crisis” by raising rates to 1 , 5% and “only” buying more than 115 billion euros in bonds.
- An additional mega stimulus from the ECB, in addition to the TLTRO liquidity programs with Draghi, which has taken sovereign bonds to the lowest yields in history and purchased almost 10% of the total debt of major states. A stimulus so excessive that, at the close of this article, the excess liquidity at the ECB is 1.7 trillion euros (it was 125 billion when the so-called stimulus plan was launched).
The problem of the European Union has never been a lack of stimuli, but an excess of them. The European Union has been a government stimulus plan chained after another since its inception. As expenditure and unproductive investment multiplied, overcapacity remained at levels of 20% (it continues at those levels) and the constant errors of the State plans left more taxes and more obstacles to the productive sectors, and additional burdens on citizens. Until saturation came. Then it all burst.
Blaming the US and Lehman, or whatever they want, is very easy, but the question is simple. If the problem of the crisis was the US and the European Union was more and better regulated than anyone, and more social and controlled, why has it taken more than double to end the crisis, and done it with less employment , lower growth, less profits, more taxes and more debt?
The answer is obvious. Because that “decisive action” has been decisive only to delay the exit from the crisis. Just as interventionist policies delayed the exit from the Great Depression by seven years, enormous bureaucratic and fiscal pitfalls, as well as perverse incentives generated by the fallacy of the “automatic stabilizers” (which is spending more), and the inexistent austerity that has only been a moderate budget constraint, all have prolonged the crisis.
No, the European Union has not “come out of the crisis”. It has come out of the depression with a lot of effort from citizens and businesses, and with structural reforms that have helped us to reduce the imbalances, but the risk of falling into the same mistakes of 2008 is enormous.
We must recognize something from the Brussels report. We gradually leave the crisis in a healthier way, increasing trade surplus, exporting and reducing imbalances. That is positive. And we have done so thanks to citizens and companies, despite the “decisive action” of the bureaucratic machinery to self-perpetuate and maintain excesses at all costs. Now the EU needs to give back to citizens and companies the effort they have made, increasing disposable income, letting SMEs and workers breathe, lowering taxes.
But let’s not forget. It would have been much worse if the EU had thrown itself into the entelechy of spending and deficit proposed by some. It would have destroyed the EU.
Brussels should not fall into triumphalism. These results, with such a massive stimulus and expense, are nothing to write home about. Growing 1.7% by increasing the ECB’s balance to more than 35% of the eurozone’s GDP and leaving overcapacity and debt is dangerous, because Europe is not prepared for the next crisis.
There is much more to do. Europe should begin by ceasing to suffocate the productive to subsidize the unproductive, then the European Union will begin to grow closer to its potential.
This is a Hedgeye Guest Contributor note written by economist Daniel Lacalle. He previously worked at PIMCO and was a portfolio manager at Ecofin Global Oil & Gas Fund and Citadel. Lacalle is CIO of Tressis Gestion and author of Life In The Financial Markets, The Energy World Is Flat and the most recent Escape from the Central Bank Trap.