On May 11, 1998, at a formal ceremony, Economy Minister Dominique Strauss-Kahn activated the mint printing press and produced its first euro coin, making France the first of 11 nations participating in the launch of the single currency to strike the money. Taking a bite out of the coin, Strauss-Kahan declared that it’s “the real thing, it’s no copy.”
At the time, the Monnaie de Paris was scheduled to mint 7.6 billion coins, or four times the weight of the Eiffel Tower, and eight different coinage denominations with a value between 0.01 and two euros. The coins maintained one national side and one European side.
Proponents scoffed at the naysayers, declaring that it would stimulate the economy and spur industrial growth that can rival that of the U.S. and Japan.
It has been 20 years since there was a lot of hope and promise that a euro banknote and coin would lead to prosperity, savings, and fiscal responsibility. Like a child’s dream of becoming an astronaut when he’s older, the European elite’s aims have not been realized. Twenty years later, the eurozone economy is running on a treadmill, subzero interest rates are the norm, and budget deficits are ubiquitous.
It has also been about a decade since the global financial crisis. Has Europe recovered? Debt is skyrocketing, deficits are not winding down, and quantitative easing persists.
Explain again why any nation wants to stay on a sinking ship… No wonder why half of Europeans hold an unfavorable view of the EU.
The Euro’s Recent Assent
Despite the European Central Bank (ECB)’s best debasement efforts, the euro has made gains against the U.S. dollar. Between May 2017 and May 2018, the euro has surged 10% versus the greenback.
This is a welcomed trend for European citizens, especially savers and retirees. On the other hand, there hasn’t been as much adulation to the euro’s latest assent by the central planners, indebted members, and failing industries. The strengthening currency has been surprising because of the ECB’s monetary policy which mostly consists of negative rates and $36 billion monthly bond acquisitions.
And this is likely confounding Mario Draghi and his Keynesian cohorts.
To the smartest men in the room in Frankfurt, a cocktail of a weakened euro, subzero rates, and bond-buying initiatives will encourage consumer spending, bank lending, and overall growth. But this has not been the case in the aftermath of the economic collapse.
European consumers are frugal in their spending and many are even saving their money underneath their mattresses. European financial institutions are lending, but it turns out that they are holding non-performing loans that are causing a toxic debt problem that may turn banks into zombie outfits. The eurozone gross domestic product (GDP), which shouldn’t be the lead economic indicator for governments, analysts, and central banks, slowed to 0.1% in the first quarter of 2018.
For all of the interventions by the ECB, Draghi is experiencing reversed results: a booming euro and a lackluster economy.
ECB Out of Bullets
In the 20 years since Strauss-Kahn bit that euro coin, France and others bit off more than they can chew. The eurozone has morphed into a complete a mess; it’s no surprise why most Britons voted to leave. The migrant crisis has negatively impacted many European jurisdictions, savers are seeing their deposits erode, national sovereignty is being threatened, and Draghi is doing a terrible job – the trade bloc’s bond market is the No. 1 risk for 2018.
In the post-recession world, the ECB has fired multiple rounds in its arsenal of Keynesian weapons. Draghi and co. have slashed interest rates, printed billions of euros, bailed out member states, and enabled reckless spending. The results haven’t exactly elicited confidence of nations mulling over a quick exit from the failed continental experiment.
Like the Federal Reserve, the ECB will be out of bullets to contain the next contraction. How much lower can rates go? How many more euros can be printed? How much can national debt and deficits grow?
Akin to the Bretton Woods System, the EU model is a failure. When the next financial crisis hits, the only thing ECB heads will be able to do is shrug their shoulders. And perhaps that’s for the better anyway.
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