Why Europe Failed

Dr Oliver Hartwich of The New Zealand Initiative discusses his new book, Why Europe Failed.

Over the past years, we have become used to Europe’s debt crisis. However, the fiscal problems of countries such as Greece are only the tip of the iceberg. Europe’s crisis has much deeper roots. Here, Dr Hartwich explains the causes of Europe’s decline.

Greece and Its Misguided Champions

From Michael G. Jacobides in Harvard Business Review:

….while some EU policies are punitive or counter-productive, the strength of opinion of pundits long on conviction and short on detail seems to ignore the real root cause of the crisis. This is that the Greek economy has become inward-looking, unproductive, incumbent-favouring, and rife with rent-seeking. They may also underestimate how Grexit would exacerbate many of the Greek pathologies at the root of the crisis.

Greece’s main problem isn’t its currency. Rather, it is that its Byzantine regulations and institutional uncertainties discourage investments and reduce competitive pressures. Grexit would further restrict available capital, shatter the fragile banking sector, and increase the investment gap, which, as McKinsey’s recent study shows, is the key issue.

Read more at Greece and Its Misguided Champions.

Greece and Iran party but China lurks in the shadows

From the Wall Street Journal:

Greece’s Parliament passed early Thursday a crucial set of austerity measures required for a eurozone bailout package….The measures were supported by 229 lawmakers in the nation’s 300-seat Parliament.

A Grexit has been avoided for the present, but unless the Greeks are successful in implementing structural reform, reversing many years of cronyism and corruption, we are likely to witness further re-runs in the future.

The nuclear deal with Iran has outraged the Right in Israel and the US. There are many pitfalls along the way but I believe this is a bold step forward. The outcome will be uncertain for many years but presents both sides with a chance to build a new relationship where they can peacefully co-exist. The alternative is another war in the Middle East — with no winners.



I was surprised to see the Russians playing a constructive role in the dialogue. I am sure that Vladimir Putin would take personal delight in poking a stick through Obama’s bicycle spokes, but the interests of the state come first. “Follow the green” as one US diplomat described it. The New York Times offers a clue:

Sergey V. Lavrov, the Russian foreign minister, lost no time in talking about the accord on Iran’s nuclear program. He was on television minutes after the deal was clinched, and even before the formal news conference had begun, announcing the landmark agreement to the audience back home and emphasizing the many potential benefits, strategic and economic, that it holds for Russia…..Russia possesses some of the world’s foremost expertise in atomic energy, and has helped build and operate atomic reactors in Iran for many years. Rosatom, the Russian state nuclear energy company, helped build and expand the Bushehr nuclear plant and already has contracts to build two more reactors there.

China, on the other hand still lurks in the background. The state managed to stem the flood, suspending trading on more than 50% of stocks and forbidding large stockholders from selling. This is a public acknowledgment that Chinese stock prices are artificial and in no way to be trusted (“What’s new” some cynics would ask). They have destroyed any credibility that their stock markets had. Japan had zombie banks after their 1990 stock market crash, solvent in name only. China seems to be following a similar path with zombie stocks. Banks who have lent money against those stocks are likely to follow.

For a deeper understanding of the situation, read China’s stock market falling off a cliff: Why, and why care? by Alicia Garcia-Herrero at Bruegel.org


Germany’s DAX recovered above its descending trendline, indicating the end of the correction. Follow-through above 11600 would strengthen the signal, suggesting a fresh advance. Breakout above 12400 would confirm. Recovery of 13-week Twiggs Money Flow above its descending trendline shows that selling pressure has eased.


* Target calculation: 12500 + ( 12500 – 11000 ) = 14000

The Footsie also recovered above its descending trendline. Follow-through above 6750 would indicate another attempt at 7100. A 13-week Twiggs Money Flow trough at zero flags buying pressure.

FTSE 100

* Target calculation: 7000 + ( 7000 – 6500 ) = 7500


The Shanghai Composite is testing resistance at 4000. Government efforts to stem the crash are unlikely to restore credibility to stock prices. The large divergence on 13-week Twiggs Money Flow continues to warn of selling pressure.

Shanghai Composite Index

* Target calculation: 4000 – ( 5000 – 4000 ) = 3000

Japan’s Nikkei 225 recovered above 20000, suggesting a fresh advance. Breakout above 21000 would confirm. Recovery of 13-week Twiggs Money Flow above its descending trendline suggests the correction is over.

Nikkei 225 Index

* Target calculation: 21000 + ( 21000 – 19000 ) = 23000

India’s Sensex recovered above 28000, suggesting a fresh advance. A 13-week Twiggs Money Flow recovery above zero indicates medium-term buying pressure. Breach of primary support at 26500 is now unlikely.


* Target calculation: 30000 + ( 30000 – 27000 ) = 33000

North America

The S&P 500 respected medium-term support at 2040. Another 13-week Twiggs Money Flow trough above zero would confirm long-term buying pressure. Breakout above 2120 would offer a target of 2200*.

S&P 500 Index

* Target calculation: 2100 + ( 2100 – 2000 ) = 2200

The CBOE Volatility Index (VIX) retreated to low levels typical of a bull market.

S&P 500 VIX

The Nasdaq 100 is approaching its Dotcom-era high of 4800. Breakout above 4550 would signal a test of long-term resistance. 6-Month Twiggs Momentum oscillating above zero reflects a healthy long-term up-trend.

Nasdaq 100

Canada’s TSX 60 recovered above support at 850/855. Breakout above the upper trend channel would indicate the correction is over, suggesting another test of 900. Recovery of 13-week Twiggs Momentum above zero would strengthen the signal. Respect of the upper trend channel is unlikely, but would warn of continuation of the down-trend.

TSX 60 Index

* Target calculation: 900 + ( 900 – 850 ) = 950


The ASX 200 broke out above its descending trend channel, flagging end of the correction. A 21-day Twiggs Money Flow trough above zero indicates medium-term buying pressure. Follow through above 5700 would signal another test of 6000.

ASX 200


Could a new property tax save the Australian economy?

Will Iran deal nuke crude?

Hint of Greek bailout revives rates (and the Dollar)

Bank share prices tipped to decline

Gold: Is Barrick next?

APRA considers two per cent capital adequacy increase

Greece: the musical (with thanks to Grease)

Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.

~ George Soros

Greece: the musical (with thanks to Grease)

Hat tip to Barry Ritholz

Another week another crisis

The crisis in Greece continues, dragging down stocks across Europe.

Germany’s DAX broke support at 11000, warning of a decline to 10000. Reversal of 13-week Twiggs Money Flow below zero would warn of a primary down-trend. Recovery above 11500 is unlikely, but would signal a fresh advance.


The Footsie found short-term support at 6500. Decline of 13-week Twiggs Money Flow below zero warns of a primary down-trend. A peak below zero or breach of support at 6100 would confirm.

FTSE 100

* Target calculation: 6700 – ( 7100 – 6700 ) = 6300


Events have been overtaken by collapse of Chinese stocks. The Shanghai Composite found support at 3500, but government efforts are unlikely to stem the rout. Reversal of 13-week Twiggs Money Flow below zero would warn of further selling pressure. Expect support at the primary trendline, around the 3000 level.

Shanghai Composite Index

* Target calculation: 4000 – ( 5000 – 4000 ) = 3000

Japan’s Nikkei 225 was unsettled by events in Shanghai, breaking support at 20000 to warn of a correction. The decline on 13-week Twiggs Money Flow is gradual, suggesting a secondary correction.

Nikkei 225 Index

* Target calculation: 20000 + ( 20000 – 18000 ) = 22000

India’s Sensex retreated below 28000 warning of another test of primary support at 26500. A 13-week Twiggs Money Flow trough above zero, however, would indicate medium-term buying pressure. Breach of support at 26500 is also unlikely, but would signal a primary down-trend with support at 23000*.


* Target calculation: 26500 – ( 30000 – 26500 ) = 23000

North America

The S&P 500 is testing medium-term support at 2040. Declining 13-week Twiggs Money Flow suggests a test of primary support (1980/2000) but today’s rally in China may alleviate this. The index is likely to range below 2120 until the situations in both China and Greece reach a conclusion.

S&P 500 Index

* Target calculation: 2120 + ( 2120 – 2040 ) = 2200

The CBOE Volatility Index (VIX) is fairly subdued but likely to break 20, indicating moderate risk.

S&P 500 VIX

Dow Jones Industrial Average broke support at 17600. Follow-through below 17500 would warn of a test of primary support at 17000. Decline of 13-week Twiggs Money Flow below zero indicates strong selling pressure but this was aggravated by yesterday’s technical trading halt on the NYSE and recovery above zero is likely.

Dow Jones Industrial Average

Canada’s TSX 60 broke support at 850, warning of a test of primary support at 800. Decline of 13-week Twiggs Momentum below zero suggests a primary down-trend. Recovery above the descending trendline is unlikely, but would indicate the correction is over.

TSX 60 Index

* Target calculation: 850 – ( 900 – 850 ) = 800


The ASX 200 found support at 5400, highlighted by the long tail on today’s candle. Breakout above the trend channel is still unlikely, but would indicate the correction is over. It would be prudent, in the current climate, to wait for a higher trough or some other confirmation. Rising 21-day Twiggs Money Flow indicates moderate buying pressure.

ASX 200


Gold Bugs warn of a bear market

Dollar calm while prospect of rate rises fades

Silver tests primary support at $15

Australia: Rising foreign debt

RBA strategy: Fight fire with gasoline

Crude breaks $54

Australian stocks: Buy in July?

Never let a serious crisis go to waste.

~ Rahm Emanuel

Andreas Dombret: What is going on in Europe? The view from within

From a speech by Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, at the New York Stock Exchange, New York, 26 March 2014:

How do we get to the end of the tunnel?

At the European level, the most important project is the banking union. The banking union is most certainly the biggest step since the introduction of the euro. And it is the most logical step to take. A single currency requires integrated financial markets and this includes the supervision of banks.

Consequently, one of the pillars the banking union rests upon is a Single Supervisory Mechanism – that is European bank supervision for the largest banks. Centralising supervisory powers in such a way can foster a comprehensive and unbiased view upon banks. It also enables policy action that is not held hostage by national interests. Thus, it will contribute to more effective supervision and better cross-border cooperation and coordination.

Read more at Andreas Dombret: What is going on in Europe? The view from within.

ECB Says Private Lending Contracted for Ninth Month in January – Bloomberg

Jana Randow at Reuters writes:

Lending to households and companies in the euro area shrank for a ninth month in January as the recession damped demand for credit.

Read more at ECB Says Private Lending Contracted for Ninth Month in January – Bloomberg.

Bernard Connolly: Why the Euro Crisis Isn’t Over | WSJ.com

From Brian Carney’s weekend interview with Bernard Connolly:

…But even if the Greeks were undisciplined, he says, “both the sovereign-debt crisis and the banking crisis are symptoms, not causes. And the underlying problem has been that there was a massive bubble generated in the world as a whole by monetary policy—but particularly in the euro zone” by European Central Bank policy.

The bubble formed like this: When countries such as Ireland, Greece and Spain joined the euro, their interest rates immediately dropped to near-German levels, in some cases from double-digit territory. “The optimism created by these countries’ suddenly finding that they could have low interest rates without their currencies collapsing, which had been their previous experience, led people to think that there was a genuine rate-of-return revolution going on,” he says.

There had been an increase in the rates of return in Ireland “and to some extent in Spain” in the run-up to euro membership, thanks to structural reforms in those countries in the pre-euro period. But by the time the euro rolled around, money was flowing into these countries out of all proportion to the opportunities available…..

Read more at The Weekend Interview with Bernard Connolly: Why the Euro Crisis Isn't Over – WSJ.com.

The eurozone’s struggling economies are increasingly selling citizenship to raise much needed capital. | EUROPP

How far should countries go to encourage foreign investment? Jelena Dzankic writes that in a time of economic crisis, some countries in Europe are now seeking investment in exchange for citizenship. Assessing recent developments in Bulgaria, Hungary, Portugal and Ireland, she argues that despite the obvious financial benefits to such policies, they are not without risks. They may raise the potential for tax evasion and security issues, and could also reduce the relationship between the individual and the state to that of a business contract.

Read more at  The eurozone’s struggling economies are increasingly selling citizenship to raise much needed capital. | EUROPP.

Productivity: Ireland leads the way

Ireland now leads the United States in labor productivity as measured by GDP (converted to USD after adjusting for purchasing power parity) to hours worked by the workforce. Mark Cassidy writes on Ireland’s strong productivity growth during the 1990s:

Strong productivity growth during this period was largely driven by substantial foreign direct investment inflows from the United States and sectoral change in industry — i.e. a continuing shift of capital and labour from agriculture and relatively low productivity manufacturing towards high-technology sectors including chemicals and ICT sectors — and was facilitated by macro and micro-economic reforms implemented since the late 1980s, favourable exchange rate and international economic developments, increased European integration and the availability of a young, relatively well-educated workforce.

Two factors stand out:

  1. Ireland joined the euro-zone on its official launch in January 1999;
  2. The Irish government is committed to a 12.5% corporate tax regime, among the lowest in Europe.

Removal of trade barriers and favorable tax rates attracted large investment in high-tech manufacturing, primarily from the United States.

EU Deal Reached on Bank Supervisor | WSJ.com


European Union finance ministers reached a landmark deal early Thursday that would bring many of the continent’s banks under a single supervisor, in what governments hope will be a major step toward resolving their three-year-old debt crisis. Ministers said the European Central Bank would start policing the most important and vulnerable banks in the euro zone and other countries that choose to join the new supervisory regime next year. Once it takes over, the ECB will be able to force banks to raise their capital buffers and even shut down unsafe lenders.

This is an important step, centralizing banking control in Brussels. Though there is bound to be dissent amongst member states as to capital buffers and unsafe lending practices.
Read more at EU Deal Reached on Bank Supervisor – WSJ.com.

Reid: Eurozone’s 2013 Nightmare Scenario | Business Insider

In his 2013 outlook, titled In Authorities We (have to) Trust, Deutsche Bank credit strategist Jim Reid warns that Europe is headed for tough times in 2013.

Matthew Boesler at BusinessInsider writes:

Reid highlights three major issues.

To start, European stocks – and stocks in markets around the world, for that matter – are considerably overvalued based on historical correlations to PMI data….

The second problem is austerity. Most accept that austerity measures weigh on economic growth in the short term, yet euro-area governments are moving forward with plans attempting to bring fiscal budgets back into balance anyway.

…. the third problem: namely, that governments have consistently set economic forecasts too high and then failed to meet their own targets.

Read more here Reid: Eurozone’s 2013 Nightmare Scenario | Business Insider.

The eurozone’s double-dip recession is entirely self-made. | EUROPP

Good comparison of relative unit labor costs for EZ countries in this article by Paul De Grauwe. Germany is lowest at 85-90. Greece and Portugal highest at 110-115, with Italy, Spain and Belgium next at 105-110. Ireland has made the most spectacular recovery, falling to 95 from a high 115-120 in 2007.

The position of Germany stands out. During 1999-2007, Germany engineered a significant internal devaluation that contributed to its economic recovery and the build-up of external surpluses.

via The eurozone’s double-dip recession is entirely self-made. | EUROPP.

Europe’s Populists at the Gate by Barry Eichengreen – Project Syndicate

Barry Eichengreen writes:

In focusing on summit declarations and promises of far-reaching reforms of EU institutions, investors are missing the real risk: the collapse of public support for, or at least public acquiescence to, the austerity policies required to work down heavy debt burdens – and for the governments pursuing these policies. Mass anti-austerity protests are one warning sign. Another is growing popular support for neo-Nazi movements like Golden Dawn, now the third-largest political party in Greece.

The rise to power of a “rejectionist” European government – that is, one that unilaterally rejects the policy status quo – would immediately bring the crisis to a head…….

via Europe’s Populists at the Gate by Barry Eichengreen – Project Syndicate.

Why Investors Shouldn’t Expect Much Euro Zone Reform | Institutional Investor

David Turner writes:

Most economists think deregulation is, in the long term, good for these countries’ economies, and hence for the sustainability of their sovereign debt markets. The economic case for pressing ahead with liberalization is strong. Can institutional investors therefore look forward to a fast pace of growth across the entire euro zone, boosted by deregulation?

The answer is “no,” for several reasons.

Experience shows that politicians will continue pressing ahead with reform only if the markets take them by the heels to dangle them over the precipice……..­

via Why Investors Shouldn’t Expect Much Euro Zone Reform | Institutional Investor.

Italian’s Job: Premier Talks Tough in Bid to Save Euro – WSJ.com

Only the ECB has the necessary firepower to move the market. Senior German officials say the ECB’s help is what [Italian premier Mario] Monti has really been after all along. The Italian leader is convinced that the June 28 summit provided political cover for the ECB to take bold action, in the knowledge that euro-zone governments—including Germany—won’t oppose it.

“I have no doubt that the night before the disintegration of the euro, the ECB will do whatever is necessary to save it,” Mr. Monti says. “The question is: Do we need to get to the night before?”

via Italian’s Job: Premier Talks Tough in Bid to Save Euro – WSJ.com.

Roubini Says 2013 `Storm’ May Surpass 2008 Crisis

Nouriel Robini on Bloomberg TV: The Euro summit was a failure… markets were expecting much more. Either you have debt neutralization [EFSF purchases of government bonds] or debt monetization by the ECB or EFSF/ESM be doubled or tripled using leverage ….or you will have a worse crisis in the next few weeks.

The ability of politicians to kick the can down the road will run out of steam in 2013…..next year could be a global perfect storm

Bloomberg TV: Roubini Says 2013 `Storm’ May Surpass 2008 Crisis

Merkel Concessions at Euro Crisis Summit Smarter than they Seem – SPIEGEL ONLINE

Christian Rickens: Merkel’s concession is more than compensated for by a diplomatic victory she scored in the run-up to the summit: Late last week, she managed to get new French President François Hollande to sign off on her fiscal pact, which is deeply unpopular in Paris, in return for her support on the €130 billion ($165 billion) European Union “growth pact.”

The inequality of the deal is difficult to overstate. The growth pact is made up of little more than empty promises and dreams that can never come true. Though it won’t spur any growth in Europe, at least it won’t cost Germans any more money either.

Should one be looking for a summit loser, in fact, it necessary to look no further than Hollande. Not Angela Merkel. She merely did what she always does on the EU stage. She made compromises. And pretty clever ones at that.

via Merkel Concessions at Euro Crisis Summit Smarter than they Seem – SPIEGEL ONLINE.