Headline writers have found some brutal things to say about the eurozone lately. To take just a few of the dozens of possible examples:
It goes on and on, through youth unemployment and political turmoil and every other kind of malaise short of major war. Meanwhile, the news in most of the rest of the world is, if not great, at least not horrendous. Here in the US headlines containing “despair” or “depression” are limited to pharmaceutical ads. And Japan, with its low interest rates and positive growth, seems to think it’s recovering (you have to admire their ability to compartmentalize, what with a nuclear plant melting down right in the middle of the country).
So why is the eurozone regressing when the rest of the world is (or thinks it is) recovering? The answer is straight out of the currency war script: The US and Japan have been monetizing the hell out of their debt, weakening their currencies against the euro, and generally giving themselves a trade advantage. They enjoy a temporary recovery while the suddenly too-strong euro pushes the eurozone into a financial black hole. The following charts appeared today in a post by money manager Axel Merk. The first shows the balance sheets of the major central banks since 2008. Notice how the Bank of England, the Swiss National Bank (two non-euro European countries), and of course the US Fed have been steadily accumulating assets by buying up bonds with newly-created money. This lowers the value of their currencies and pumps cash into their banks, which results, other things being equal, in faster growth.
The next chart, showing the big four central bank balance sheets over the past year, is an even more dramatic picture of differing currency war strategies. Looking at this chart, an observer might expect the two entities with the fastest balance sheet growth to have weaker currencies and stronger economies, and the observer would be right.
So what does this mean going forward? Clearly, the eurozone is looking at a horrible 2014 that leads its elected officials – whether incumbents trying to salvage their jobs or newcomers elected to restore growth – to force the European Central Bank to ease big-time. Like the Bank of Japan in 2013, the ECB will have no choice but to give up the pretense of independence and do what its constituent countries demand. Already, ECB governor Mario Draghi is laying the groundwork for capitulation:
FRANKFURT—The European Central Bank surprised markets with an emphatic assurance that it would respond aggressively if inflation weakens to dangerously low levels, as officials sought to spur the fragile euro-zone recovery.
President Mario Draghi’s pledge Thursday to deploy “further decisive action” if needed to counter threats stands in contrast to the Federal Reserve, which deployed its stimulus measures sooner and is now slowly winding them down amid signs of more robust U.S. growth.
It also reflects Europe’s grim economic prospects—among the weakest in the industrialized world—which weigh on its global trading partners as well.
Growth returned in Europe last spring, but just barely, after a lengthy recession that pushed unemployment rates above 25% in parts of southern Europe. Annual inflation is far below the bank’s target. Some analysts warn of a “lost decade” that will rob future generations of opportunities for higher living standards.
Governments in France, Italy and elsewhere have been unable to combat this economic malaise, leaving the ECB widely seen as the only institution with the firepower to keep Europe from following Japan’s path of falling prices, stagnant activity and mounting debt.
So when analysts update their central bank balance sheet charts a year from now, it’s a very safe bet that the biggest change will be a sharp upturn in the ECB asset line. The euro will be weakening, US and Japanese exporters will be screaming, and Washington and Tokyo will be plotting their response.