The Alternative Truth of the ECB… and All the Consequences This Entails

February 14 2017

Lately, I had a sensation that the European Central Bank (ECB) is trying to disguise and deny at any cost the fact that the Eurozone economy is in pretty good shape.

Board members of the central bank often begin their conferences or interviews by acknowledging that things are getting better, but they almost immediately follow up with a comment that slower growth is a real possibility. We can also observe this unnatural pessimism when they speak about future monetary policy. They often repeat that the central bank could extend and expand its purchases of government and corporate bonds and that interest rates will remain low for an extended time. Never ever have we heard from an ECB board member that the ECB´s asset purchase program might be reduced and discontinued or that we should count on higher interest rates in the near future.

In the meanwhile, this despondency is taking bizarre forms. If we take a look at how the economy is performing, then we must conclude that the Eurozone is not doing a bad job. It might be a surprise to many, but it is the simple truth: the Eurozone is outperforming the U.S. when it comes to economic growth! And remember that in the U.S. the central bank is in the process of raising interest rates – purchases of government bonds has ended a long time ago – because the economy is improving!

Eat That USA!

Let us glance through the numbers. The Eurozone economy has been growing for at least two years, on a quarterly basis, between 1 and 2 percent. The economy has been growing for almost four years, quarter after quarter. That simply cannot be called bad. Eurozone economic growth has been, beyond any doubt, higher in every quarter since the fourth quarter of 2015 than in the U.S., which is often publicly praised. Some Eurozone countries completely outshine the U.S. in economic growth. In Spain and Slovakia, for instance, the economy has been growing between 3 and 4 percent since the fall of 2015. For comparison sake: growth in the U.S. was between 1.3 and 1.9 percent in the same period. Public debt in the Eurozone is lower than in the U.S. and has been declining for some time, whereas in the U.S., on the very contrary, public debt is still increasing.

Source: eurostat

Thus, the fact is that we in the Eurozone are, economically speaking, performing better. Unemployment has been coming down for the past few years and recently broke below the psychological barrier of 10 percent. Business and consumer confidence has gone up rapidly and reached the highest level since the beginning of the crisis. But it is not only about growing confidence: the numbers clearly show that companies are investing more and more, and that recent economic growth is therefore not built on sand. Especially since domestic demand is increasing, too.

And all this against the backdrop of a political-economical landslide: for the first time ever an EU member country is leaving the union. We also see positive developments in lending by banks to businesses and households, a crucial variable in our debt-driven economies. For the first time in years more loans are being made. This is mostly due to the low interest rates of the ECB. But instead of shouting from the rooftops that, finally, it is going well and kindly pointing out that the U.S. is doing worse – yes, we may! – we merely hear from the ECB that there are all kinds of dangers and that we should expect further monetary expansion by the central bank, a thing you normally do in case the economy is worsening.

We Are Not Allowed to Be Happy

Of course, this does not mean that no troubles exist, which is something too good to be true. Greece remains in coma and the danger exists that Italy, with its staggering debt, low growth and a banking sector that is in shambles, will follow suit. Economic reforms in almost all euro countries leave much to be desired. But still, despite everything, we are doing better than the U.S.

Then why is it that the ECB time and time again emphasizes the dangers and uses every trick in the book to avoid talking too much about the positive developments? I suspect because the central bank cannot acknowledge that it is going well. After all, if the ECB would be more optimistic, then that would mean that the bank should stop buying €80 billion euro worth of government and corporate bonds a month (about 35,000 euro per second!) and, just like the Fed in the U.S., should raise interest rates. But in that case the euro countries would get into big trouble. The interest burden would go through the roof; interest payments would rise with tens of billions of euros a year. Even Germany would get into big trouble. The German Institute for Economic Research, an economic think tank better known as DIW Berlin, has calculated that an increase in interest rates of one percentage point would result in an additional €21 billion euro in annual interest payments for Germany.

Here, the fact that the euro countries have piled on more public debt since the beginning of the crisis is beginning to avenge itself. The ECB has, apparently, no backbone anymore to simply ignore the debt and adjust their monetary policy according to the economic situation. The result: expect that the ECB will downplay the economic performance in the Eurozone and that interest rates in the Eurozone will remain very low for a very long time. These are, in addition, not the circumstances in which the euro will strengthen, but the right circumstances for inflation to rise further, with all the consequences that this entails for your savings. Rising inflation and at the same time a central bank that not only fails to act, but also looks for ways to pour more oil onto the inflation fire: I cannot remember that this has ever been bad news for precious metals prices.


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