What About the European Union and the Euro Currency?

While in the previous month I have discussed the rise of European Union as a political and economic power which was later tested in 2010 debt crisis, the good news favored by bullish euro currency investors continue to emerge as the ECB meeting minutes in December 2017 showed that the ECB is ready to shift guidance, sending a signal to begin tapering it’s QE program, and the commencement of normalizing monetary policy in 2018. This sounds as good music for the ears of investors for now.

You might wonder why I am being pessimistic regarding the European Union growth prospects which are not only based on intuitive factors, but also on multiple aspects that show cracks in the demographic, financial, economic, and social structure of the EU. Starting first with the demographic factor the percentage of population in the EU above the age of 65 have steadily increased from 15.7% in 2000 to 19.46% in 2016; this movement was accompanied by a turbulent growth in the GDP mainly hampered by the 2010 debt crisis. But as in the case of the U.S.A., a negative correlation of -0.41 exists between GDP growth rate and the percentage of senior citizens that constitutes the overall populace. This will lead to stagnant real growth levels in the future. Moreover, annual inflation figures show a strong negative correlation of -0.74 with the level of senior citizens. This suggests that a major obstacle exits over the long run for the ECB to achieve the goals of its monetary policy that constitutes economic growth, price stability, and job creation. The result is a higher real value of debt in the EU, and higher levels of non-performing loans (NPLs) in European banks. The outcome was multiple bailouts by the Italian government for the following banks: Banca Monte dei Paschi di Siena, Veneto Bank, and Banca Popolare di Vicenza, the latter two rescued by a €17bn bailout, an act supported by Intesa Sanpaolo, back in June 2017.

In addition, Spain’s Santander bank have rescued Banco Popular from collapse after struggling with a     €37bn of NPLs. All of this was under the guidance of the ECB. Such actions show that abating capitalism from taking its natural path of clearing inefficient companies will create zombie-like firms, which will result in economic and social inefficiencies on a longer time scale.

In response to its financial and demographic struggle, some EU members have opened the gates of Immigration for young individuals running away from their war-torn countries (Africa, Middle East) with Germany being the largest host nation as it plans to increase the percentage of young populace to its demographic structure as these immigrants enter its social ecosystem and learn professional skills that will help them find a suitable profession. As a backlash to such policy, recent German Bundestag elections led to the ascent of the right-wing populist “Alternative for Germany” political party which promotes anti-refugee policies, that produced a minority led government unable to implement major legislations such as reforming the health care system, and risking the unity of the largest economy of the EU. A compromise was reached later to create a government that includes all factions. Moreover, right wing “Austrian People Party” gained 15 more seats in the Austrian legislative elections in 2017, another signal of rising right wing parties that prefer conservative rather than liberal political and social agendas.

All in all, as the daily fluctuations in the EURUSD pair shows a strengthening Euro currency, it’s worth to have a closer look at other factors that engulf this Union other than the ECB monetary policy statement, as economists lack the tools to address social, political, and demographic shifts.

About the author

Mohammad Al Jamal

In love with the financial markets since he was a 16-year-old, Mohammad has grown up being fascinated by stocks, bonds, commodities and foreign exchange. Mohammad currently works as a FX Dealer at Amana Capital Group; he holds a Master’s Degree in Finance from the American University of Beirut, and enjoys reading, socializing and working out.

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