Across Europe, and particularly in the 18-member Eurozone, the economic news is sobering. It’s now clear that the credit crunch in emerging markets which has played out over most of this year, plus the slowdown in China, are having negative consequences in Europe. Yet, despite the ongoing trauma of Brexit, the UK is cruising along relatively smoothly – for now.
A number of critical events are about to coincide. Firstly, the ECB will cease printing money by means of quantitative easing (QE) in December. ...
Then there is a second shock about to arrive, namely Brexit, scheduled for 29th March 2019. As I write it seems very unlikely that the May-Barnier Withdrawal Agreement will be approved by the House of Commons when it comes to the vote on 11th December (see below). The Europeans have already said that there is no room for any form of renegotiation. Therefore, a no-deal Brexit is looking more than 50 percent probable.
While that would be a huge shock for the UK economy as supply chains freeze (at least for a few weeks until manufacturers work out how to trade with the EU under WTO rules), it would also be a massive shock to the EU economy. Remember that something like 20 percent of all German cars produced are shipped directly to the UK. Threats to shut down air links (Ryanair’s Mr O’Leary seems, happily, to have fallen silent of late), and of closing cross-channel ports in Europe would prove a double-edged sword. The European Commission’s Eurozone growth forecast for 2019 of 2.1 percent now looks highly implausible.
Thirdly, the spat between Brussel and Rome over the Italian government is about to bubble over into a major crisis. ...
The German IHS Markit manufacturing index fell to 50.2 in November. The Germans have not been as short of confidence about their future since the end-game of the European sovereign debt crisis in 2013. Orders for German exports have fallen to a six-year low.
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Italy’s economic growth sputtered to a halt in Q3. The ECB’s Chief Economist, Peter Praet, warned that the country is moving towards financial crisis. Italian government 10-year bonds are yielding 3.2 percent this morning – while equivalent German Bunds are yielding 0.34 percent. Italy’s banks are becoming unable to refinance their outstanding bond issues in the current market with the result that they are curtailing lending at a moment when the economy is already pitching downwards. Mortgage rates have been rising markedly – and this is having an immediate impact on disposable incomes.
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French manufacturing data in November was sobering. France has been beset by mass protests and demonstrations of various kinds – all opposed to President Macron’s economic policies which, despite his socialist pedigree, appear to benefit only the rich. His liberal metropolitan liberal credentials have been reinforced by some of his social initiatives but he is increasingly perceived as a globalist – both within and outside France. The opinion polls suggest that he is now the most unpopular French president ever.
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In late November the EU bailout team of inspectors turned up in Dublin with their clipboards and officious manners. They told their hosts that they were in danger of overheating. They warned that a Brexit shock could upset the country’s fragile banking system.
In 2010, readers will recall, Ireland was obliged to accept a bailout of €85 billion from the troika (the EU, the ECB and the IMF). That was supplemented with bilateral loans from Denmark, Sweden and the UK. The Irish economy fell by 11 percent and haemorrhaged 300,000 jobs. While the economy has recovered since then, much of the uplift is on the back of a few multinational corporations (principally Apple (NASDAQ:AAPL)) domiciling themselves in Ireland on account of its favourable corporation tax regime. This had the effect of inflating the country’s growth rate (and thus the Eurozone’s overall) artificially.
About 10 percent of Irish mortgagees are still in negative equity – though few people are likely to lose their homes as a result of Ireland’s liberal foreclosure rules (unlike in Spain). Overall, Ireland’s banks have a ratio of 9.2 percent of non-performing loans.
Ireland is heavily exposed to any negative fallout from Brexit. Ireland sends 15 percent of its exports to the UK and the UK accounts for 25 percent of Irish imports. However, Brexit, in my view, is not the single biggest threat to the Irish economy. Rather, that is manifested by President Macron’s plans to harmonise business taxes across the Eurozone.
Currently, Ireland offers multinationals like Apple the so called Double Irish tax break. This loophole allows Apple et al to vest their intellectual property rights into an offshore jurisdiction (Panama – whatever) and then license that technology to a company based in Ireland. (Starbucks does something similar in the Netherlands). Such entities are subject to offshore taxation but the US government regards them as Irish companies. Soon, our Irish friends will have the European Commission and the US Internal Revenue Service after them at the same time.
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