Europe is bound to collapse

Suspension

I have been watching with dread the escalating economic situation in Europe since about mid-February. On February 21, I published a short report Twitter theme He details the worst economic scenario for Europe, if war breaks out between Russia and Ukraine, as it did.

The prediction had 10 stages:

  1. The West is likely to respond with sanctions.
  2. Russia will respond by shutting off gas to Europe.
  3. This would lead to a massive rise in energy prices in Europe, pushing the continent into recession with rising inflation pressures (stagflation).
  4. Inflation will reach double digits within 2-3 months.
  5. Asset markets will fluctuate heavily first, and then collapse.
  6. Rampant inflation would force the European Central Bank to raise interest rates in a rapid manner and halt the Pandemic Emergency Purchase Program (PEPP) and quantitative easing (QE).
  7. The European banking sector will collapse.
  8. Sovereignty’s revenue will explode.
  9. The eurozone will collapse.
  10. Europe will fall into a depression.

Energy prices skyrocketed, asset markets fluctuated, and the European Central Bank (ECB) halted PEPP and QE (sort of, see below). Eurozone inflation was 9.1 percent in August and shows no signs of abating. So we’ll probably get to double digits maybe next month. So, ominously, we have already “checked” the numbers 1, 2, 3, 4 and 6 of the “worst case” forecasts.

What do you expect in the coming months

‘Credit default swaps’ have arrived for Credit Suisse, a Swiss banking giant classified as a systemically important global bank, or G-Bank. levels We haven’t seen it since 2009. German 2-year government bond yields (Bund) are Currently rolling About 100 basis points above the two-year OIS euro swap rates, which reflect the European Central Bank’s rates over the next two years. We haven’t seen such a divergence since the height of the European debt crisis in 2012. This has led to a huge “guarantee crisis” in banks, as the value of the most frequently used collateral (sovereign bonds) collapses in relation to deposit prices.

A banking crisis is brewing

Italian 10-year bond yields are flirting with the 4 per cent that is believed to be the “line in the sand” of the Italian government’s inability to cover its finances. The European Central Bank uses the money from Germany and the Netherlands due for example to buy the sovereign debts of Greece, Portugal and Italy in particular. In the end of JulyThe European Central Bank’s holdings of German, French and Dutch bonds decreased by $19.3 billion, while Italian bond holdings increased by $14.3 billion. The European Central Bank is expected to increase its purchases in the coming months.

However, the question is, will that be enough to avert another debt crisis?

Italy’s inflation rate has hit a euro-era record, over 8 percent, and its families and businesses are feeling it full burden Rising energy prices and disruption of the flow of Russian gas to Europe. according to modeling By the International Monetary Fund (IMF), if the European gas market is interrupted, which means there will be disruptions in gas supplies, Italian GDP could shrink by about 6 percent. We are very close to that point after Russia to cut Gas supplies to Germany (Italy continues to receive Russian gas). The Italian government is already working on a file rescue fund for small lenders. They, small lenders, aren’t the real problem, though (see below).

Italy, and thus Europe, is approaching a full-blown debt crisis

According to a report by Equinor, a Norwegian energy group, energy companies are facing collapse 1.5 trillion dollars Margin calls value due to violent price reactions in European energy markets. Energy companies are required to maintain a minimum margin in the event of a default prior to supplying power. These margins raced upwards as electricity prices rose in the future, which remained high despite moving away from their high levels. Recently, Finland became the first European country to sign “bridge agreementTo cover the side agreements of Fortum, Finland’s largest energy producer. Other governments are likely to follow suit.

The price of electricity is still high. For example, in Germany Spot price Currently about 10 times higher than in the summer of 2021. Many households and businesses are seeing their energy prices multiply by 10 or more across the continent.

Unfortunately, it is not surprising that the disintegration of the European economy is already on its way.

Many European industries are energy intensive Closure or slash Largely produced due to high energy prices. Even pubs in Britain prognosis Whether they will lock the doors (actually “power shutdown”) because they can’t afford the energy prices. At the same time, UK inflation may reach a peak 20 percent Next year!

Commercial loan defaults are increasing across the continent (see, for example, this is) and a “flood” of corporate and household bankruptcies. All because of the weight of the massive increase in electricity prices, inflation, high interest rates and an impending recession.

Thus, Europe is currently heading to RecessionAnd he won’t stay here. As I mentioned earlier10 of the 30 global G-SIBs reside in Europe (PDF). For comparison, the United States has seven SIBs, but still the housing market crash of 2006-2009, which led to a banking crisis in the United States, nearly collapsed the global financial system. If the European economy breaks down, which seems likely at the time of writing, its banking sector will follow, taking with it the global financial system, and possibly the common European currency (the euro).

Can anything be done to avoid all of this?

I don’t think we can no longer escape the European recession, which has also been delayed, but there is still time to prevent it from escalating into depression. While he is unpopular, the only thing that can bring immediate relief is to fully restore the flow of gas from Russia to Europe again, which would require the removal of Western sanctions.

Even if hoarding and reducing global demand and supply could replenish Russian supply to Europe, which is highly unlikely (see more, for example, from the news), natural gas prices are likely to rise very quickly around the world. The price hike has already led totsunami of lockdownIn the USA. Just think how bad the situation would be if natural gas prices doubled or tripled from current levels.

It must be admitted, in full, that we are here because political decisions. First, green policies have made Europe highly dependent on Russian energy. Second, President Vladimir Putin’s decision to attack Ukraine, Western leaders’ decision to impose severe sanctions, and the Russian regime’s decision to respond to them fueled the crisis.

In 1924, John Maynard Keynes warned Against the use of sanctions, which “would always risk ineffectiveness and indistinguishable from acts of war.” In his Greatest Composition, The General Theory of Employment, Interest, and Money, he also argued that a globalized economy would eventually stop all wars, because their economic costs would become so dire.

We are slowly learning this lesson.

The opinions expressed in this article are those of the author and do not necessarily reflect those of The Epoch Times.

Thomas Malinin

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Thomas Malinin is CEO and Chief Economist of GnS . Economics, a Helsinki-based macroeconomic consultancy, and associate professor of economics. He studied economic growth and economic crises for 10 years. in his newsletter (MTMalinen.Substack.com), Malinen deals with forecasting and how to prepare for a recession and approach a crisis.

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