Germany Is Going To Take Down The EU
The EU is done.
This is something that I touched upon in the past, yet it is really starting to accelerate. We are witnessing the beginning (or middle) of the end. The alternative to the United States as a superpower is not going to come into being. For the EU, the best days are behind it.
What is causing this proclamation? There are many factors but the largest is the fact that we are seeing the demise of Germany right before our eyes. This is, by far, the largest economy in the Eurozone and it is about to take a nosedive. It is a situation that will echo across all of Western Europe.
Some will proclaim that the EU was destined to fail. The idea that countries with some much history, often violent, could get along for the benefit of the northern countries (mostly) was misguided. Nations gave up their soverignty in an effort to be included in more economic productivity.
Sadly, it is looking like this is not going to end well.
Germany: An Industrial Leader
Germany's economy is from the old merchantile days. This is an area of excellence forged over hundreds of years. Few can argue with German engineering and workmanship. The country excelled like few have.
It is also an economy that builds stuff for others. Consumption is not the main focus. The Germans became leaders at exporting, shipping their products all over the world. It make it one of the more powerful economies, helping to set a standard for the EU.
Of course, the Germans benefitted greatly from the elimination of trade barriers on the continent. Since all commercial activity was open, the Germans were the ones who benefitted the most. They exported more to other EU partners than anywhere else. Disproportionately affected were the southern countries.
Obviously, one of the major components to German success is power. It takes energy to run factories. Here is where the country is running into difficulty.
With the push for green energy along with the ongoing conflict with Russia, the EU's largest economy is encountering some headwinds. This is something that is going to affect the output for a number of years to come.
This is arising at a time when the global economy could be facing a recession. This means the dependence upon the viability of other countries is further exposed. No matter what Germany does, if their partners such as China are experiencing a slowdown, this is a problem.
It certainly appears that is the case.
Massive Demographic Headwinds
We are seeing the max potential of the German workforce. This is going to create a host of problems that the rest of the EU is coming upon. Because of obligations already made, the idea of less workers does not create an ideal economic model when it comes to paying for everything.
The country under the disaster that was Angela Merkel tried to alleviate the problem by bringing in refugees. As one can guess, this is backfiring. We are now seeing clashes between the German population with the refugees.
A major part of the problem is that Germany decided to hand out checks to those entering the country. Here is where things really start to go off the rails. Instead of seeking a better opportunity, most relocated for the check. This is compounded by a generous umemployment package which actually incentivizes people to work.
This is something that should be obvious and the government is starting to look at taking some action.
The new Government has proposed reforming the support for the long-term unemployed – currently known as “unemployment benefit II” (Arbeitslosengeld II) or Hartz IV. The proposed new system scheduled to roll out in early 2023, will be called Bürgergeld, or “citizen’s allowance.” This will increase in the basic monthly benefit from €449 to €502. Additionally, the Bürgergeld will reduce sanctions for those who are avoiding employment and training meetings, which appears to have emerged since the COVID lockdowns around the world. Many appear to have enjoyed free money to stay home under COVID restrictions and have been reluctant to return to any employment. After the first six months, the benefit can be reduced by up to 30% if they refuse to take courses or work.
Even with automation, the bottom line is workers are needed to sustain economic output. Technology only takes us so far. The situation gets magnified when we mix the global slowdown.
The EU Cards Are Falling
The backward slide of the EU is nothing new. When we look at the obligations of these countries, we see how unsustainable they are. Spain is an example of lunacy with their pension plan, one that reaches Rolls Royce status. With their demographics, good luck.
Then we have the rest of the southern countries. They were not thriving when the economy was doing well. From Italy to Greece to the aforementioned Spain, things have been a slog over the last few years. This has tensions towards the north at an elevated level.
Another major factor is the fact foreign banks are not buying European debt. This was evidenced by the Swiss National Bank currency swap with the Fed last month. The auctions saw banks showing up for the first time years. Granted the numbers weren't that large but it is a sign of how bad things are. When commercial banks are heading to a central bank for liquidity, it is danger Will Robinson.
Finally, we live in a world that is rapidly being dominated by technology. Here is a question: what is the largest tech company in the EU? What company would you put on global stage in this area?
My guess is we would come up with SAP or something like Siemens although the latter might be more of an industrial. Either way, where is the Google or Apple; the Tencent or Alibaba?
The answer is they do not exist.
We discussed the automotive industry quite a bit on here. This is another area that Germany could take a hit. VW seems to be making some mistakes, falling further behind as their sales are flat. The EV competition is heating up and many are wondering if VW will actually be a player.
When the largest economy is starting to sink, it cannot help but to affect the entire region. There are no easy answers to what is confronting Germany. Based upon the situation with Japan, the sad reality is there might not be a viable solution. We could simply be faced with the premise that contraction is the only outcome.
If that is the case, expect it to ripple throughout the EU. Things are wound to tight to endure much of a hit.
My forecast is the EURO will collapse by 2030, a time where some of the countries will have reverted to their own currencies. By 2035, I predict the EU will be a skeleton of itself as compared to today. A number of countries will follow Britain and leave the Union.
None of this is to be considered financial advice. It is only for information purposes.
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