Someone has to tell, not so super Mario, the EU economy is not a game

  



Written by: Steve Ruffley, Chief Market Strategist at InterTrader.com

When it comes the EU, in my commentary and webinars on FXStreet over the last 2 years I have been very clear. The EU in its current form is not working. It’s doomed to failure and the Euro as we know it will split in two in the next decade.

I will go in to some stats later, but here are the nuts and bolts and my underlying rational. People don’t really change. You can’t make a Greek national save, work or have the same economic principle as that of a German. If you go to a place like Sicily and ask someone, are you Italian? They will say no they are Sicilian, a small example but how can you expect people in the EU as a whole to then say they are all true ‘Europeans’? If you go to any state in America and ask the same question, are you American? You will see my point.

The dream for the EU ended some years ago. The principles of EU using one interest rate and benefiting from a huge single economy of scale was a good one. Similar things have been done throughout the ages. However once the huge pools of money were spent by Spain, Portugal and Greece (among others) on much needed infrastructure, the idea was that these countries would then use this to grow their own industries and stimulate their own growth. When countries like this used to rely on donkey rides and tourism it seemed anything was achievable. Now saddled with huge debt commitments and a down turn in the global economy what was the answer ever going to be? There inevitably was no answer. The growth was never achievable or sustainable.

The fact is that founding members of the EU were strong financially, economically and historically. The idea was to strengthen the EU with numbers, skill sets and the basic economic principle of economies of scale. There was nothing new here in principle.

As the global indices remain strong and it is hard to see how the in particular DAX is still so bullish. As with the banks, do the global investors believe that Germany is simple too big to fail? Germany has single handily bank rolled the rest of the EU and to my knowledge although these debts are relatively ‘manageable’ they are still very risky. Over the last few months with the threat from Russia causing some instability for the markets and US and EU data was disappointing, although there were brief dips in confidence the markets have already discounted any downside. With the recent poor GDP from the US (0.1% vs1.1%) there was every opportunity for a sell off. With Friday’s NFP reading 288K vs 210K the markets one again took a bid and now look as strong as ever.

The fact is that Europe and especially Draghi have grown complacent in confronting its problems. The message is more to the world leaders than the people in the EU themselves, that things are stable. The region’s political leaders are going about their business as if the crisis is over. It isn’t. The euro zone has technically come out of recession but after six years of pain there seems to be not long term growth or unemployment answers. The countries that required European Union-backed rescues are beginning to exit from them but it’s hard to call what is happening a ‘real’ recovery.

The latest forecast from the IMF estimates GDP in the EU will expand at 1.2% in 2014, compared with 2.8% for the U.S. Some of the most important European economies aren’t even moving at that extremely slow pace. The IMF expects France to grow a 1%, and Italy only 0.6%. Meanwhile, with prices barely rising, concerns have arisen that the euro zone could plunge into spiraling deflation, which would weigh heavily on the EU weakest member states.

Europe and Draghi have made little progress in solving the unemployment problem. The latest EU jobless rate is 11.9% — a year earlier, it was 12%. For some countries unemployment remains almost incomprehensible. I have continually raised concerns over Spain and its rate of 25.6%, with very high youth unemployment levels (between the ages of 15 and 24). Ceuta came in top of the list with 72.7%, compared to the EU average of 23.4%. Along with Ceuta in the top 10 were the Spanish regions of Andalusia (66.1%), Extremadura (61.7%) and Castilla-La Mancha (61.6%). Where are the jobs going to come from if they have not been created by now?



Technically I am starting to see the signs that the mood is changing. For the 4th time we have now made significant lower highs on the daily charts. Having failed to break out of the upper Bollinger bands we are targeting the 20 period MA and certainly now looking to start to complete a Fibonacci retracement of this year’s trading. Taking the highs 9794.30 and the lows 8908.80 we are certainly looking to target back the 61.8% (9454.91) and the Key 50% retracement level at 9350.60. The FTSE in general has a major correction every 6 years, we are coming perilously close to that point in time. The DAX as well as the other indices only need a small trigger to correct in my opinion.

With Draghi talking about negative deposit rates, room to manoeuvre on interest rates and the fact they can still implement measures like QE, i all sounds to me like a desperate ploy to con the world into thinking one giant lie will be so big no one will be able to disbelief it.

Without sounding like a broken record or a persistent EU bear, sometimes you have to accept some things are unfixable and simply untenable. The major concern of the straw that may break the camel’s back is that if Greece decide they have had enough and default on their debts. In reality it may already be too late for the EU and Euro.