Home » Money » Eurocrisis II: The Hot One

Eurocrisis II: The Hot One

Pity poor Europe. 2014 was supposed to be the year that they finally put the Eurocrisis behind them, culminating with a stress-test of banks to prove they could weather the next downturn. There has always been hope for a little bit more growth, too, showing that the forced marriage of nations had benefits beyond just staying together for the kids’ sake.

Then, it all blew up in Ukraine.

Like the previous crisis Europe faced as a freshly united single entity, this one was partly their own making. Ukrainian President Yanukovych was clearly fishing around for about $15B to stabilize his country – and when Europe couldn’t offer reasonable terms he went over to Russia for it, sparking this whole conflict. Europe eventually had to offer the new, less legitimate government the same aid when things turned again. But unlike the previous Eurocrisis, this is an external conflict that will test their determination to stand together to face a more horrible threat – war.

Shadows of War lay across Ukraine

Shadows of War lay across Ukraine

The constant escalation in Ukraine has started to take a toll on the nations involved. Russia’s stock market continues to tumble, falling 13.5% as foreign money can’t stomach the risks. A scramble for new sources of natural gas for Europe, to separate them from dependence on Russia, has been sparked across the planet. Over the long haul, Russia will be the net loser if Europe shows any resolve at all.

In the short term, however, Europe itself feels the pinch as the possibility of war slowly ratches up. Germany’s stock market has started to fall because of their ties to Russia, a nation they export $36B worth of manufactured goods to and rely on for half of their natural gas. But even this demands a bit of courage and determination which, if they try hard enough, can come from a little perspective.

For example, those exports to Russia are around 1% of Germany’s GDP. Exports to the US totaled $114B in 2013, more than 3X as much. That’s important when you look at the value of the Euro, which has climbed to $1.38 from last year’s $1.28. That’s an increase of 7.8%, meaning German goods are now 7.8% more expensive in dollar terms.

EURUSD

This is happening despite the relative strength of the US Dollar for one simple reason – the German insistence on stern austerity as the course for Europe. Where the US has printed $3.3T in “quantitative easing”, the European Central Bank (ECB) has opted for a more modest €1.5T. This comes on top of harsh terms for member nations that found themselves in trouble. The ECB takes their job of defending the prestige of the Euro very seriously, and has been willing to bear slower economic growth to prove it.

What is that prestige for? If it can’t be cashed in for the purpose of preventing another war on the continent, I’d argue it’s not worth much at all.

That's the stuff.

That’s the stuff.

If the Euro was to reverse last year’s rise, the ECB would have to print about 7.8% more Euros, which s about €400B compared to their money supply of €5.4T. It’s a good idea if only to keep their currency from getting out of hand and staying even in the currency war that developed nations are carefully advancing. But could it prevent a shooting war? If $15B was enough to make Ukraine your friend, what could you get from them for €400B?

The short answer is that they should start spending more heavily – not just to keep their currency in line with the rest of the world, but also to promote growth. A big spending spree would come with demands from Spain, Greece, and other nations that have been suffering. But consider how even a fraction of that amount might repair the situation in Ukraine – and possibly even Russia.

The negotiating point with Putin would run along the lines of, “Listen, Vlad, we’re going to spend a lot of money – either to frack the Hell out of Poland and run natural gas pipes across Turkey to never have to send you another Euro, or else to settle this conflict in reasonable terms. Which is it?”

Oh, and Ukraine still needs aid. That was the point all along.

Perhaps we can build the Great Gate of Kiev, too.

Perhaps we can build the Great Gate of Kiev, too.

If this seems unreasonable, even a bit too pragmatic, consider the reunification of Germany itself in 1990. Chancellor Kohl, a former history professor, knew that a historic moment was not a time to quibble. He agreed to accept the Ostmark, the currency of East Germany, at par or equal value to the West German Mark – a decision that cost about €500B in today’s money. It was the largest share of around €1.3T that went to the East. It was a lot for Germany to swallow on its own, but it did. Reunification was worth it.

What is Ukraine worth as a part of Europe? Any more or less than East Germany? How about avoiding a war?

The pain of this slowly escalating conflict is being felt in markets all across Europe, much as the lingering unemployment has been felt in homes across the continent. The ECB is the most powerful weapon against both problems, if only it were properly unleashed. Their defense of their new currency has been admirable, but it’s poorly directed.

This is not a time for austerity, and it’s not a time for cheapness. If they are doing this for posterity, as the European marriage seems to be, they may want to think a lot more about not just the world their kids might inherit but the war those kids might be drafted into.

15 thoughts on “Eurocrisis II: The Hot One

  1. I don’t know if you can buy your way out of this. Putin has his plans, too. But if there is any way they can avoid a war they should take it. This is getting scarier all the time. Don’t forget that Russia has nukes, too. It hasn’t come down to that but I bet it would.

    • Yes, Russia has nukes. I haven’t seen that mentioned in any of the news stories, but we have to be treading a little lighter than we would for any other nation because of this.
      I agree that avoiding war is the most important thing. I also think that the US has a very limited role in any of this, and I really hope NATO doesn’t get involved.

  2. Let me get this right – they shouldn’t balance their budgets and be fiscally responsible? You have written about this both ways. Same for the US.

    • If Europe was in great shape, the rise in the value of the Euro wouldn’t be a big deal. Same for a possible war on their East. But they have both of those problems, and I just think this is no time to be parsimonious. This is an historic moment, at least on the war front – though I have long shown that their stinginess to their member states is the main reason they have slow growth.

  3. yes lets aide the nazi’s that took over ukraine – what they need is more money and weapons to get going

  4. Interesting strategy.

    Putin has introduced instability to Eurasia, I think there should be some fighting involved, especially to disarm or kill pro-Russian forces in Ukraine.

    Both sides militarily would go back to ex ante, including Crimea.

    The revolution in Ukraine is internal to that country and is legitimate. They need their Abraham Lincoln however.

    • I hope there isn’t more fighting, but it’s escalating all the time. I do think there will have to be something more. I heard recently that Ukrainians are being “purged” from Crimea as the Russians take over.
      I agree that this is a legitimate revolution, but I constantly read Russian propaganda that the US left likes to repeat claiming that this was started by the US and/or Europe as part of a covert operation. It’s nonsense, of course, but I’m sure we have our side and our people on the ground. The John Perkins crowd is pretty vocal, however.

  5. I saw pictures of Ukrainians taken captive by some Russians trying to break away from Ukraine. They really beat these guys up & then showed them off like prizes. Sick!

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