posted June 3, 2016
Europe’s Chronic Stagnation (Ch. 5 of ‘Systemic Fragility in the Global Economy’, Clarity Press, 2016

If the defining characteristic of Japan’s economy since 2008 has been perpetual recession, then Europe’s has been chronic stagnation. Europe, and in particular its 17-country core Eurozone group, has been fluctuating between+1% and -1% growth for most of the post-2008 period, whereas Japan has been fluctuating at a still lower level of growth or in recession.

Neither the Eurozone nor Japan has yet recovered the level of economic output they had in 2007-08. That’s more than $20 trillion in combined global GDP that is still mired in ‘epic’ recession conditions—i.e. a kind of muted depression—seven years after the 2008 crash. Add to that $20 trillion the growing number of EMEs that have slipped into recession by 2015—and major independents like South Korea, Australia, Canada and others sliding toward zero growth or worse—it is likely that more than half the global economy in 3rd quarter 2015 is either stagnant or declining.

Much of that half continues, however, to bet that by focusing on stimulating its exports, and growing its share of slowing total global trade, that it can somehow extricate itself from stagnation and decline. That bet is a high risk gamble that will likely not pay off, as the recent history of the Eurozone economy itself since 2010 clearly shows.

The Limits of Exports-Driven Recovery

Since 2009 Europe in general, and the Eurozone in particular, has focused increasingly on exports-driven growth as the primary strategy of recovery from the 2008-09 global crash. So too have Japan and the EMEs. And until 2013, so had China as well. But exports-driven growth, especially since 2009, means one country’s export gain is often another’s loss. The global economy in the longer run consequently slows, as more and more countries retreat from domestic real investment and focus on exports as their primary growth strategy, driving down export and import prices and lowering the value of total trade.

While mainstream economists argue otherwise, based on their archaic theories founded on erroneous assumptions, the historical record since 2010 clearly refutes their argument that more trade, and free trade, always means more economic growth.

As recent data in late 2015 from the World Trade Organization shows, for nearly a quarter century, from 1983 to 2005, the growth of world trade averaged 6% a year. Since 2010 it has averaged only half that at 3%, which includes a boost from a significant but brief surge in trade in 2010-2011 that quickly abated. World trade in 2015 is projected to grow by a mere 1%, but may actually grow less since, for the first time since 2009, global trade actually contracted in the first half of 2015.

Thus, as more countries have tried to focus on expanding exports after 2008-09 as the means by which to grow their lagging domestic economies, the growth of total world trade has progressively slowed. Despite the dramatic slowdown in world trade since 2011, the competition for a shrinking world trade pie continues to intensify as more countries—including most notably those in the Eurozone—turn increasingly to export-driven growth as their primary strategy for recovery.

Not only the period since 2011, but also the decade of the 1930s—contradict the accepted view of mainstream economists that more trade always leads to more growth. In both periods, intensifying export competition resulted in slower global growth. Global trade slowed sharply as a result of competitive devaluations by countries during the 1930s global depression decade, enacted as governments lowered their currency exchange rates by fiat—i.e. legal declaration. Today it is devaluations by central bank liquidity injections that depress currency values and ‘internal devaluations’. And now emerging as well, internal devaluations are implemented by what is called ‘labor market restructuring’, occurring in the form of draconian cuts in wages and benefits to provide an export cost advantage. In the Eurozone today, both forms of devaluation—by central bank liquidity injections and labor cost cutting—are being implemented.

In the 21st century much of global capitalism has been shifting to financial asset investing at the expense of real asset investment. But it has also been reorienting a good part of what real investment remains after the financial shift, to growing exports and trade instead of real investment targeting the domestic market. As a consequence of both shifts—to financial asset as well as export-oriented investment—real investment in the form of infrastructure development, industrial production, new industries development, etc., that might have been directed toward the domestic economy, has slowed.
Unlike financial asset investment, real investment redirected to export production does provide some real growth and income creation. However, export-driven investment and growth is sporadic, volatile, and tends to be short lived. Since more and more economies are playing the ‘beggar my neighbor’ export card, an export advantage of one country quickly tends to dissipate, as other countries respond with similar export-oriented policies. The net result over time is intensifying competition that leads to more volatile, unsustainable, and unreliable growth for those that lose out in the ‘exports first’ competition.

Increasing dependence on trade and exports creates imbalances between the different sectors of the global economy that tend to slow the growth of trade over time: China and EMEs grow their exports, and thus their domestic economies, at the expense of Europe and Japan (2010-2012); Japan responds with QE and other monetary measures to drive down its currency to try to gain a temporary export advantage (2013-14); Europe then injects liquidity via QE and other measures in response in pursuit of the same (2015); China eventually responds with measures to lower its currency (2015-16); Europe and Japan follow with still more QE programs (2016?). And so the export ‘tit for tat’ game goes.

The outcome is currency wars as each sector of the global economy targeting exports for domestic growth attempts to gain a temporary advantage at the expense of the other. Long term, however, currency wars end up reducing world trade, as inter-capitalist competition and fighting over a slowing global export economic pie intensifies.

Select individual economies may benefit from an exports-driven growth strategy, but only in the short run. There may even be net benefits globally, but again only in the short run. Over time, intensifying exports competition leads to destabilizing devaluations by QE and other central bank measures; to more resort by countries to internal devaluations cutting wages, benefits, and disposable incomes that reduce domestic consumption and growth; and to more imbalances in global money flows that contribute to more financial instability as well—all of which slow global growth in the longer run.

Whichever the means—liquidity injections or labor cost cutting—the results are the same. Whether in the 1930s or today or in Europe or elsewhere, those who benefit do so at the expense of the losers, whose collective loss typically exceeds those who gain—for a total net loss to the global economy.

Nowhere has this consequence of an exports-driven growth strategy been more evident at a regional level than in the Eurozone. For more than a decade now, Germany and other northern European economies have benefited—at the expense of growing indebtedness and slowing growth in many of the Eurozone’s peripheral economies (Spain, Portugal, Greece, Ireland, and even Italy).

Stripped of the ability to lower their currency as a result of having joined the Euro, having given up their central bank independence by joining the German-dominated European Central Bank (ECB), and unable to reduce unit labor costs to match Germany and other northern European economies, the Eurozone periphery economies were forced to rely on German-Northern Europe bankers’ and governments’ money capital in-flows as the primary strategy by which they hoped to recover from the 2008-09 crisis. That strategy has proven a dismal failure.

German Origins of Eurozone Instability

The chronic stagnation that has characterized the Eurozone over the past decade begins in Germany— in Frankfurt, the seat of the German-dominated European Central Bank (ECB), and in Berlin where Germany’s finance ministry also dominates Eurozone fiscal policy through a coalition with its allied northern and eastern Europe foreign ministers whose economies are dependent on German trade and financial relations.

With a de facto majority, Germany and its allies dominate the ECB, whose governing body is composed of the head central bankers of the 19 Eurozone countries. A German-led coalition of finance ministers also functions as a bloc within the European Commission (EC), which determines much of the Eurozone policies on fiscal measures, austerity, and government debt bailouts.

The ECB and EC constitute two of the three key pan-European institutions that make up the so-called ‘Troika’ in Europe which together determine much of the Eurozone’s neoliberal policies. The third Troika member, the International Monetary Fund (IMF), located in Washington DC, operates on a more US-Europe consensus. It is less directly influenced by Germany and its allies than the ECB and EC. The IMF may occasionally critique the EC-ECB policy choices, including at times the pace and magnitude of Eurozone austerity fiscal measures. But the IMF tends to eventually fall in line with the ECB and EC where matters directly impacting European economic issues are involved.

The exports first policy and the chronic stagnation in the Eurozone economy begins in 1999 with the creation of the Euro. The Euro enabled Germany to become the dominant force with regard to exports and trade within the Eurozone, especially in relation to the southern and eastern periphery regions. German exports dominance within the Eurozone in turn has created severe trade and capital flow imbalances within the Eurozone—imbalances that have played a key role in the excessive debt accumulation in the Euro periphery after 2009.

While the Euro laid the groundwork for a major increase in trade throughout the Eurozone, the question was who was going to benefit most? That is, which economy would get the lion’s share of the increased internal European goods trade flow?
The country that would gain the most from the anticipated escalating internal trade within the Eurozone would be the country able to lower its production costs the most. The alternative option of lowering costs to get an exports advantage by devaluing one’s currency was no longer available to countries that had adopted the Euro as common currency. The country that would dominate intra-Eurozone exports trade would be the country most successful in lowering its unit labor costs—i.e. the one which reduced wages, benefits, and squeezed more productivity out of labor the most. After joining the Euro in 2002, Germany quickly sought to position itself as the most successful low cost exports producer within the Eurozone and the EU in general.

As the Eurozone began to emerge from the 2001-02 tech recession, the Germany economy was considered the laggard of the Eurozone and was referred to as the ‘sick man’ of Europe. In 2005 its unemployment rate was 11.3%. It thereafter enacted extensive labor market reforms and cut corporate taxes from a rate of 45% of profits to a low of 15%. The labor market reforms included reductions of wages, restructuring of collective bargaining, cuts to welfare, raising the pension age and encouraging and enabling new employment in the form of part time work. By 2014, more than half of all German jobs created after 2009 were part time jobs. Together, the spending program cuts, the labor market reforms dramatically reducing labor costs, and the deep cuts to corporate taxes resulted in a classic demonstration of currency ‘internal devaluation’ by deep corporate cost reduction. By 2005, Germany was in a position to reap the lion’s share of intra-Eurozone exports and trade.

The adoption of the Euro meant that other European countries, especially the periphery, could no longer offset Germany’s internal devaluation cost-cutting with reductions in their currency exchange rates. That was neutralized effectively by the Euro. The Euro was also valued high at the time, so that periphery countries that borrowed from German and northern banks in Euros could buy large volumes of German exports. Conversely, it meant they would also incur large amounts of debt to German and northern European banks as well.

German exports to other Eurozone economies surged, as German banks loaned funds to periphery banks, periphery companies, and to periphery governments in turn. Much of the lending by both German-Northern Europe banks and periphery banks as well went into the housing and commercial property markets in Spain, Ireland, and elsewhere, where prices were rising rapidly and reached bubble levels by 2007-08. The boom spilled over to other industries and sectors of the periphery economies, as is typical in a housing and real estate construction and financial asset boom. Ever rising prices in real estate, properties, and in general in turn encouraged still more lending, as collateral values for real estate and properties rose. More lending, more debt, more market price escalation followed in an upward spiral, as financial asset prices continued to rise.

German non-financial businesses benefited from the increased sales of their exports to the periphery. German banks benefited from financing the export trade. Banks especially benefited from the rising flow of money capital now coming back in the form of interest payments as debt accumulated in the periphery, and as periphery businesses, investors, and wealthy recycled their share of profits from the speculative boom and growth back into the northern banks for safety and future re-investment as well.

This successful strategy convinced German bankers and leaders that if Germany could pull itself out of a deep recession and crisis in 2003-05 by means of austerity and exports, then so could other Euro economies do the same, later after 2010. Germany enacted austerity and it appeared to work. Why couldn’t Greece, Portugal, Spain, Ireland and others then do the same? What this view conveniently ignored, however, is that the German recovery post 2005 occurred in the context of a solidly growing European and world economy after 2003—not a collapsing and stagnating economy after 2009. The success of their own exports plus austerity policies before 2009 convinced German financial and economic elites, and their politicians, that a focus on exports combined with fiscal austerity worked; it was therefore not necessary to establish a Eurozone-wide banking union to centralize monetary policy. National central banks were sufficient to carry out monetary policy as a supplement to the focus on exports and fiscal austerity.

This view pushing an austerity fiscal policy, a central bank with limited powers, and an exports oriented growth strategy would have profound effect on future Euro recovery when Germany became the dominant player after 2010. It would mean Germany would recovery first and most, while other Eurozone economies would struggle and thus call for more banking union and less fiscal austerity.

When the global crisis of 2008-09 hit, like the US and UK, Europe too had created a kind of real estate bubble. But the property crash in Europe was not as widespread as in the US. It was regional, located largely in the periphery and even there mostly in Ireland, Spain, and to a lesser extent Portugal. Nor did the financial real estate bubble involve shadow banks and derivatives as extensively as in the US. The Eurozone’s banking system was still largely dominated by commercial banks and other local, traditional forms of banking. The economic contraction that followed events of 2008-09 was serious, but not as much so as in the US and even UK.

Despite its less severe downturn in 2008-09, Germany in 2009 forced the invoking of an obscure rule that had been introduced earlier in the decade at the time of the creation of the Euro: that rule called for a kind of budget balancing—achieved by means of fiscal austerity—in the event of a crisis. The rule in question called for a ceiling on government budgets and spending, according to which deficits could not exceed 3% of annual GDP. A related rule required that government debt could not exceed 60% of GDP. The deficit-debt ceiling rule was activated by the EC and Eurozone governments in 2010.

By the next full fiscal year, 2011, the full impact of the rule—which in effect required perpetual austerity—began hitting economies hard. At the same time, Germany and its allies in the ECB pushed for the central bank to raise interest rates.
The rate rises that followed in 2011, combined with the austerity policies now taking effect in 2011, exacerbated an already weakened Eurozone economy that had barely just begun recovering from the 2008-09 crash.

The new emphasis on policies of austerity and ECB rate increases also coincided with and exacerbated the debt crises that emerged in 2010 in the weakest of the Eurozone periphery economies—Ireland and Greece. The rate hikes caused bond rates in the Ireland, Greece, and elsewhere in the periphery to rise still further in 2011. The austerity cuts made it increasingly difficult to service the debt, as tax revenue income fell sharply. Government balance sheet fragility in the periphery deteriorated as a consequence of both rising debt and declining tax revenue needed to service the debt, due to austerity.
The Eurozone economies declined further, especially in the periphery, thus requiring still more austerity to meet the 3% budget deficit rule that Germany insisted Eurozone economies adhere to. Fiscal austerity, rate increases, and deteriorating sovereign debt began to negatively feedback upon each other, leading to a still further decline in GDP, again especially in the periphery economies. The weakest of the periphery economies, Greece and Ireland, required still more bailout, which meant debt added to prior debt in order to continue to make payments to Northern Europe lenders on previously incurred debt.
Greece received a 73 billion Euro bailout in May and in November Ireland received an 85 billion Euro bailout. In exchange, they were required to implement even more draconian austerity measures. ‘After all, if Germany did it, why can’t they’ was the rationale heard in northern Europe banking and political circles at the time.

This perverse combination of sovereign debt crises in the periphery; a banking system that was still not recapitalized (i.e. still technically insolvent) with bank lending declining; rising interest rates engineered by the Eurozone central bank; and ever deepening and severe austerity policies—together drove the Eurozone into a severe ‘double dip’ recession beginning in late 2011.

After growing at a Eurozone wide 3% annual GDP rate in the second half of 2010, nearly all the Eurozone economies began to slow noticeably in early 2011. And not just in the periphery. Growth in the northern European economies stagnated by the summer of 2011 as the periphery economies fell deeper into recession by the third quarter. By the final months of 2011 virtually all Eurozone economies, including Germany, were contracting. The Eurozone’s double dip recession was underway; it would last another 18 months, through early 2013. The decline was even more severe in some ways than that experienced during the first recession associated with the global crash of 2008-09.

Eurozone’s Double Dip Recession: 2011-2013

After having contracted roughly -10% during the 2008-09 crash, the Eurozone recovered slowly in 2010. Despite a very short and weak recovery from the 2008-09 contraction, the Eurozone central bank, the ECB, raised interest rates sharply in two quick steps, from 1% to 1.5%, in early July 2011, even as the Eurozone growth rate had slipped to only 0.2% when the rate hikes were implemented. It was a classic example of central bank rate hikes implemented prematurely—in an economy still overly sensitive to rate hikes due to excess household and business debt overhang from the preceding boom period and asset prices still not fully recovered yet from the 2008-09 crash.

Both the debt overhang and the asset price weakness served to exacerbate the negative effects of the ECB interest rate hikes on the real economy. The ECB rate hikes were also implemented as Euro bank lending to non-bank businesses was still declining, thus further exacerbating the effect. Raising rates only made banks even more reluctant to lend. The negative effect of the rate hikes on the real economy was almost immediately and significantly felt throughout the region.

At the time the ECB rate hikes were justified by the ECB, and in particular German ministers and Germany’s central bank chair, as necessary in order to check escalating inflation. But the inflation spike of 2010-11 was not due to domestic conditions. It was due to speculation in oil and rising demand for oil and commodities driven by the surge in China and EME economies in 2010-11. The inflation was therefore external, supply driven and temporary. Raising domestic rates within the Eurozone to reduce demand in the region would therefore not dampen inflation, given these external global forces. Nevertheless, an ideological preoccupation with preventing goods inflation, in Germany in particular, prevailed and was cited to justify the premature rate hikes. The decision revealed the dominant influence of German and allied central bankers within the governing council of the ECB. This decision to raise rates in 2011, given prevailing conditions, would prove disastrous.

Rising interest rates were not the only factor that drove the Eurozone economy into its double dip recession in 2011. The rate rises coincided with the advent of more severe austerity policies enacted in 2010, now beginning to have their full force and effect. Italy, France, Netherlands, Spain—as well as Ireland and Greece all introduced spending cuts ranging from $17 to $24 billion for the year, in addition to raising sales (value added or VAT) taxes, property taxes, and some income taxes. Outside the Eurozone proper, European Union (EU) countries also introduced austerity programs. The UK’s austerity budget passed in 2010 called for a 20% budget cut. More than $130 billion was cut from the budget for 2011 and after. The UK’s VAT was raised from 17.5% to 20%, which was typical.

As the Euro economies slowed, so too slowed their tax revenue intake, raising their deficit levels well beyond the 3% of GDP rule. Consequently, even more spending cuts and sales tax hikes were called for in 2012. Spain cut another $80 billion, Italy another $7 billion. Greece tens of billions more, as it required a second bailout. France introduced what it called a neutral budget plan, cutting business taxes and reducing spending elsewhere.

Surging global oil prices in 2011-12 took a further toll on the Eurozone economy, further depressing real investment that was already falling due to the freeze up in bank lending, the higher ECB rates, and financial asset deflation. It is estimated that Europe’s oil import costs rose from $280 billion in 2010 to $402 billion in 2011, in effect taking $122 billion out of the economy that might have been otherwise invested or consumed.

As nearly all Euro economies slowed or contracted, so did exports and imports, making their contribution to the general slowdown. Eurozone-wide unemployment rose quickly, from 9.8% to 12.2%. In the southern periphery economies, the jobless rate was more than double, as in Spain and Greece unemployment rose to 27%. Rising unemployment and austerity, combined with high debt loads, in turn translated into declines in household consumption as well. All the main elements of economic growth—government spending, household consumption, exports, and business investment—were thus slowing or in decline by mid-2012.

Real investment measured in terms of gross fixed capital formation sharply declined in the 2008-09 crash and then continued to progressively fall during the short recovery that followed and throughout 2011. The focus on exports and external growth, on austerity fiscal solutions, and on raising interest rates led to a chronic decline in real investment. This was true not only of the Eurozone but the entire 27-country European Union. According to a study by McKinsey Associates business consultancy, investment between 2007 and 2011 fell by more than 350 billion euros, or nearly $500 billion—a decline equivalent to 20 times the contraction in private consumption.

In the periphery, falling investment amid rising real debt levels led quickly to collapsing government bond prices, intensified by the professional investor-speculators betting on the fall and thus accelerating it. While external commodity-driven inflation in goods was occurring, financial asset price deflation was also becoming a serious concern. Stock and bond prices were accelerating, as the Euro currency also fell from $1.45 to $1.35. Real estate and property price deflation was particularly severe in Spain and Ireland. Financial instability was thus occurring in parallel to the real economy’s contraction then underway.Badly timed central bank rate increases, counterproductive austerity policies, intensifying sovereign debt crises, and collapsing financial assets all combined to exacerbate the downturn. Given that the private banking system was still fragile, banks loaned even less than before. Bank lending in early 2012 fell at its fastest rate since 2009: whereas bank lending in early 2008 grew at a 12% annual rate, by June 2012 it had essentially stalled, now growing a mere 0.3% annual rate.

The Eurozone economy thus stagnated through the summer of 2011. And by the fourth quarter virtually all the economies were in recession. That decline would continue until the spring of 2013, for a total of six consecutive quarters—i.e. longer and with a greater total negative impact perhaps than the shorter 2008-09 crash and recession. Equally important, by the summer of 2012 it was clear that the real contraction was no longer concentrated in the periphery economies only; it now had clearly begun to spill over and deepen in the northern European ‘core’ economies as well.

ECB Opens the Money Spigot … Just a Little

After the ECB raised interest rates in April 2011 and again a second time in July, it was forced to reverse its policy and quickly lower interest rates in November and December, from 1.5% back down to 1%. But the move had virtually no effect on the slide to recession by then well underway. Meanwhile, the sovereign debt crisis was worsening fast and bank insolvency was still widespread.

Government debt to GDP ratios rose further in 2011. The debt levels in the periphery economies—Ireland, Portugal, Greece and others—were now well over 100%. Spain’s ratio was approaching the century mark, and Italy’s rose to 123% debt to GDP. Private bank debt was even higher, averaging more than 127% of GDP across the Eurozone. By 2012, Spanish, Greek, and even French, Belgian, and Italian banks were growing increasingly insolvent. A banking crisis throughout the Eurozone, not just a government debt crisis in the periphery, thus loomed large on the horizon. $200 billion was needed just for refinancing old bank loans coming due in early 2012 alone. And total long term corporate and government bond refinancing needs for all of 2012 amounted to no less than $1.29 trillion.

What was emerging was a financial crisis situation potentially greater than even that confronted in 2008-09. Moreover, the financial instability was overlaid on a rapidly declining real economy as well. The possibility of one crisis exacerbating the other, sending the region into a downward spiral of real and financial asset deflation, was therefore high.

Given this situation, Eurozone finance ministers and the ECB decided not only to lower interest rates rapidly at year end, but to introduce extraordinary emergency programs to bailout both governments and banks as well. The great Euro liquidity injection was about to begin.

Unlike the US and UK, the liquidity injections did not take the form of ZIRP and QEs, at least initially. True ZIRP and QE would have to wait until 2015. The prevailing Eurozone view at the time was that austerity was sufficient to refloat the economy. Monetary policy would merely buy some time for austerity to start having an effect. Monetary policy was still limited to the ECB reducing interest rates, as the Eurozone economy fell deeper into recession in early 2012.

Two government debt bailout programs were introduced under the aegis of the European Commission in 2010 and early 2011. However, although potentially large they were limited in their application to only the most severe sovereign debt cases. The first program, introduced at the time of the eruption of the first Greek government debt crisis in early 2010 to provide bailout for Greek banks and government, was called the European Financial Stability Facility (EFSF). It earmarked 780 billion Euros specifically for government bailouts, just about $1.1 trillion in exchange rates at the time. Greece would acquire 164 billion euros from it in May 2010 (and a second bailout of 165 billion euros in March 2012). Ireland was given 68 billion later in November 2011. Portugal would receive about $29 billion in April 2011 and Spain much later $123 billion. A second, smaller program run by the European Commission directly was called the European Financial Stabilization Mechanism, or EFSM. Introduced in January 2011, it amounted to 60 billion euros in loan guarantees to bailout financing that might be raised from private sources.

But these were select, targeted government bailout funds and not meant to directly bail out private banks or flood the general economy with liquidity—as the US and UK quantitative easing (QE) programs in 2009 were designed to do. Moreover, the total funding of the two Eurozone government bailout programs were mostly commitments on paper. Only roughly half of the approximately $1.2 trillion in bailout funding provided by the EFSF and EFSM was eventually disbursed to Greece, Ireland and other periphery economies.

In the EFSF and EFSM government bailouts, the respective governments were supposed to pass on the bailout funds to their banking systems as well as use them to refinance their own debt. But typically more went to government than to the private banks, which continued to experience very unstable and fragile conditions. The bureaucratic EFSF and EFSM were thus failures in terms of private sector bank bailouts. Not surprisingly, bank lending continued to contract throughout 2011-2012. Many Eurozone banks remained technically insolvent, with available capital far less than necessary should a classic run on the banks emerge. However, the arrangements did conform to the German preference for rigid ‘rules’ governing bailout fund distributions.

Yet another bailout program was introduced in 2012 as the banking and debt crises intensified and the real economy’s slide into double dip accelerated. It was an emergency program called the ‘Long Term Refinancing Operation’ or LTRO. Unlike the prior two government bailout programs, the EFSF and EFSM, it directly targeted banks. The LTRO allocated initially 489 billion euros to 523 banks facing the need to rollover 200 billion euro loans beginning January 2012, just months away. Another 530 billion euros in funding was added to the 489 billion quickly in February 2012 when it had become clear the earlier amount was insufficient to head off a banking crisis. The combined two issues equaled 1,012 billion euros, or about $1.3 trillion at the time. That raised the total bailout funding—for governments and banks—now potentially available to more than $2.3 trillion.

As the Eurozone economy slide faster into recession in the first half of 2012, a new institution was created to centrally administer the various funds (EFSF, EFSM, LTRO), called the European Stability Mechanism, or ESM. Introduced in June 2012, like the LTRO it was also given authority and funding for bank bailouts, providing another 500 billion euros ($600 billion roughly).

All were introduced in a period of just over six months, from December 2011 to June 2012, with total bailout funds now amounting in dollar terms to approximately $3.15 trillion. While undoubtedly a large sum, once again much was still on paper and represented targeted bailouts of select governments or banks in the most severe trouble. Germany and its allies in the ECB and European Commission (EC) reluctantly agreed to the programs but required various bureaucratic approvals, as well as subsequent approval votes of their respective Parliaments, before the programs might actually disburse funds. In other words, just as Germany was the obstacle on the fiscal front, insisting on rigid rules and implementation of extreme austerity measures in exchange for bailout funds, so too it continued to function as an obstacle to massive direct QE liquidity injections.

All the preceding emergency bailout programs were technically in place by June 2012, at least on paper, as the real economy and debt crisis deteriorated further. The new chair of the ECB, Mario Draghi, had assumed office in November 2011. No time was wasted by Eurozone elites to demand he do still more to stimulate the economy by monetary measures. Fiscal policy was politically frozen as an option. The only tool left was monetary policy action by the ECB. As the Eurozone fell deeper into recession by mid-year, Draghi stole a page from the US central bank playbook that US chairman, Ben Bernanke, had introduced earlier in the decade when Bernanke declared that in the event of a major crisis, if necessary, he would ‘drop money from a helicopter’. Draghi therefore stated boldly and publicly that the ECB would “do whatever it takes” to ensure banks and the economy were provided with all the necessary liquidity. Central bank massive liquidity injection, along the lines of the US and UK, was coming. Exactly when and how was still unclear. Nevertheless, Eurozone stock and bond markets surged on the Draghi announcement of July 2012.

To substantiate his determination to do “whatever it takes”, a subsequent fifth bailout program was announced soon after in September 2012. It was called the OMT or ‘Outright Monetary Transactions’ program. Much like the US third version of QE that was about to be announced in October 2012, the OMT was defined as an ‘open-ended money injection’ program. That is, it would provide an unspecified amount of bailout as needed and therefore potentially unlimited funding.

OMT meant that the ESM, authorized to spend 500 billion euros, with the remaining funding from the EFSF and ESFM and the LTRO all under its umbrella as well, could now purchase bonds from countries which were not already in a bailout program. Government bond purchases could occur pro-actively, even before a formal bailout program was introduced. The OMT had the added feature of the option to purchase a broader range of securities, not just sovereign bonds, in doing ‘whatever it takes’. Yet the purchases still had to get approvals of the bureaucracies and legislatures that were still dominated by the German bankers and their allies. Germany and friends kept their finger on the distribution purse strings. Unlike the US and UK central banks, the ECB still could not unilaterally make purchases that it wanted or targeted simply on its own authority.

The ECB, in other words, was (and still is) not really a true central bank. It is the executive disbursement agency for the governing council composed of the 25 Euro central banks, still dominated by a German and allied northern and east European central bankers majority.

As the bureaucratic maneuvering with regard to monetary policy within the ECB, EC, and other agencies continued throughout early 2012, financial and real economic instability worsened in the Eurozone. The private banking system remained fragile, and banks continued to refuse to make loans, especially to small and medium enterprises in the Eurozone. While the ECB was now permitted to ‘turn on the money spigot’, given the highly bureaucratic management structure of the bailout funds and the German-imposed set of rules that required layers of approval before funds might be disbursed, very little actual general liquidity had yet to flow. That would only occur with a QE program.

But Germany and allies were adamantly opposed to a banking union, as well as other central bank powers like Eurozone-wide banking supervision authority for the ECB, a true Eurozone-wide deposit insurance program, and a Eurozone bond which were all prerequisites for the introduction of a true QE program like that introduced by the US and UK to date. Germany did not want a true centralized central banking system—a bona fide banking union like the US Federal Reserve or Bank of England—any more than it wanted a more unified fiscal union in the Eurozone. It had little to gain and potentially much to lose from both.

Germany was doing quite well in most of 2012 and therefore had little interest in giving up or diluting any power it was exercising through its influence in the ECB, EC and elsewhere. In the first half of 2012, moreover, Germany was still growing modestly, even as the rest of the Eurozone was now deep into its double dip recession. That would change, however, when the German economy also began to decline sharply at the end of 2012 due to a significant drop in its exports. Toward the close of 2012, the value of total German exports fell from the low 90 billion euros range at the start of the year to 80 billion at the end of 2012. The German economy was now joining the general Eurozone recession.

That narrow, parochial and nationalist position meant that the Eurozone—with the second largest combined GDP after the US at the time—would remain the weak link in the global economic system, perpetually responding to crises real and financial, but never really able to generate a self-sustained economic recovery above 1% or for very long. Its long term fate was therefore to stagnate at best, which it would continue to do.

Germany’s Export Pivot to Asia

But didn’t Eurozone stagnation mean that exports to the rest of Europe would decline for Germany? Yes, it did. But after 2010 Germany was already orienting more toward exports to China and the EMEs, which were now booming. During the 1990s Germany was not particularly export driven. After 2010 it would become one of the most exports-dependent. Exports would constitute 20% of its GDP by 2015, about the same as its domestic gross capital investment contribution to its GDP. Its leading export products were autos, machinery and equipment, and chemicals—i.e. just the items that China and other EMEs were interested in as imports. But this was making it increasingly dependent on global economic conditions outside Europe. If the phrase ‘as Germany goes, so goes the Eurozone’ is correct, then overlaid was the phrase ‘as the global economy goes, so goes Germany’.

What Germany’s economic pivot to China and Asia meant is that the Eurozone periphery economies, which had provided such a lucrative destination for German exports up to 2011, were now increasingly on their own so far as German and northern money lending to them to finance expansion and purchases of exports were concerned. With the recessions of 2008-09 and 2011-13 those money flows going to the periphery to buy German exports and develop periphery infrastructure, housing, and commercial property were drying up as Germany turned ‘east’ in its export strategy. That left the periphery with massive debts from the previous money flows from northern Europe bankers that benefited Germany and northern Europe. In a kind of ‘economic strip-mining’, to use a metaphor, the periphery economies were left to clean up the mess on their own. Alternatively, they could continue to borrow money from German and northern banks, global investors, and German and northern Eurozone governments—but now primarily not to finance import purchases or internal development but rather to continue making payments on the previously incurred debt—i.e. increasing their debt in order to pay old debt and ending up paying even more interest on total debt than before.

Money capital to pay for money capital, but not money capital to grow periphery EU economies. That was the new ‘German arrangement’, as Germany pivoted to push export growth to Asia. Thus the Euro banks, especially in the periphery, were still not bailed out and remained financially fragile. Simultaneously governments fell further into ever more debt as their tax revenue source of income declined, requiring greater government debt bailout. And with austerity now ravaging their economies as well, rising unemployment and wage compression meant growing household consumption fragility as well. It was a classic case of growing government balance sheet fragility, adding to bank financial and household consumption fragility. The entire Eurozone system was thus becoming ‘systemically fragile’.

Eurozone’s 2nd Short, Shallow Recovery: 2013-2014

The Eurozone recovered from its double dip recession in the spring of 2013—but only barely. Eurozone growth averaged a mere 0.2% per quarter throughout 2013, driven largely by Germany’s economy which accounts for about a third of the total Eurozone. The Eurozone would continue to grow at a similar tepid 0.2% average GDP rate through the following nine months of 2014.

Indicative of the weak recovery was the consistent decline in the rate of inflation in goods and services, which steadily fell within a year from more than 2% annual rate to 0.8% at the end of 2013. Disinflation—i.e. a slowing rate of inflation—would continue through 2014, crossing into deflation—i.e. negative prices—at the end of 2014. Wage growth would fall even faster than goods and services prices, from 2.8% at the start of 2013 to 1% at year-end 2014. Retail sales continued to contract throughout 2013, as did manufacturing and industrial production. Services spending remained flat during 2013.

The point of all this data is to show that the Eurozone’s weak 0.2% recovery in 2013 was not due to internal growth factors—whether consumer or business spending. It was due primarily to exports, and in particular German and northern European exports. Germany’s growth exceeded the Eurozone region, accelerating in early 2013 due to expanding trade with Asia and, to a lesser extent, due to rising exports to the US as the value of the US dollar rose. Remove Germany and exports in general from the Eurozone growth numbers, and the Eurozone’s 2011-2013 double dip recession continued another six to nine months throughout 2013, rather than officially ending in April 2013.

The weak Eurozone recovery of late 2013-2014 was of course also attributable to the continuation of fiscal austerity measures, as well as ineffective central bank interest rate policies that did little or nothing to stimulating the real economy.
In a March 2013 meeting of finance ministers in Brussels, the pro-austerity argument was reaffirmed, even as France and Spain were given two additional years to reach the 3% budget deficit rule and other region economies were also given more leeway. However, in exchange for the ‘stretching out’ of austerity, as it was called, German and Dutch ministers demanded more structural reforms by those given the extensions.

It was about this time as well that the need for labor market structural reforms was resurrected aggressively by Germany and others. Labor market ‘reforms’ meant reducing wage and benefit costs to lower the price of exports in order to stimulate domestic economies by export demand. This is sometimes referred to as ‘internal devaluation’.

Such reforms were an echo of policies introduced in Germany in 2005, and again in 2010, as German politicians and business leaders shifted to driving down labor costs to give German businesses an export advantage with competitors. Labor cost restructuring was a key element of austerity and exports-driven strategy and should always be viewed in that light. Twice within five years, in 2005 and 2010, Germany reduced pensions, cut unemployment benefits, allowed more hiring of part time workers, as well as weakened unions’ collective bargaining. Now it wanted the rest of the region to do the same—but this time, however, in the context of their undergoing two recessions in just four years.

Spain was the first to follow Germany in adopting the ‘labor market restructuring’ approach and by the end of 2013 had cut real wages by 15%. Its exports coincidentally rose by the same 15%. Workers were thus subsidizing—in effect ‘financing’—Spain’s recovery. Labor market restructuring was but the latest form of austerity. Old forms of austerity were continuing elsewhere in the Eurozone. Netherlands introduced a new 8 billion euro spending reduction program. France announced it would soon sell its major stake in many private French companies, as well as consider later raising pension retirement ages and reducing unemployment and family benefits as well. Labor market restructuring was thus coming to France. Italy too was planning for it. And in Greece, the second bailout deal called for 25,000 public worker layoffs and additional wage cuts of 25% before the ESM and ECB would agree to release more bailout money. ‘Old’ austerity was still much alive, while new forms were being developed and introduced as well.

But austerity did nothing to resolve the problem of still growing sovereign debt. Austerity policies purport to cut spending to restore deficits and reduce debt—thereby somehow encouraging investors to invest. But if that is the main justification for austerity, it continued to accomplish the opposite in 2013-2014; it continued to create more deficits and more debt. Nor did the more than $3 trillion in available bailout funds reduce government debt levels. By mid-2013 the debt levels of all the major Eurozone governments had continued to rise. All were approaching, or were already well over, the 100% of Debt to GDP ratio economists generally agree is a threshold making a future instability event highly likely.

If austerity policies failed to reduce debt or lead to real economic growth, then so had central bank monetary policies during 2013-2014. Despite the ECB having cut interest rates to 0.5% in May 2013 and then 0.25% in November 2013, lending by traditional banks had not improved, especially for small and medium businesses. The ECB’s latest initiative, the ‘OMT’ program, didn’t help. In the Eurozone, small and medium businesses depend almost totally on traditional bank loans, not bonds, so ECB government bond buying through the OMT or other bailout funds didn’t help. Nor did ECB programs targeting specific bank bailouts. Bailing out banks didn’t mean they would turn around and start lending. That was an erroneous key assumption that was by now clearly disproven not only by the Eurozone experience but by bank bailouts in the US, Japan, UK and elsewhere. Banks can be bailed out, but won’t necessarily lend.

The linkage between low interest rates, bank bailouts, and money injections as monetary means to generate real investment and general economic recovery , was clearly now broken in the post-2008 crisis world. Large multinational corporations in the Eurozone could tap into what are called global capital markets following the example of US shadow banks offering their corporate junk bonds to global investors or US Money Market Funds providing capital. But small-medium businesses could not. Thus, as the ECB lowered rates and managed its trillion euro bailout funds, Eurozone private bank credit growth declined every month. Bank lending was actually negative every consecutive month throughout 2013 and through the first nine months of 2014 as well, as banks consistently complained they still had too many non-performing loans (NPLs) on their balance sheets—i.e. were too fragile to loan.

No longer in official double dip recession, during 2013-2014 movement in the Eurozone economy became more ‘crab-like’—i.e. moving sideways, and slowly. Only Germany was doing somewhat better than the region, by focusing increasingly on exports targeting China and Asia. By 2013, 25% of all Europe’s exports were to China and Asia, most of which originated in Germany. This China-Asia export shift effectively impoverished the rest of the Eurozone economies, especially the periphery economies that were now saddled by debt, both public and private, and unable to obtain capital with which to grow their real economies out of recession and stagnation (or depression in the case of Greece, Spain, and Portugal).

On the other hand, while the Eurozone real economy languished, the Euro stock markets and their professional investors were doing quite well during 2013. Already the Euro equity markets had risen by 40%. Corporate cash was piling up on balance sheets, approaching $1 trillion, and dividend payouts to investors continued to rise even faster than in the US.
But the limits of Germany’s export growth strategy were soon to reappear. By 2014 the IMF estimated that more than half of Germany’s (and Spain’s) growth of exports came from sales outside Europe. Should the value of the Euro rise relative to other major competitors, then the 2013 export boomlet could quickly dissipate, and with it the moderate German growth that enabled the Eurozone to raise its economic head briefly above recession with its meager 0.2% growth.

In 2014 three developments began to occur with just that consequence: Japan’s 2013 introduction of its own massive QE program that significantly reduced the value of its currency, the Yen, by more than 20% to the Euro began to take effect and impact German-Euro exports to China and elsewhere. Like Germany, the Japan focus was also on exports to China and Asia. In late 2014 Japan further escalated its QE program, raising the competitive pressure further on the Eurozone. Second, throughout 2014 the US continued to keep the dollar low by not raising interest rates. That ensured further competition for China-Asia export markets. Third, the global oil glut erupted in mid-2014 and commodities sold by EMEs collapsed in price and volume. That drove down the currencies of emerging market economies. The Euro consequently rose rapidly against the dollar, the Yen, and emerging market currencies, reaching a two year high of $1.38.

With austerity continuing to depress domestic economies in the Eurozone, with central bank monetary policies and 0.25% rates failing to generate Eurozone bank lending, with government debt levels still rising throughout the region, and with unemployment remaining well above 11% with more than 19 million out of work—there was little internal Eurozone source for growth.

And now at year end 2014 it appeared the strategy of dependence on exports for growth by Germany-Eurozone was about to collapse as well. Japan, EMEs, and even US currencies were falling in 2014, thus offsetting Germany-Eurozone export competitiveness. It was also becoming clear that by mid-2014 the major source of German-Eurozone exports—i.e. China—was beginning to slow significantly as well. German exports declined once again at year end-2014, thus raising the specter that the major source of the Eurozone’s poor growth performance of 2014 would fade once again, throwing the region into yet another triple dip recession in 2015.

Eurozone’s QE Money Firehose: 2015

If 2012 witnessed the creation of the bailout funds that didn’t work, and if 2013-14 witnessed the introduction of a ZIRP (0.25%) interest rate policy that didn’t work, then in 2015 the ECB and the Eurozone shot its last monetary policy bullet in the form of a Eurozone version of a massive QE liquidity injection program.

The Eurozone’s dominant economic event of 2015 was the introduction of a European version of quantitative easing, or ‘QE’. In December 2014 the ECB all but announced it intended to go forward with a QE program. Almost immediately the Euro currency began to fall against the dollar, having risen initially in 2013 by 12% and 40% from its historic pre-crisis lows.
The ECB crossed this ‘monetary policy Rubicon’ in late 2014. Conditions strongly suggested the $13.2 trillion Eurozone region was potentially about to slip into another recession in 2015—as Euro/German exports began experiencing increasing pressure from the accelerating slowdown in China, Asia and the EMEs and the US economy showed signs of slower growth as well.

Continuing fragility in Euro banks was another growing problem. That concern had just prompted the ECB to conduct a ‘stress test’ to allay public concerns about banking system stability—always the purpose of such tests that always produce positive results regardless of the real condition of banks. The French and Italian economies were also showing severe weakness at year end 2014. Greek and other peripheral countries’ debt conditions were worsening. Unemployment was still 1.8%.

For the first time in five years core deflation in goods and services turned negative across the Eurozone in general, declining -0.2%. The red warning flags went up. Something more must be done. But nothing more would be done with regard to fiscal policy, with austerity policies effectively locked in. And lowering interest rates was no longer an option. Rates were already virtually zero. Worse, should deflation continue, real interest rates would actually rise, above zero, and slow the economy. The task to do ‘whatever it takes’ was turned over to the ECB and its chairman, Mario Draghi, who signaled in December 2014 that QE was coming.

In response to the ECB’s imminent decision, not only did the Euro currency start to plummet, from a high of $1.38 to the dollar to what in the next few months would be a low of $1.07, but conversely, Eurozone stocks accelerated by 25% in anticipation of QE.

In January 2015 the ECB announced a 60 billion euro a month liquidity injection QE program, indicating it would continue purchasing bonds at that rate for at least the next 18 months through September 2016. That amounted to a money injection of about $1.2 trillion.

The justification and ‘selling’ of the program was that it would boost financial asset prices—stocks, bonds, etc.—that would in turn boost business confidence and eventually lead to real investment in goods and production as well. This is always the traditional argument for QE. The first part is of course true. QE and money injection does boost financial markets. It also initially reduces currency exchange rates. The ‘free money’ quickly goes into financial assets, providing a quick return on investment. But the free money does not go into real asset investment in an equivalent way. Cheap money reduces the cost of investment, but that doesn’t necessarily mean a competitive rate of return on real investment compared to investment in financial assets, which is the real determinant, not the cost of money.

German opposition to the QE program was not sufficient to stop it. In Germany, the slowing of exports on the horizon given events in China and the EMEs, and the new more aggressive escalation of QE by the Japanese in late 2014, caused a split in the German-northern and east European allies bloc within the ECB and among the 19 Eurozone finance ministers. Some saw QE as necessary to lower Euro exchange rates to restore German-Eurozone exports. They of course were right. As noted, the Euro did decline significantly even in anticipation of the QE announcement. After a low point of $1.07 to the dollar, for the rest of 2015 the Euro once again drifted up, by late summer 2015 back to $1.15 where it was when QE was announced in January. In the interim, however, German exports did accelerate in 2015, from a previous low of 85 billion Euros at the end of 2014 to a new high of 110 billion. However, other German elements opposed QE since it represented more centralized authority to the ECB and less to the national central banks. QE also represented a further step toward a bona fide banking union, opposed as well by Germany.

In the longer run, the contra-QE argument that would prove most convincing was that QE would ultimately prove ineffective at best at stimulating real growth for the Eurozone over the longer run.

First, critics of the program noted that 80% of the lending in Europe was provided by bank loans to private businesses and households—not by bonds. The fact that almost all the ECB bailout addressed bond buying meant it would have little effect on bank lending and real investment by non-bank businesses. QE bond buying was about protecting and subsidizing the assets of investors and governments, and would not lead to more bank lending, real investment, or general economic recovery. Secondly, the Eurozone banking system was fragmented along national lines and national banking systems. How much QE bond buying would occur within each national economy? How would proportionality in bond buying be assured? A third critique that followed this last point is there was no single Eurozone-wide bond to buy, only the bonds of each of the 25 countries. Did that mean Eurozone countries would now be responsible for the bonds of those Eurozone countries that default? Would their taxpayers have to foot the bill? This had always been Germany’s concern and why it opposed the creation of a true Eurozone bond all along, as well as why it insisted in having final say in any bailout program.
Yet another critique was that the bank bailout program, the LTRO, had not proved particularly successful thus far with regard to stabilizing the private banking system. Despite having bought 528 billion euros to date, the private banking system in the region was still not sufficiently capitalized and thus unstable and refused to make loans. Another point was that how could a QE program significantly influence the economy by reducing bond interest rates, when interest rates on government bonds were already approaching zero?

In another often heard criticism, the concern was that introducing a QE would take the pressure off the economies that needed to undertake the kind of fiscal and labor market restructuring that Germany had successfully introduced earlier in order to become more efficient.. Germany wanted the rest of Europe to become like itself—that meant the kind of restructuring that it had undertaken to become more export driven. QE would delay this restructuring. Finally, some critics had noted whether there were even enough bonds or private securities available in some of the national economies for the ECB to purchase.

Notwithstanding all these serious criticisms, the ECB proceeded in January 2015 to introduce its Eurozone version of QE. It announced it would buy bonds and non-bond securities now, up to a total of 60 billion Euros every month, or $68 billion, for the next 18 months starting in March 2015 through September 2016. The mix of bond vs. non-bond securities was set at 50 billion vs. 10 billion euros respectively. In a significant change to prior policy and programs, the buying would be ‘open ended’, much like the US QE3 program. That is, it would continue potentially beyond the 18 months and $1.1 trillion total for as long and as much as necessary until a 2% Eurozone-wide inflation rate was achieved. In what were important concessions to Germany, 80% of losses on bonds of other countries would have to be covered by those countries’ own central banks, not the ECB, and bond buying would be proportional to each country’s contribution to Eurozone-wide GDP.

With the $1.2 trillion QE program, the Eurozone now had allocated total liquidity injection in the amount of $4.3 trillion. That was ‘open ended’ and subject to further general liquidity injection in subsequent QE2 and after programs. Having already reduced interest rates to 0.05% as well, the Eurozone now also had clearly introduced a ZIRP program.

The justification for the now massive liquidity injection was that QE and ZIRP provided the confidence necessary for banks to loan and businesses subsequently to invest in real assets. It was the monetary policy analog to the justification for austerity fiscal policy—i.e. it would restore business confidence which, once returned, would lead to real investment, jobs, wage income recovery, consumption and eventual GDP recovery. Business confidence restoration was thus the key ‘transmission mechanism’ to both austerity and liquidity overkill. But in neither case, however, did the transmission work. The ‘mechanisms’ were in fact a fantasy, and ideological construct of policymakers intent on simply ensuring that the assets of corporations, bankers and investors would be protected, while they hoped somehow the economy would eventually recover.

‘Triple Dip’ Recession on the Horizon?

By the summer of 2015 it had become abundantly clear that the global economy was rapidly slowing—led by China’s accelerating slowdown, emerging markets’ deepening recessions as global commodity deflation intensified, the collapse of Chinese stock markets, and the ratcheting up of global currency wars.

The Eurozone’s Germany-driven exports first strategy was unraveling. The $327 billion liquidity injection by the ECB from March through August 2015 had raised the Eurozone growth rate by a statistically insignificant 0.2%. The drift toward deflation in Eurozone goods and services continued, with inflation projections for all of 2015 down to only 0.1%. Greece’s debt crisis erupted a third time, resulting in still 86 billion more euro debt imposed on the country along with more austerity, ensuring further debt and austerity to come. US-dictated sanctions on Russia contributed to the slowing of German and select east European economies. The initial advantage the Eurozone QE achieved in reducing the Euro and stimulating exports had dissipated in less than six months, as other economies—including China—devalued their currencies in turn and as the US decided not to raise interest rates and held back dollar revaluation. After an initial 16% decline of the Euro to the dollar in the months leading up to the Eurozone QE, by September 2015 the Euro’s value remained at the $1.2-$1.14 range that it held the preceding February before QE was introduced. As fast as the ECB was able to reduce the Euro’s exchange rate, other countries reduced theirs—in a currency war ‘race to the bottom’.

Nor was the outlook promising for the Eurozone resurrecting its exports-first strategy, given that Asian economies and China were slowing; that Japan was planning to introduce still more QE to offset the Eurozone and China’s August 2015 devaluations; and that the US decided in September to hold its interest rates steady thus preventing the dollar from rising further.

Euro government debt to GDP continued to rise to 93%. EU banks were desperately trying to deleverage their balance sheets still bloated with non-performing loans now equivalent to three times Eurozone GDP levels. With bank lending still moribund, Euro non-bank companies began turning increasingly toward raising junk bond debt in capital markets, which escalated 73% in the first half of 2015. Private corporate debt was thus being piled on to government debt.

By third quarter 2015, financial markets globally were becoming more unstable as well. After initial gains of 25% with the QE announcement, German (DAX), French (CACS) and other Euro stock markets gave up their gains by late summer 2015. US stocks were following China’s down. Still more Euro government bonds slipped into negative interest rate territory. And currency markets were weakening. Non-Eurozone European economies—Switzerland, Denmark, Sweden and others—decoupled their currencies from the Euro to discourage speculators and were also discussing more QEs. The Swiss franc and other currencies immediately began to appreciate, cutting into exports and driving their economies toward stagnation and recession.

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