The ECB will fight migrants and terrorists

ECB’s New Bond Plan: OMT! Crisis Averted, for Now
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Now, perhaps more than ever, many people think that the euro area is a star-crossed creature of a continent in search of an elusive peace and unity. I am not one of them, but the economic and security policies pursued by Germany and France may well justify the worst fears about the future of Europe's epochal achievement.

Just when the ECB was beginning to make some progress in helping the monetary union climb out of a deep valley of recession, stagnation and mass unemployment, caused by Germany's ill-advised austerity policies, it got a one-two punch by what the German finance minister calls the "avalanche" of migrants.

That is a great pity indeed, because the flash estimates for the third quarter show that the euro area economy picked up at an annual rate of 1.6 percent, from 1.3 percent in the first half of this year. Even the laggards like France and Italy moved up a bit, while Spain nearly doubled its pace of advance compared with the past year's economic growth.

The euro area's industrial production also marked an impressive performance, rising 1.9 percent in the three months to September from a 1.3 percent gain in the previous quarter. The strongest output was noted in capital goods and in consumer durables – excellent indicators of broad-based recoveries in business investments and household consumption.

Remarkably, these good results of the strengthening aggregate demand did not come at the expense of deteriorating trade balances. Probably boosted by a banner tourist season, the French current account moved toward a rarely seen balance, Spain's surplus widened and Italy's surplus remained roughly stable.

Employment gains were much less impressive, but a notable progress has been achieved in some high unemployment countries like Spain and Italy.

All that is now under a big question mark.

Fears and political instability

The chaos created by uncontrolled waves of migrants/refugees has led to problems threatening government stability in Germany and France. The mismanagement of Europe's largest human migrations since WWII is not only compromising the free flow of people within the union, but it is also leading to dangerous confrontations between the countries trying to control their borders by walls, barbed wires, police and armed forces.

Germany's imprudent invitation to migrants and refugees has put enormous pressures on its public and security services at all government levels and in most parts of the country. As a result, the once stable governing coalition seems to be on the ropes. The can-do German chancellor is losing public support, and is being threatened by what looks like a palace coup within her own party.

The latest opinion polls are showing that 52 percent of the German people disapprove of the way Chancellor Merkel is handling the migrant/refugee crisis. Her powerful finance and interior ministers are publicly clashing with her on immigration and security issues, and she is being forced to backtrack on her initial assurances that she can manage an inflow of more than a million people.

These are serious issues in a country that gladly lectures the rest of the EU about political, economic and social stability. The confidence of German businesses and households is badly shaken as a growing number of regions and local communities are overwhelmed by financial and security problems of apparently uncontrollable asylum seekers' arrivals.

EU's guerrilla warfare

Predictably, Germany is now putting pressure on its neighbors to help shoulder its unbearable burden of illegal immigration. But instead of co-operation, Berlin is getting a scathing criticism of its failure to consult and coordinate with its EU partners before issuing an open invitation to migrants/refugees that it now cannot handle.

What we see at the moment is just the beginning of the EU's worsening humanitarian, economic, political and security crisis. Germany is again accused of wreaking havoc on the EU economy; it is also blamed for paving the way to political forces that are ready to turn back the clock on nearly 70 years of European integration.

Last Friday's terrorist attacks in Paris are seen by some observers as a logical continuation of the damage done to Europe by largely uncontrolled arrivals of 1.5 million immigrants every year since 2000. And these are not the analysts espousing the ideas of the extreme right xenophobic political parties in France, Germany, Italy and the Netherlands.

Ominously, the Paris bloodshed, claimed by the Islamic state (Daesh), is an example of the terrorists' changing warfare strategy in Europe and elsewhere. The French investigators are reporting that the emphasis is now on well trained and equipped, small guerilla groups, with thoroughly prepared missions and a reliance on local suicide fighters ready to die in order to kill. They say that three such groups led the Friday evening attacks. The French security services are also telling the media that they have a list of 11,000 such individuals (all French citizens) classified as high-security risks – adding that they have no resources to track the rest.

That is how serious the problem is, and how difficult the French government finds to fight these people, even though they apparently knew that a large attack was imminent after a devastating onslaught last January on a satirical journal (Charlie Hebdo) and a kosher restaurant in Paris.

Some of my French friends are telling me that they want to continue to go about their daily lives as they usually do. They won't be intimidated, they say. But, in the same breath, they are adding that they now have second thoughts about taking the subway or shopping in large supermarkets and department stores. I did not wait for these admissions to tell my daughter, who lives and works in Paris, to take the bus instead of a subway.

Investment thoughts

The EU's migrant/refugee crisis has no early solution. More than a million asylum seekers are already in, and hundreds of thousands are on the way. The problem is compounded by terrorist attacks and fears of spreading violence involving home-grown guerrilla fighters.

Indications of Germany's growing political and social instability should be taken seriously.

In France, the media are probably not exaggerating that the country is at war. A weak government, sluggish economy, high unemployment and the likelihood of the country's radically changing political landscape after regional elections early next month are additional complications.

The Spanish government is fighting a Catalonian bid for secession and rising challenges in the upcoming general election (December 20, 2015) from political parties with populist agendas.

Italy is defying Germany and the EU Commission with apparently unaffordable tax cuts. Enough to make even the dogmatic U.S. supply-siders full of envy, Rome says that the tax cutting is not only right ("giusto"), but it is also beautiful ("bello"). The typical Italian gesture to its north European lecturers may be missing, but the message is clear: Over to you, Berlin and Brussels.

How, under these circumstances, can the ECB expect that the key euro area governments will enhance the effectiveness of its extraordinary monetary easing? Clearly, last week's laments of one of its policy committee members that governments should do their part with structural reforms and a sound fiscal management are just pious wishes.

But the ECB, just like the Fed, will soldier on. And if more is needed, the ECB will fire some of its heavily loaded "whatever it takes" bazookas.