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Cheap money fuels the boom in Germany, but fails to lift France and Italy

The new headquarters of the European Central Bank (ECB) is shown in Frankfurt am Main, Germany, Dec. 4, 2014.
Getty Images
The new headquarters of the European Central Bank (ECB) is shown in Frankfurt am Main, Germany, Dec. 4, 2014.

The euro area's "one-size-fits-all" monetary policy has never been a joke that some economists intended it to be. It was a serious warning about the limits the area's central bank would face in an economic system of deep-seated labor market rigidities, structural and political differences, and independent and uncoordinated fiscal policies.

That warning has been well-known to economists and their political bosses ever since the first drafts of the European monetary union were written in the late 1960s. And it is a tragedy for those 16.3 million people who are currently unemployed in the euro area that the new generations of European leaders have yet to come to terms with fundamental problems posed by a single currency.

Put in a more familiar language, these European leaders put a cart before the horse. And the horse is the European Central Bank (ECB), whose trillions of free euros are eliciting widely different responses in segments of a structurally and cyclically uncoordinated economic space it is supposed to manage.

One against all

Germany, for example, does not want zero interest rates and those trillions of euros created through ECB's massive asset purchases. Germany is a fully-employed economy with balanced public finances and an exploding current account surplus of 9 percent of GDP. With a 1.8 percent annual growth in the first half of this year, the economy is running almost an entire percentage point above its potential and noninflationary growth.

Germans are complaining about an overheated real estate market, and the country's fund managers are furious that the ECB has been snapping up, since early June, all the high-quality corporate bonds. That was part of the ECB's QE programs to keep flooding the market with fresh liquidity.

You understand now why the Germans are up in arms about the ECB policy, and why they are making that known all the way to their Constitutional Court and the European Court of Justice.

Now, for a sharp contrast, take a look at Italy. On a quarterly basis, there has been virtually no growth in the first half of this year. In fact, the economy has been declining and stagnating over the last four years, and is currently experiencing a price deflation.

Italy's 3 million of unemployed in June (10.6 percent of the labor force) are only slightly below that level in the same month of last year. A shocking 36.5 percent of the country's youth is out of work.

France is in a slightly better shape, but with an average 0.3 percent quarterly growth since the middle of last year, and no growth at all in the second quarter of this year, this is not an example of the economy thriving on cheap credit. Indeed, the country's 2.9 million of unemployed -- 9.9 percent of the labor force -- are political dynamite in the run-up to general elections in May 2017.

It also seems that the French third-quarter growth will be negatively affected by a sharply declining tourist trade. In the first half of this year, the number of visitors to France was down 10 percent, compared with the same period of 2015. Nice and Cannes, the two key tourist centers on the Riviera, have seen the number of visitors dropping 20.5 percent and 29 percent, respectively, since the terrorist attacks in early July. Visitors from the Middle East will also be turned off by the prohibition to wear "burkini" on elegant beaches in Cannes and other summer resorts.

Spain apparently has no similar restrictions. Its tourist industry is headed for another record year that will probably see a double-digit increase of the last year's 68 million visitors. The country is benefiting from tour cancellations to several other Mediterranean destinations affected by violence and permanent threats of terrorist attacks.

Weak leaders passing the (euro) buck to ECB

Apart from that, the economy has grown at an annual rate of 3.2 percent in the first half of this year. The unemployment, however, is still a staggering 20 percent.

Similar to Spain, Portugal is also witnessing a booming tourist trade. That could reverse a mild economic slowdown observed in the first half of this year to stabilize growth around 1 percent for this year as a whole. Tourism will probably also help to bring the unemployment rate below its current reading of 11.2 percent.

That is the situation the ECB is looking at in 80 percent of the economy it manages.

Once again, Germany, close to one-third of the euro area's products and services, does not need, and does not want, the ECB's extraordinarily loose monetary policy.

But the hard-pressed economies of France, Italy, Spain, Portugal and Greece -- another 50 percent of the euro area output -- need that oxygen to survive. Easy money is all they got. Their budget deficits of 2-5 percent of GDP, and their rising public debt of 120-185 percent of GDP, leave no room for fiscal policy to support demand, output and employment.

The EU authorities, whoever they are, have relented from imposing penalties on Spain and Portugal – and have looked the other way in the case of France – for transgressing the euro area budget deficit commitments. But they continue to insist on labor market deregulations and on other socially and politically sensitive measures that act as short-term growth and employment killers.

If that's what they (Germany?) want, then the logic of economic management requires that these restrictive fiscal and structural measures should be offset by loose monetary policies.

Exhausted migrants light camp fires and sleep in a field after crossing the border from Serbia into Hungary along the railway tracks close to the village of Roszke on September 6, 2015 in Szeged, Hungary.
Christopher Furlong | Getty Images
Exhausted migrants light camp fires and sleep in a field after crossing the border from Serbia into Hungary along the railway tracks close to the village of Roszke on September 6, 2015 in Szeged, Hungary.

And then, there is this issue: Why is nobody objecting to Germany's open-ended invitation to Middle East immigrants instead of offering jobs to the 12.1 million of unemployed fellow Europeans from France, Italy, Spain, Portugal and Greece?

Compassion and humanitarian considerations for people fleeing violence and poverty are laudable features of public policy, but they should also apply to EU people on soup kitchens, the jobless, the working poor on subsistence wages and to more than 2 million of euro area young people without jobs, incomes and a viable future.

After all, the EU's long-established principle of "préférence communautaire" (trade discrimination against non-EU countries) should apply here the same way it does to purchases of Airbus planes, French helicopters and German tanks.

Investment thoughts

The ECB is a central bank for 19 member countries of the monetary union. Its policy impact is bound to produce different results in these economies because of their diverse structural properties and intrinsic consumer and business characteristics.

Instead of blaming the ECB for their own failures, the euro area leaders should focus on deepening integration and growth-enhancing structural and fiscal policies. That would raise the effectiveness of the monetary policy and ensure a more balanced economic and social development of the monetary union. Invectives and law suit spectacles are no substitutes for that sort of policy.

Meanwhile, as a practical matter, investors can only look to ECB. There is nothing else.

Spain cannot find a new government. Italy may soon be looking for one. France and Germany are riven by instabilities caused by their beleaguered leaders and shifting political alliances in the run-up to next year's elections.

Not a pretty picture, isn't it? In spite of that, the trade-weighted value of the ECB's currency rose 3.5 percent over the last twelve months (the trade-weighted dollar is down 4.8 percent over the same period), and the euro area equity markets rebounded 13.6 percent (in euro terms) since they hit bottom in early February of this year.

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