is Europe so back so you’re back 15 years
of underinvestment have left the continent crumbling and grumbling and many have become
resigned to structural decline but something just snapped Germany is about to give itself
a trillion doll makeover and other countries might follow suit today we investigate the
drastic times drastic measures and possible drastic outcomes that are now facing Europe and
the markets my name is Nick and you’re watching the coin Bureau once upon a time it was the
world’s economic Powerhouse now it’s an aging giant facing a slow and agonizing decline this
is Europe according to Mario dragi the former Central Bank chair and prime minister of Italy
he made this grave conclusion in a report from the European commission last year that made
painfully clear just how cooked Europe is it was supposed to be a wakeup call but it failed
to move the needle in Europe to most it was just another glum fact of life on the continent
like gray skies bottle caps that can’t be removed and Eurovision hello Eurovision can you
believe it the Malay dragy described has been hanging over the continent ever since the great
financial crisis of 2008 it is now an omn crisis of decrepit infrastructure and crumbling
Public Services economic uncompetitively many of Europe’s crises stem from long-term
underinvestment after the crash of 2008 world leaders faced a choice between stimulus and
austerity you can spend your way out of a recession or you can tell your people to tighten
your belts we can’t afford nice things anymore while the US chose stimulus the EU focused
on deficit reduction and as Europe’s largest economy and creditor Germany led by example with
the schwat or black zero policy which required the government to run balanced budgets so when a debt
crisis unfolded in the Euro Zone in 2010 the EU in tandem with the IMF and ECB was ready to Strongarm
countries like Ireland Greece Portugal Spain and Cyprus who were drowning under soaring debt costs
into accepting strict austerity as a condition for debt relief they were force fed spending and
public sector wage Cuts tax hikes labor market deregulation and pensions reductions this only
deepened recessions across Europe but Germany opposed debt relief describing it as quote moral
hazard to help countries it saw as irresponsible Spenders now 15 years after the Eurozone crisis
Europe’s doubling down on austerity is recognized as an historic Act of self harm it has left the
continent economically and socially scarred and woefully INE equipped for demographic aging and
Global competition by 2023 the eu’s share of global GDP had fallen to just 14% down from 20% in
2000 meanwhile public investment in the EU is now half of that of the US and China who fared much
better in the wake of 2008 they spent their way out of the crisis and have now enjoyed strong
economic growth basically ever since and they now have a large lead over Europe in Cutting
Edge Tech energy and defense now speaking of Defense uh the armies of Western Europe are in a
sorry State and Ill prepared to fight opponents who can fight back as such the last thing Europe
needed after the pandemic was a new armed conflict on its border unfortunately that’s exactly what
they got with the Russia Ukraine war now enter in its fourth year among other consequences the
war ended the supply of cheap Russian gas that had kept European economies trundling along and
this caused a painful energy cost crisis in 2022 Germany chose to sou out by pouring €2 200 billion
EUR into energy subsidies with no regard for the Damage Done to the internal Market it was accused
of giving quote a big middle finger to the rest of Europe straining relations with its neighbors
at a moment when European Unity was exceptionally urgent if there was a silver lining to This Cloud
it was that Europe could count on the Americans to help support Ukraine it’s a godsend having the
world’s most powerful military on side when your defense resources are being depleted Leed in a far
away proxy war of attrition three cheers for NATO then no matter how crisis struck Europe may
be there was no question in the transatlantic security Alliance this was a given just as long as
Camala Harris won the 2024 presidential election I mean she was totally going to win right well
this was the hope in Brussels last year but it was not to be still that was fine I mean Donald
Trump may talk tough on NATO but it survived his first Administration all right so after Trump’s
victory optimists in Europe refocused on his transactional worldview they reason that Trump
doesn’t hate his allies he just wants to Strongarm them into making impressive sounding concessions
to the US so if European governments have to cut deals and increase their own defense spending
to get security reassurances from the White House then so be it but alas this was not to
be either after Trump’s inauguration there was much uncertainty about the new administration’s
policies straining diplomatic ties and causing chaos in global markets the optimistic case was
then downgraded to okay surely the uncertainty is the worst part but this too was not the case as
policy uncertainty gave way to policy certainty Europe’s worst fear was confirmed it’s over
Washington wants to break up oh sorry I just the second when Europe’s heart ripped in half or
at least the date it was February 14th 2025 ah Valentine’s Day when the transatlantic lines fell
apart after 80 years of post-war matrimony and in the end it was the vice president who broke
the news JD Vance was visiting Germany for the Munich security conference where he was expected
to speak about the war in Ukraine and address the differences of opinion between Washington and
Europe but that took the Audience by surprise he told European leaders that it was the culture
War not the Russia Ukraine war that they should be worried about the audience heard that Europe faced
no challenge more pressing than migration which he described as quote the threat from within the
message was it’s not me it’s you who has ruined our relationship with your woke nonsense I don’t
know if you are even worth defending anymore van said there was quote a new sheriff in town and
quote there is nothing America can do for you nor for that matter is there anything you can do
for the American people who elected me and elected president Trump Vance and his audience did not
see eye to ey to add insult to injury he refused to meet German Chancellor ol of Schulz during his
visit and instead held a meeting with the leader of Germany’s afd party this was a step too far for
most of Germany’s other political parties which have banded together to form a firewall aiming to
shut off the afd from participating in government and this firewall has been a consequence across
most of the political Spectrum in Germany in the 12 years since the afd was founded anyway vice
president Vance met with the leader of this party instead of the chancellor of Germany and it sent
a very clear message to the political mainstream throughout the EU many of whose member states
have also witnessed the rise of their own afd equivalence Vance spent much of the conference
speech criticizing Germany’s firewall and expressing the same views about a danger from
within that Germans normally hear expressed by the afd meanwhile much ofer’s audience was most
likely to perceive the danger within Germany to come from the afd it didn’t take long for the
implications of Van’s Munich visit to actually sink in Ukraine’s president zalinski gave a neat
summary quote the US vice president made it clear Decades of the old relationship between Europe
and America are ending from now on things will be different and Europe needs to adjust to that
zelinsky’s words ring true in light of JD Vance’s growing influence in US foreign policy prior to
Vance’s visit optimists in Europe had hoped that Trump’s transactional worldview would enable
the transatlantic Alliance to remain intact in exchange for European governments spending more on
defense however Vance had his own interpretation of the Trump policy agenda and the Munich security
conference speech suggested that he has been given Le way to fill in the blanks left by his boss
so like Trump Vance had a bone to pick with NATO but in the vice president’s case it’s not
about money for Vance it’s a matter of principle namely the go woke and go broke principal he’s a
culture Warrior and cannot be appeased by European leaders flying out to the White House to Kiss
the Ring in front of the TV cameras Vance’s foreign policy differences with the president were
highlighted again when he defense secretary Pete tth and other officials discussed top secret War
plans in a group chat that somehow also included the editor-in-chief of the Atlantic screenshots
showed the men discussing president Trump’s plan to bomb Yemen to quote send a message which
Vance described as a mistake because it would disproportionately benefit Europe by freeing up
trade routes currently subject to blockade Vance said quote I’m not sure the president is aware
how inconsistent this is with the message on Europe right now I just hate bailing Europe
out again Secretary of Defense hexi agreed quote I fully share your loathing of European
free loading it’s pathetic it’s now clear that President Trump’s claim that the European Union
was formed to quote screw the United States was not an off-the-cuff Zinger but Washington’s new
model of atlanticism in Europe the message has been received loud and clear NATO is cooked and
you can no longer depend on us support in the event of an armed conflict well you know what
they say when life gives you lemons you spend 600 billion EUR on German rearmament or at least
that’s what Germany is now saying in a dramatic break with schwarzen Orthodoxy Germany has just
passed a gargantuan stimulus that could see the government borrowing more than $1 trillion do
and this was Germany’s policy response to the newly estranged security relationship with the
United States as always German rearmament will have geopolitical implications that are far
reaching but also it’s hard to overstate the political and economic ramifications of Germany’s
new stimulus the Catalyst was the collapse of the transatlantic Alliance but Germany’s reaction is
a huge break with history that is not confined to its military and that’s because it’s the final
nail in the coffin for the debt aversion that has gripped Europe’s largest economy since 2009 9
now some of you might be wondering why it’s such a big deal for a government to issue debt to pay
for stuff after all some governments issue debt in the trillions of dollars every year without
even batting an eyelid for many an omni crisis caused by years of structural underinvestment
is a good enough reason to issue debt because you know the solution to underinvestment is
pretty straightforward you simply invest and if you need to borrow to do so then so be it
but in Germany large scale borrowing was not only politically contentious it was also
unconstitutional the schwarzen null policy was enshrined in the Constitution and enforced
at all levels of the government by something called the debt break the debt break or schen
brza is a relic of the 2009 Coalition led by Angela Merkel who decided that fiscal discipline
was the correct reaction to the great financial crisis for Germany’s government at the time
it was not enough for their own government to Dawn a financial straight jacket instead
every German government should have to wear it forever so they passed a constitutional amendment
imposing strict limits on structural deficits so deficits not caused by economic downturns the
federal government capped its annual structural deficit at 0.35% of GDP while State parliaments
have been entirely forbidden from running any structural deficits since 2020 by intern ational
standards this is strict in the extreme uh for reference the US Congressional budget office has
projected that the federal government will run a structural deficit of 6.5% of GDP this year
that’s more than 18 times the level permitted in Germany in percentage terms as a result public
investment in Germany averaged 2% of GDP between 2010 and 2023 far below the EU average in recent
years German governments have increasingly invoked an emergency clause in the Constitution to
get around the debt break it was suspended between 2020 and 2023 allowing for a 750 billion
Euro pandemic relief package and a 200 billion Euro energy crisis bailout however the rapid
reinstatement of the debt break in 2023 likely contributed to Germany’s post-pandemic slowdown
Germany suffered backto back budget crises amid economic contraction in 2023 and stagflation in
2024 Coalition Partners repeatedly split over whether the solution to Germany’s problems was to
find a way around the debt break to make way for public investment or to double down on austerity
in October 2024 the Social Democratic party and the greens advocated for suspending the debt break
to plug a 10 billion Euro hole in the 2025 budget but on November 1st the Finance Minister and
leader of the free Democratic party Christian Linder issued an 18-page policy paper that treated
the debt break as sacran and identified tax cuts and more austerity as the solution Germany
needed the difference proved irreconcilable and Chancellor Schultz soon fired Linda effectively
ending the coalition government in the process even in the face of multiple compounding crises
demanding urgent investment the debt break proved too much of an obstacle for Germany and even
after it killed the skull’s Coalition Frederick Murs Germany’s new Chancellor campaigned on
a promise to keep the debt break in place and only hinted towards limited exceptions and this is
why it was so remarkable to see him sweep it aside under extraordinary circumstances just weeks after
winning February’s elections Ms needed a 2third majority in both legislative Chambers to reform
the Constitution and this was looking unlikely with the newly elected Parliament he didn’t bother
waiting until he became Chancellor to get the job done he managed to rush the reform through
emergency sessions of the outgoing parliament in its final days while skols was still Chancellor as
a result the military is now exempt from the death break allowing for unlimited defense spending
and Germany has a new 500 billion Euro vehicle to modernize its infrastructure in the next 12 years
so big changes are a foot Germany has changed its tune and decided it gets to have nice things again
now what does this mean for the rest of Europe and for the markets you’ll recall that Germany led the
EU ECB and imf’s charge to force feed austerity down the throats of Europe’s weaker economies
in the 2010s it also led by example taking the moral High ground with its own debt break and
Schwartz a n policy but now that everyone has seen Germany dump its own straight jacket some
of these countries may want to follow suits and they should face less friction in doing so for
example European commission president Ursula felan announced the mobilization of 8 00 billion EUR for
the rearm Europe program including €50 billion EUR of loans for defense investment provided by the
European Central Bank the plan would allow EU members to significantly increase public spending
for defense without triggering the eu’s punitive excessive deficit procedure the commission
also released a white paper outlining potential mechanisms for joint borrowing explicitly citing
the need to support weaker economies in the EU all of this is quite the change of tune from last
year when Mario dr’s plan for joint debt issuance for massive public investment arrived dead in the
water facing opposition from felan among others so European fiscal policy is undergoing a major
Vibes shift austerity is out and debt is back in stimulus packages like the one passed by Germany
and its European neighbors are long overdue and they will no doubt be welcomed by everyone who
relies on public infrastructure which should be just about everyone not to mention the armies
of Western Europe however there are the concerns that increased borrowing could lead to increased
inflation and rise in bond yields with more bonds hitting the market bond prices fall and yields
go up moreover current stimulus proposals aim to Spur growth but improved economic prospects can
increase the real interest rate further pushing yields up and indeed the yields on 10e German
government bonds did Spike after the debt break reform and stimulus were passed now a spike
in bond yields means a sharp rise in borrowing costs and this could create a scenario where
debt servicing becomes burdensome a triggering fiscal tightening and adverse market dynamics
reminiscent of the Eurozone crisis but a rerun of 2010 appears unlikely however savings rates in
Europe are high and many institutional investors like Pension funds and insurance companies
have risk management structures that make them attracted to high quality bonds any spike in
bond yields is likely to be temporary because of the latent institutional demand and this is why
for example B&P parar is expecting the yield on the 10-year bond in Germany to stabilize in the
range between 2.5% to 3% in the near term disaster looks unlikely at the moment but then again we
live in uncertain times very uncertain we’ll be sure to keep you updated if and when bond yields
in Europe start hitting the fan in the meantime if you’re hungry for more macroanalysis check
check out our report on the recession threat in 2025 that’s right over here and if you’re not
subscribed to the channel yet well you can do that right over here that’s me for now thank you
very much for watching and I’ll see you again soon
