Philippe Legrain: Investors are ignoring eurozone risks

I generally agree with the main point made by Philippe Legrain in this FT article and I can also recommend his new book.  At the same time, it is unfortunate that he focuses on the recent GDP numbers for Ireland, given the well-flagged interpretation issues with the recent GDP data.

19 replies on “Philippe Legrain: Investors are ignoring eurozone risks”


In the introductory section of your book, you state that you “recognise that nation-states still matter but wouldn’t shed a tear if they disappeared.” In a Eurobarometer 2013 poll, a majority of Irish respondents suggested they wouldn’t shed a tear if the EU disappeared, though the Irish – 72% – still ‘like’ the euro, and the EU in general.

In the midst of the current EU Parliament elections campaign, all the issues are ‘local’. Media coverage is predominantly of the ‘horserace’ variety as to what parliamentary members of the mainstream parties will do to their respective leaders should they fail to win the requisite number of EP seats – not quite heads on spikes; it’s either ‘exile’ to some European post for some or just being ‘dumped’ for others, depending on who’s in power [and thus has power of appointment to jobs in Brussels] and who’s not at this moment in time. In their election literature too, EP candidates make light of their actual ‘achievements’ in Europe in the past term, and more of their party group affiliations and what oats they might harvest for our local consumption if we’re generous enough to send them back to Brussels for another term. And if that weren’t enough, Martin Schulz was in Dublin yesterday to canvass support for his Commission Presidency bid. He must have found the experience very strange, as all the media attention was focussed on an internal party row within the Irish Labour Party. As to who he is, what he stands for, what he might do for us as Commission President, we’re all as wise now as we were before he came.

Over the past twenty years or so, there’s been a lot of academic debate, and public discussion too, about the EU democratic deficit and the possibility and desirability of fashioning a ‘Cosmopolitan Europe’ with social democratic values at its core. In parallel, there has been further extensive debate and discussion on the withering away of the party system in liberal democracies etc. ( The late Peter Mair’s ‘Ruling the Void’ is one of my own favourites on this topic). However, the political appetite for the emergence of anything resembling a ‘Cosmopolitan Europe’ does not appear to have increased to any great extent in any member state , large or small, over that period. At national level, the popular loss of faith in the party system of representative democracy didn’t start with the onset of the Great Recession and I’m not convinced either that anger/disillusionment with existing political institutions, or the elites who inhabit them, can or should in any way be conflated with any fundamental loss of popular faith in democracy.

Certainly, in this very small country, it could be argued that the popular commitment to democracy remains as strong as it historically has been enduring: for instance, a recent attempt by the government to dismantle our democratic institutions, by abolishing the upper house of Parliament, the Seanad, on grounds of ‘cost’ and ‘efficiency’ and ‘getting rid of excess politicians’ was decisively rejected in a referendum. As a member of the current Cabinet is reported to have observed in the wake of the 2011 General Election, the Irish don’t riot. Instead we “place the grenades in the ballot box.” Or, in other words, we wait for them in the long grass of electoral opportunity.

However in the face of another major economic shock of the kind your article predicts as a possibility, all bets on all scores would be off.

What risks? Winston is in exhuberant form ….

“Mirabile dictu – wonderful, wonderful newz ..

The Leader has announced a toothless committee to think about a banking inquiry …. wonderful … and

The Leader has announced the formation of a high level task force to figure out how to drain the Shannon …. wonderful …

The Newz just noted that the war in Oceania is now going swimmingly …. and with growth in the economy exploding the beer ration is being increased by half a pint a day ….

Oh Happy Days! Oh Brave Neu World!”

@PL x 2



Blind Biddy has gone to ground, dumping her cell phone, somewhere in Kharkov; Paddy Zhukov is on the ‘listh’.

Advice from academic writers to the markets is best taken with a grain of salt, assuming the latter are paying any attention, which I very much doubt.

On points of detail, the German constitutional court did not rule that OMT was illegal; in its usual fashion it came up with a decision which is neither fish nor fowl and said that there was a presumption that it was while referring – a first – certain points of law to the European Court of Justice.

As to the resolution of the banking crisis, stating the obvious that this has not yet happened does not mean that nothing has been happening cf.

The interest of this document – the final text of the SRM – is that it indicates where the shoe pinched in the negotiations between the Council and the European Parliament. The closing articles are of particular interest.

@ veronica

The EU is first and last a Union of law. The independent roles of the Commission as sole proposer of EU legislation and the Union’s executive constitute one of the foundation stones of that law. It cannot be viewed qua organisation as an instrument of the “Left” or the “Right”. The “lead candidates” or “Spitzenkandidaten” for the elections to the European Parliament have seized upon an ambiguous and misjudged addition to the treaties to push just the opposite and dangerously mistaken approach.

Recital 66 of the SRM Regulation illustrates the point.

“The Commission should be empowered to adopt delegated acts in accordance with Article 290 TFEU in order to determine the type of contributions to the Fund and the matters for which contributions are due, the manner in which the amount of the contributions is calculated and the way in which they are to be paid; determine the annual contributions
necessary to cover the administrative expenditure of the Board before it becomes fully operational; specify registration, accounting, reporting and other rules necessary to ensure that the contributions are fully and timely paid; determine the contribution system for institutions that have been authorized to operate after the Fund has reached its target level; determine the criteria for the spreading out in time of the contributions; determine the
circumstances under which the payment of contributions may be advanced; determine the criteria for determining the number of years by which the initial period for reaching the target fund level can be extended; determine the criteria for establishing the annual contributions when the available financial means of the Fund diminishes below its target level after the initial period; determine the measures to specify the circumstances and modalities under which ex-post contributions, may be temporarily suspended for
individual institutions.”

Curiously, this is the one and most significant aspect of the issue to which the major participants seem least willing to draw attention.

Investors have been ignoring investment risks in the EU for quite some time.

On Tuesday April 29, 2014, day traders took International Energy Companies, IPW, TOT, E, RDS-B, SNP, STO, IMO, XOM, CVX, ECA, BP, SSL, SU, HES, CNQ, OXY, to rally highs, causing the Defensive ETF, DEF, as well as petroleum based nations Norway, NORW, Canada, EWC, the UK, EWU, Denmark, EDEN, and Italy, EWI, to rise to new rally highs, stimulating Nation Investment EFA, the Eurozone, EZU, and European Financials, EUFN, to new rally highs, despite a trade lower in the EURJPY.

Of note, the chart of the Eurozone Stocks, EZU, shows the diagonal ascending wedge pattern from which prices always fall sharply lower; stocks worthy of short selling include BUD, ASMI, COV, IR, DEG, NVS, NVO, MNK, AER, SNY, LUX, LYB, NXPI, ORAN, ST, TI-A, TS, CSTM, COV, SAN, UBS, LOGI, TEL, FWLT, NVS, ACE, TWM, WFT, GLOG, CMRE, TNP, TOT, and E.

@PL x 2

Broadly agree with the FT piece.

One risk ignored is the geo-political one – and this has been seriously increased by the loose-cannon neo-kons within the US state department, their corporate and militarist backers, and the attempt to expand NATO into Russia’s backyard.

Attempting to push Ukraine into NATO via EU and grab Russia’s longstanding warm water port in Crimea was reckless in the extreme – and broke previous agreements post 89. Were Nuland’s puppets, post her putsch led by some really nasty politicos, to unilateralilly join NATO then Russian would have been forced to war with NATO over Crimea. DISASTER

The weakness of the EU here is embarassing – a little neo-kon piece of tail is wagging the entire EU to its own interests! Common sense would suggest that a strong relationship be formed between EU and Russian Federation – and not only for ‘energy’ purposes. The propaganda is simply embarassing …..

Could one really blame the Russian Federation if it decided to turn off the taps ….. ? Galloperin deflation anyone? Oxymoronic ‘negative growth’ ‘further mass unemployment etc Anyone done the maths?

Read on for some real political economy & on who has destabilised Ukraine and practically wrecked the Russian/EU relationship [while the EU has stood idly by] [h/t]

The FT article seems to indicate that it is the expectation of ECB QE that is driving bond yields down. But is that the case.
Surely the more pertinent fact, was and is the fact that the ECB will buy bonds (minus QE), if yields go too high.
Therefore from the point of view of a bond investor, Draghi is effectively giving a guarantee, at no charge, to bond buyers. The guarantee may not be there for a five year bond when purchased, but time will change that bond to a three year guaranteed bond.

As to the long term issues of debt dynamics, Japan is at ~200% Debt/GDP, a place where Europeans think ‘there be dragons’, but Japan is still alive. In any case there may be dragons for investors, but there is another world, populated by people, who are not investors, and who believe, rightly or wrongly, that their interests also count.
Its not all about investors.

Ireland’s nominal GDP growth was ‘minus 1.4% in the year to the fourth quarter of 2103’, its economy ‘tanked in the fourth quarter of last year’ (presumably a reference to the 2.3% q/q fall in real GDP), while ‘it has debts of more than 150% of GNP’. For completeness, real GNP rose in Q4’13, by 0.2%, while nominal GNP grew by 3.6% in the year to Q4’13 following growth of 3.7% in the year to Q4’12…

@ Philippe Legrain

After Philip Lane introduced you here, I bought the book, and just started reading, and there is on nearly every page so far something irritating.

1. Your mentioning of the Pew Research Center report. Well, if you ask folks, whom they consider the most or least trustworthy, or similar, most people will give you SOME answer, and it is only interesting relative to others. What I as a German see there, that all other countries, but Greece, and therefore the overwhelming majority considers Germany the most trustworthy, I smile a little bit when Greek folks claim that for themselves, after all the shenanigans. The rest is the usual stereotyping, and everybody considers himself the most compassionate.
My impressions from this report are very different from your picture.

2. I do not agree with your description of the Landesbanken (not spelled like your repeated “Germany’s Ländesbanks”). To keep it short, the problem of especially the Sachsen LB was that, lacking local projects, they got heavily invested in the US real estate market, they didn’t understand and got skinned, royally. We chopped many heads, prime and finance minister resigned, and the entity is stricken from the records.

3. “With hindsight, Osborne, Schäuble and Rehn argue that governments borrowed too much in the pre- crisis years.” Would you have a reference for them saying that?

A very good commentary by Jim Power!!story/Comment/Opinion/COMMENT%3A+All+quiet+on+the+euro+zone+front/id/87198161-2385-361f-5f36-940078851420

Especially this quotation!

“I recently came across a quote on Twitter to the effect that ‘the euro sceptics are still waiting for the euro to break and the europhiles are waiting for it to work’.”

It is not, strictly speaking, accurate with regard to the latter, or at least with regard to those beavering away in the engine room e.g. on assessing the contributions by banks to the SRF. This issue is big news in Germany, Austria and the Netherlands cf. the AFME briefing note from 17 March.

The poet of the banking sector must be Walter Scott; “Oh what a tangled web we weave when first we practice to deceive”, a good example being the attention being devoted to the ECB’s stress tests when the real action may well be elsewhere.

The EU only looks as good as it does thanks to the United States’ weak recovery. The EUs policy has been weaker than the US, but the difference between those two weak policies has meant that the divergence in economic performance has not been as great as it might be.

If the Republicans win in the US, they will likely go on a massive Keynesian spending spree (this is historically what they do despite what they say), leading to a very robust recovery. The EU’s performance will look craterous in comparison. The abysmal goverment structures and increasing ideological fanaticism (both political and economic) will prevent a needed coordinated turn-around in EU monetary and fiscal policy, and cause investors to flee.

Also, if you think the US and Russia are going to be enemies and this will help the EU: think again. US policy ought to be to bring Russia into the Western-sphere to counter China. A China & Russia deep alliance (apparently the neo-con Obama’s policy preference, given this is the likely result of his actions) is not something many American foreign policy types want to see happen. Wither the EU in that US geo-political equation? It doesn’t have a role: it’s expendable.

I am waiting since 2 days for an answer to:

@ Philippe Legrain

3. “With hindsight, Osborne, Schäuble and Rehn argue that governments borrowed too much in the pre- crisis years.” Would you have a reference for them saying that?

4. “Bouncing back quickly from the post-Lehman collapse, its economy grew by 8 per cent in two years.”

“ The German economy has been one of the wonders of the world over the last couple of years,”

If you take a look at the OECD Annex Table 1, and keep in mind that we didn’t have the pre-2008 bubble in the first place, because of reunification (see Annex Table 10 output gaps) there is absolutely no miracle, just the bounce back from the minus 6% kick in 2008/2009, to a long term trend growth of 0.75% productivity, 0.25% clearing up old Eastern German legacy, and some 0.5 – 0.25% demography vs longer working times adder. Boring.

But the 8% over 2 years certainly looks more inciting, doesn’t it.

5.” Between 1995 and 2010, households’ disposable income rose much faster in Sweden (2.87 per cent a year), Britain (2.67 per cent) and France (2.17 per cent) than in laggards such as Germany (0.74 per cent) and Italy (0.37 per cent).”

The endless repeat of selective picking of data, just like point 4. Not technically wrong, but misleading, and in this huge amount, there can not be any doubt, that this is intentional.

“But in Germany, only the top 10 per cent did reasonably well.” Off course no reference given, as usual for those wild claims.

The net income distribution in Germany is the same as it ever was, with very minor fluctuations people can stir up to seemingly high numbers

6. then all the usual “creative class” bullsh*t, you can hear in any MBA program. I have been there, I know it.

The endless repetition of the same buzz words (entrepreneurial, foreign born inventors,GPS, DARPA, not a single common place left out.

The Microsoft ex-CTO Propellerhead Nathan Myhrvold was at least funny enough to don one, and write some 400 Euro “Modernist Cusine” cook book, for people who need the ultimate kick of walking the abyss of food poisoning for a unique taste

7. the endless blah of encouraging new ventures, as if the capital driven results have not been dismal in so many places, outside the entrenched old guard at Menlo Park,

see e.g. Christoph Kaserer & Diller
“What Drives European Private Equity Returns? Fund Inflows, Skilled GPs, and/or Risk” European Financial Management Journal, 15, pp. 643-675, 2009.

And so I could go on and on, that the facts are not downright false, but presented misleading.

Hope is not a Strategy !

8. “A fairer society with opportunities for all”

Yeah, don’t we want that all, and lower taxes, and better social benefits, and, not to forget,

“and a pony” (there are actually some citable Krugman’s on that, e.g. saying something rare positive on both from me : – )

“Tax Land, not Labour”

And how many land is there to be taxed? And who owns that?

“Openness, accountability, choice”

And who would be against that? What does it mean?
Maybe I give a hint to the Sachsen LB again here?

“Why we need a European Spring”

“Germany must “ didn’t we hear this before?

Summary : I don’t see anything new, I haven’t seen before many times

Boring Bad

Maybe DOCM and David take some interest in

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