Crossing Jordan

What difference does it make…whether the mad destruction is wrought under the name of totalitarianism or in the holy name of liberty or democracy? - Mahatma Ghandi

In 1949, "1984", a dystopian novel penned by British author George Orwell, was published. The title reflects the inversion of the last two digits of the year it was written. Orwell's experiences during the Spanish Civil War and his disillusionment with authoritarianism heavily influenced the narrative.

The plot unfolds in a grim and oppressive world dominated by the all-seeing Party led by the enigmatic figure of Big Brother. The protagonist, Winston Smith, navigates a world of constant surveillance, propaganda, and manipulation. His struggle against the Party's thought control, embodied by the slogan "War is Peace, Freedom is Slavery, Ignorance is Strength," forms the narrative's core. Through Winston's journey, Orwell explores themes of censorship, surveillance, propaganda, and the erosion of individual freedoms.

"1984" resonates deeply with real-world problems, both past and present. Orwell's portrayal of a surveillance state where privacy is nonexistent and dissent is brutally suppressed echoes concerns about the encroachment of government surveillance and erosion of civil liberties. The novel's depiction of a society where truth is subjective and historical facts are constantly rewritten to fit the Party's narrative reflects the dangers of propaganda and manipulation in shaping public opinion.

Moreover, Orwell's exploration of the power of language and its manipulation by authoritarian regimes is particularly relevant. The concept of Newspeak, a language designed to eliminate dissent by limiting the range of expressible thoughts, highlights the importance of language in shaping thought and perception. In a world where misinformation and disinformation are rampant, and language is weaponized to distort reality, Orwell's warning about the manipulation of language rings alarmingly accurate.

The economy of "1984" is marked by manufactured poverty, a deliberate strategy the Party employs to maintain its grip on power. By keeping the populace in a state of perpetual want, the Party ensures compliance and obedience, exploiting the vulnerability of the impoverished masses to further its agenda of control and domination.

Amidst the orchestrated scarcity, a shadow economy emerges—a black market where forbidden goods are traded clandestinely. Despite the Party's efforts to stamp out such illicit activity, the black market serves as a subversive undercurrent, offering a glimpse of resistance against the oppressive economic policies enforced by the Party.

Within this controlled economic landscape, employment is not a matter of personal choice or vocational fulfillment but a tool of the Party's agenda. Citizens are assigned to bureaucratic roles within the vast government apparatus, performing redundant or meaningless tasks to maintain the illusion of productivity and economic activity.

---

I bring this up because some aspects of this phenomenon closely resemble ongoing events in the European Union and its member states. While my primary focus remains on economics and financial markets, it's essential to delve into the potential ramifications of proposed policies on the future trajectory of EU nations.

It's no secret to those tuned into political and financial market developments that the European Union currently faces significant challenges. However, while many of these issues have surfaced in recent years, they are rooted in policy decisions made long ago.

A glance at the present economic landscape of EU member states reveals glaring disparities in growth. Between 2000 and 2023, as measured by purchasing power parity, Poland emerged as a formidable economic force, witnessing a staggering 264% surge in GDP. In contrast, Germany, often hailed as Europe's industrial powerhouse, experienced a more modest 123% increase in its economy over the same period. The French economy closely trails Germany with a 119% GDP growth, but Italy's economy has stagnated since 2000, presenting a stark contrast.

Chart 1 also encompasses the GDP (PPP) for the Czech Republic, another non-eurozone member, which has experienced approximately 200% growth since 2000. It appears that Central and Eastern European countries have demonstrated more robust expansion compared to their Western European counterparts, particularly those not utilizing the euro currency.

Several factors contribute to the superior growth rates observed in Central and Eastern Europe compared to Germany and France. One significant advantage lies in the regulatory environment. Countries such as the Czech Republic and Poland, having been part of the Soviet bloc post-World War II, retain memories of the centrally planned economic structures that resulted in empty store shelves. Consequently, these nations maintain less stringent regulations, offering businesses greater flexibility than their French, German, or Italian counterparts.

Additionally, Central and Eastern European countries benefit from lower wage levels. Post-Soviet governments recognized that attracting investment necessitated cost competitiveness. Given their educational and capital deficiencies, lower wage rates were a magnet for businesses seeking to relocate production facilities and reduce production costs. Conversely, regulations artificially inflate wage rates in Western Europe.

Upon joining the European Union in 2004, industrial producers of automobiles, electronics, machinery, and manufacturing began migrating their industries to Central and Eastern Europe. These countries are geographically positioned at the crossroads of Europe and the East as strategically advantageous locations to cater to both markets.

This begs the question: why has Italy stagnated since 2000 despite sharing similar geographical advantages? One could argue that Italy's membership in the Eurozone is a primary factor.

While proponents of the euro highlight benefits such as streamlined cross-border transactions, the euro's intended objectives extend much further. Before its implementation, the absence of a unified financial and capital market among member states hindered competitiveness against the United States. The euro was envisioned as a rival to the US dollar, aiming to rectify this disparity.

However, two significant challenges emerged. Firstly, the absence of a fiscal union prevented the issuance of joint government bonds, which could have provided an alternative to the US treasury market regarding size and liquidity.

Following the euro adoption, Italian bond yields decreased, reducing foreign investment attractiveness while stimulating higher government expenditures initially, artificially boosting economic growth. However, the inability to enhance competitiveness through currency devaluation eventually took its toll, leading to stagnation.

Within the Eurozone, adjusting real wages became challenging without altering nominal wages, akin to a "quasi-gold-standard" arrangement among member states. The fallout from the Global Financial Crisis necessitated government bailouts for numerous European banks, culminating in the sovereign debt crisis 2012 and prompting ECB intervention.

Throughout this process, the EU pursued increased centralization of political decisions, fostering heightened lobbying by major corporations to shape future EU legislation in their favor. The proliferation of regulations disadvantaged small and medium-sized enterprises, helping large corporations to maintain their dominant positions. The EU pursued further central planning with each crisis, solidifying the status quo.

---

Presently, economic woes primarily afflict Germany, yet the issues within the euro area extend beyond its borders. Like Italy, industrial production in France and Spain has declined since the euro's introduction, underscoring the currency's unsuitability for their economies amidst prevailing centralization, regulations, and wage rates.

What's concerning here is that the stagnation of industrial production coincided with a rise in government debt. While much of the discourse revolves around government debt, it's also crucial to consider the debt situations of households and non-financial corporations within any comprehensive analysis.

In June 2022, amidst the ECB Main Refinancing Operations Announcement Rate still holding at zero, the CME Group published an insightful piece titled “Is France At Risk Of A Debt Crisis?” The report referenced the Bank for International Settlements findings, indicating that France's total public and private debt-to-GDP ratio surged from 187% in 2000 to 347% by the end of 2021, marking the highest ratio in the Eurozone.

Debt has risen across all sectors of the French economy since 2000. Public sector debt has increased from 59.3% to 113.3% of GDP. Household debt has doubled as a portion of the economy from 33.9% to 67.1% today. Finally, French corporate debt has grown from 93.5% to 167.3% of GDP.

While countries such as Ireland, the Netherlands, Portugal, and Spain undertook deleveraging efforts, and others like Italy and Greece maintained relatively stable total debt levels, France's debt dilemma has consistently worsened since 2000.

Regarding GDP, the French government's debt level resembles that of Spain, while Italy's is higher and Germany's is lower. However, examining the rate of change in debt-to-GDP ratios between 2001 and 2023 reveals a stark contrast: France's government debt ratio surged at a pace akin to Spain's, doubling over the period, whereas Italy experienced a mere 30% increase, and Germany's rose by just 11%.

While CME acknowledges that France hosts several multinational corporations where "debts are matched by revenues earned abroad," the report highlights examples from other countries indicating that private debt can quickly morph into public debt through bailouts during financial turmoil. This transition could occur gradually via higher public deficits and private sector deleveraging, similar to Japan's experience.

Since the ECB hiked interest rates, interest rates for French companies have doubled for large corporations and risen more than fourfold for small and medium enterprises, as per a Banque de France study. These figures suggest that France may encounter difficulties should economic activity further decelerate.

---

Yet, the media scarcely covers France's issues, whereas Germany's current problems take center stage, ostensibly due to perceived missteps by the government, particularly Robert Habeck, the Green economic minister. The recent budget crisis is especially noteworthy given that government spending is nearing levels seen during the height of the COVID-19 pandemic.

Germany's policies serve as further evidence of the failure of Keynesian economic strategies to spur growth. Despite hopes for an economic rebound in 2024, projections now indicate that the government will slash its growth forecast again to 0.2% in 2024 and 1% in 2025. The DIHK Chambers of Industry and Commerce went as far as to predict a 0.5% drop in GDP for this year.

The evolving geopolitical landscape, coupled with efforts to orchestrate a "green revolution" sans nuclear power centrally, has escalated costs for German industries, particularly energy-intensive ones. Formerly, cheap Russian natural gas bolstered industry competitiveness, but with the Ukraine-Russia conflict, this advantage evaporated, signaling the end of Germany's industrial prowess.

Furthermore, heightened competition in green sectors, intensified by China's dominance in the electric vehicle market, poses challenges for German producers. Domestic renewable production faces challenges as China can undercut prices significantly. The burgeoning German bureaucracy exacerbates matters, with companies enduring lengthy delays in securing investment approvals. Although bureaucratic hurdles persisted during the Merkel era, the current coalition has compounded the situation.

The liberal FDP finds itself sandwiched between the social democrats and the greens, who advocate for increased regulation, subsidies, and spending. Robert Habeck's recent proposal for a power plant strategy epitomizes this trend with its focus on more subsidies and government intervention.

---

Eurostat's December 2023 industrial production figures for the Eurozone were a pleasant surprise this week but primarily driven by a significant uptick in industrial production in Ireland, which soared by 45% annually. Sector-wise, growth was only witnessed in the capital goods sector compared to December 2022; other sectors remained negative.

The EU Commission remains deeply involved in crafting more regulations and subsidies under the guise of the green energy transition, likely continuing to advocate for joint financing to further centralize economic policies in Brussels. Economically, the EU is gradually morphing into a centrally planned economy, reminiscent of Orwell's "1984."

However, the drive for increased centralization extends beyond economic policies. Though recent plans for journalist surveillance were shelved, proposals for public chat surveillance persist despite being deemed illegal by the European Court of Human Rights this week, according to Parliament member Patrick Breyer.

Given these aspirations for heightened central planning and regulation, the ECB's digital euro plan emerges as a logical avenue to consolidate power within central institutions. The German Federal Office for Information Security's publication on technical guidelines for a future CBDC suggests that the digital euro could be leveraged to impose policy objectives on the public:

One general approach to address this dilemma is to use...two types of wallets: Fully anonymous wallets requiring no personal information and facing restrictions and personalised wallets that are completely traceable but do not face restrictions.

All these developments suggest that the EU, alongside its member states while expressing support for Ukraine in the name of "freedom," is increasingly veering away from economic and social domestic freedoms. History indicates that this trajectory is unlikely to yield economic prosperity and instead hints at a trajectory resembling Orwell's "1984." While one can hope to avert such a scenario, it's plausible that the EU may have already embarked down that path.

Forever in my mind,
My memories are all I've got,
I keep you in my heart,
Remembrance of what we had.

The Sorrow – Crossing Jordan

Regarding the financial market outlook, my views from last week remain steadfast.

Have a great weekend!

Fabian Wintersberger

---

Thank you for taking the time to read! If you enjoy my writing, you can subscribe to receive each post directly in your inbox. Additionally, sharing it on social media or giving the post a thumbs-up would be greatly appreciated!

(Please note that all posts reflect my personal opinions and do not represent the views of any individuals, institutions, or organizations I may or may not be professionally or personally affiliated with. They do not constitute investment advice, and my perspective may change in response to evolving facts.)