Today the European Central Bank has a policy meeting and not much is expected apart from them wishing everyone a Merry Christmas. Actually in its own way that is a defeat as surely it should be Felix Navidad. But underneath the surface a lot is going on and we can look back to this from Dr.Isabel Schnabel on February 19th 2024.
However, this capability is increasingly under threat. At the turn of the millennium, Europe was operating at the global technological frontier, but today many euro area firms are laggards. Compared with many of their global peers, they invest less in both physical capital and research and development, and they are less productive.
Those words echoed as they described the European economic malaise. Later that year we then got what was the grand design in response. The Draghi Report which we looked at on September 12th last year.
First – and most importantly – Europe must profoundly refocus its collective efforts on closing the innovation gap
with the US and China, especially in advanced technologies.
But even then we quickly saw trouble.
The second area for action is a joint plan for decarbonisation and competitiveness.
In fact the same speech quickly became what Taylor Swift would call “trouble,trouble,trouble”
Even though energy prices have fallen considerably from their peaks, EU companies still face electricity prices
that are 2-3 times those in the US. Natural gas prices paid are 4-5 times higher.
We have moved from one of the central EU problems which is lack of innovation to an energy policy that makes the EU more competitive by raising prices. Lower prices are always just around the corner.
Over the medium term, decarbonisation will help shift power generation towards secure, low-cost clean energy
sources.
Finally there was this
The third area for action is increasing security and reducing dependencies.
Where do we stand?
If we stay with the comparison with the US we see that the AI boom there has continued. In stock market terms we have seen the first ever US $5 trillion company. But from the EU? I cannot think of anything. Indeed with the rise of Chinese exports we see that Europe is also now under pressure in a previous area of strength which is motor production and exports. This particularly affects Germany but also to some extent Italy which has rarely got much credit for its exports.
Also if we switch to national performance we see this.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2025 is 3.5 percent on December 16, down from 3.6 percent on December 11. (Atlanta Fed0
So in our terms we think that the US GDP rose by around 0.9% on the third quarter. By contrast we have 0.4% in the EU and 0.3% in the Euro area which are relatively good results. Looking ahead here is the HCOB PMI.
“Economic growth slowed at the end of the year due to a slight contraction in the manufacturing sector and weaker momentum in the service sector. The weaker performance is primarily attributable to German industry, where the downturn intensified. In France, on the other hand, there are signs of a cautious recovery in industry, although a single monthly figure should not be overrated.”
Remember there is a danger from the French numbers which have flattered the underlying situation.For newer readers I am very careful about saying such things bit reporting a surge in exports after telling everyone that the Trump tariffs would create the reverse? Also the recent discussion on weight-loss drugs and Ozempic in the comments might like to know that this development really juiced GDP in Denmark in the third quarter as it rose by 2.3%. But the boom looks to be over and will we now see a bust?
Denmark has benefited in recent years from Wegovy-maker Novo Nordisk’s booming weight-loss business, and the country’s growth in 2024 ranked among the highest in Europe, in part driven by the drugmaker.
Novo Nordisk, facing growing competition in the obesity drug market, has struggled with slowing sales growth and profit warnings this year, leading to layoffs of 9,000 employees, more than half of them in Denmark. ( Reuters)
We know it is a real problem because it has been officially denied.
Defence Spending
We come to an area where part of the Draghi Report may be happening. From yesterday.
Germany’s parliament signed off on €50bn in military purchases on Wednesday, rounding off a bumper year as the EU’s largest nation ploughed ahead with a vast rearmament. Members of the Bundestag’s budget committee, which has the power to block or approve all significant weapons purchases, were asked by officials to approve the projects including a €21bn multiyear order for clothing and protective equipment for soldiers, according to documents seen by the Financial Times.
Not all of this is for European companies though as we peruse future plans.
They include a tranche of 35 US-made F-35 fighter jets that can carry American nuclear weapons stored on German soil and 20 more Eurofighter Typhoons.It has ordered US-made Patriot and German-made IRIS-T air defence systems, more than 100 modern Leopard 2A8 tanks, 60 Chinook heavy-lift helicopters, plus a raft of new warships and submarines and billions of euros’ worth of ammunition. ( Financial Times)
The European Union is also trying to do things by proxy or in fact proxy squared.
The bloc last week agreed to keep €210bn of Moscow’s assets immobilised for the foreseeable future as part of plans to channel them into a €90bn loan to Kyiv over the next two years designed to help fend off Russian aggression and bolster Europe’s role in US-led peace talks. ( Financial Times)
In essence proxy one is that it wants Ukraine to do the fighting for it and proxy two is that it wants to use Russian assets to pay for it. I am a Ukraine supporter but I think that this is a really stupid idea as you win by holding to the rule of law not manipulating it and there will be more adverse consequences along the lines below.
If you think Belgium is playing the drama Queen about those Russian frozen assets : Euroclear has 17bn of assets in Russia that could be wiped out and they’ve been put on review for downgrade by Fitch. ( Johannes Borgen)
Eric Dor has written an interesting piece on this.
The €90 billion alone would represent 14% of
Belgium’s nominal GDP in 2025, and €7,616 per capita. And €185 billion represents 28.8% of Belgium’s
GDP and €15,655 per capita.
That is the risk for Belgium and you can see why it is not keen. If the EU backstops this then here is an example of the risk.
France would thus be exposed to the risk of paying guarantees of €14.639 billion, or €214 per capita, if
the reparation loan amounts to €90 billion. This would be €34.159 billion, or €499 per capita, for a loan of
€210 billion.
That would cause trouble because you see France has applied different rules to Russian assets in French banks. Then there are these issues.
Euroclear plays a vital role in international financial markets. If Euroclear were to be destabilised, systemic
risks would increase significantly, potentially leading to a financial crisis……Euroclear plays a vital role in international financial markets. If Euroclear were to be destabilised, systemic risks would increase significantly, potentially leading to a financial crisis.
Even the ECB has refused to back this and we may hear more from President Lagarde on this later.
But the theme here is of a type of reflation via defence spending and the Ukraine element is an attempt to get a free lunch avoiding directly affecting the public finances. As you can see there are clear dangers of this backfiring. Plus we are back to the issue of debt at a time o higher interest-rates.
Comment
The latest European Commission growth forecasts tell their own tale.
Altogether, this forecast projects real GDP to grow by 1.4% in the EU in 2025 and 2026, edging up to 1.5% in 2027. The euro area is expected to broadly mirror this trend, with real GDP growing by 1.3% in 2025, 1.2% in 2026, and by 1.4% in 2027.
That used to be considered weakish but now is what Chic would call “Good Times”. Remember they never forecast the crises which happen more frequently these days so the average is more likely to struggle to be 1%. With inflation around target and forecast to stay there you may be wondering how Dr. Isabel Schnabel said this on the 9th?
So do the expectations for the next move to be a hike feel right? Would you agree with those expectations?
I’m rather comfortable with those expectations.
Well the ECB is often in the land of what I call The Outer Limits. As to growth from the Draghi Report not so much. After all if there was any they would keep telling us…
