Germany the canary?

There is nothing I like more than dunking on Germany or France.

If you’ve been paying attention to German economic data of late, you’d have noticed that things are…

Not great.

They haven’t been for a long time now.

Today’s data was just the latest drop.

MINUS 6.7% YoY on the industrial production front.

While many over here will still be suggesting that Germany is all roses, the reality is not so.

And it’s got a hell of a lot to do with the below.

And I think actually this chart shows the scale of energy destruction, or at least usage destruction, over the past few years.

But something to note…

This was not a post-pandemic trend!

Look at where Germany started to crater in energy transmission.

In 2019.

What happened then?

Their coal use fell according to Clean Energy Wire.

But there were increases in nat gas, heating oil, and diesel uses to power buildings.

Weird — surely not a net zero policy coming round to bite them!

I’d argue this short term dependence on Russia and literally EVERYTHING bad happening at once over a 3 year period was a serious death knell to German industry…

And currently, it doesn’t look great for German exports, OR on a forward looking basis over the next 3 months, which isn’t necessarily too different to current expectations, but could be important for our next analysis…

Now there’s always a chance we shift all the way back up and exports are made massively more attractive again, but this would require a heavy shift in rate pricing in my view.

I’ve explained before about how Europe is reliant on lower interest rates, mainly to permit German industry to thrive again.

Devalue the euro and German goods are cheaper when bought from abroad.

About 80% of DAX sales are foreign!

So yes, a lower interest rate causing a wider interest differential between, say, the US and Germany would lead to relatively cheaper goods when purchased in USD.

This is the key balancing act now for the ECB — how aggressively do they cut to be able to effectively manage multiple fragile economies at once?

See the below chart for how fragile European growth prospects ACTUALLY are right now.

What’s interesting this time is that the traditionally ‘bad’ nations, like Italy and Greece, aren’t sounding a horn of danger yet.

Instead, Austria, Netherlands, and France are the ones which are facing troubles, with Germany just about there as well.

The ‘insulation’ the ECB provided to these nations after the debt crisis, what, 13 years ago is sort of coming back to bite them I reckon…

See, the nations that are now doing poorly were effectively the ones to bail out the PIIGS as they were known.

Germany has been the KEY nation which has helped facilitate credit transfers across the bloc…

But since Germany has gone down the toilet, there’s an elephant in the room, and this is identified via the Target2 system (identified, not because of)…

The TARGET2 system (Trans-European Automated Real-time Gross Settlement Express Transfer System) is a payment system used by central banks in the Eurozone. While it's an essential mechanism for facilitating cross-border transactions, there are concerns about imbalances within the system, particularly regarding large deficits. Here are some key issues:

1. Accumulation of liabilities: Countries with persistent TARGET2 deficits accumulate large liabilities to the European Central Bank (ECB). This is particularly problematic for countries with weaker economies.

2. Risk concentration: The system concentrates risk in countries with large surpluses, primarily Germany. If a country were to leave the Eurozone, it might be unable to repay its TARGET2 liabilities, potentially leading to losses for surplus countries.

3. Masking of economic imbalances: TARGET2 imbalances can mask underlying economic issues, such as trade deficits or capital flight, potentially delaying necessary policy responses.

4. Monetary policy complications: Large TARGET2 imbalances can complicate the implementation of a uniform monetary policy across the Eurozone.

5. Political tensions: The accumulation of large deficits and surpluses has led to political disagreements between member states about risk-sharing and economic policies.

6. Potential for systemic risk: In an extreme scenario, very large TARGET2 imbalances could pose a risk to the stability of the Eurozone financial system.

7. Debate over interpretation: There's ongoing debate about whether TARGET2 imbalances represent a serious problem or are simply an accounting feature of a monetary union.

Point 2. is key here.

Since Germany has been considered the saviour of the Eurozone, these imbalances have been managed well — no concerns.

But alongside the energy issues and disruption to German production, their fiscal situation has also come under scrutiny, with their off budget deficit being found to be in the BILLIONS.

Germany is not a frugal state, and the EU does not like this.

If we combine the fact the European Commission is now committing some nations to austerity, we might be able to see how Germany is going to come under considerable scrutiny from other member states now…

What’s the solution to all this?

A weaker euro.

There is no trade more obvious to me right now than the euro going to sub parity.

It’s pretty much the only way the Eurozone can provide some sort of balance across the bloc.

If you were to sell the euro between 1.08 and 1.15, I’d consider it a good entry for the next 5 years.

Genuinely that bearish with these factors considered.

More will come to light over this soon!