Let me put this more bluntly: there is a substantial probability that Europe will have a financial crisis that will create significant economic chaos, and if it is combined with an immigration crisis, the results are unknowable but unpleasant to contemplate.
Another looming danger is that the United Kingdom will hold a referendum this summer that may well lead it out of the EU. A member leaving the EU would set a dangerous precedent. For years following, there would be major consequences for world trade and currency flows.
There are two possible outcomes to a European financial crisis stemming from massive sovereign debts and unbalanced budgets. The first is that an entirely new economic structure might evolve in the European Union. If the EU is to stay together, it is going to have to resolve the sovereign debt issues. Because the European elites really do want to see a united Europe when push comes to shove, they are likely to take on the debt of every Eurozone nation according to some odd formula that only a European bureaucrat could love, mutualize that debt, and stick it on the balance sheet of the European Central Bank. They would then require each country to balance its own budget, much as the various states of the United States must do. It would be a difficult thing to do, but it could be done.
However, mutualization would very likely make the euro weaker, possibly much weaker. And of course, Germany would have to go along with the mutualization of debt. Why would they do this? Because 40% of their GDP derives from exports, half of which are sold to their fellow European Union members.
The second possible outcome is that there will be no agreement on how to deal with the debt, and the European Union currency region will sunder and its various countries go back to managing their own currencies. Those new currencies would likely be much weaker against the reinstituted German mark, thus pummeling German exports. As a side effect, a significant portion of the European Union’s former member states would then find their currencies 30 to 40% lower against the dollar (and some small countries might see a much more significant drop). While that scenario would be good for American tourists (think cheap Italian and Greek holidays), it would not be good for American exporters of all types, including and especially agriculture.
We will talk next week of what you as president might do to strengthen the exporting capability of US corporations – and there is much that could be done on a bipartisan basis – but continuing deterioration of the European situation could lead to an immensely difficult environment for US exporters and would likely trigger a deep recession in the US.
Alternatively, the ECB could continue to monetize Eurozone debt and step it up a notch or two in the wake of an Italian crisis, which is likely to weaken the euro. Such a program might kick the European crisis can down the road a few years, but that debt is going to have to be rationalized sometime. The latest ECB move to create a multitrillion-euro “loan book” – essentially paying European banks 40 basis points to borrow money and then turn around and lend it at very low rates, and presumably even buying negative-rate sovereign debt – could potentially kick the can far enough down the road to bounce it into your second term. It is unclear what the consequences of such a radical ECB action will be, but the experience so far suggests that the strategy might not result in the growth that we would like to see in Europe. How long a low-growth or no-growth continent could maintain political stability without a backlash from voters – especially given the immigrant crisis – is a question that looms like a spectre over the whole EU project .
Regardless how the economic crisis turns out, the migrant crisis will remain. The refugees will not stop coming as long as jihadists threaten their homes. The deal with Turkey is unlikely to solve the problem. Refugees will keep crossing the sea; and with 23 countries having to approve Turkish membership in the EU, it is truly up in the air as to whether such a deal on immigration will actually come about. There is much more potential for instability in a region that is the equivalent of the US in economic importance.
I could say much more about Europe, but I will leave it there. We’ll wrap up this letter next week when we look at Africa, Latin America, and the US itself.
Newport Beach, New York, and Abu Dhabi
I’ll be heading out at the end of month to Rob Arnott’s fabulous advisory council meetings, this time at Pelican Hill in Newport Beach. Those of you who know Rob and Research Affiliates know that his conference is a tad more academic than most, but he combines the intellectual heavy lifting with a fabulous food and party experience. It’s kind of like Adult Nerd Heaven. Then the following week I’ll be in New York, speaking and attending a conference.
For those who want to attend my annual Strategic Investment Conference this May 24–27 in Dallas, I hope you have registered. The conference is sold out, and we are creating a waiting list. We are trying to figure out how to accommodate more people but will not do so if we cannot make sure that the total experience for those already registered will be up to the standards we always strive for.
That said, if you want to attend, I suggest you go to the Strategic Investment Conference website and register to have your name put on the waiting list. I can almost guarantee that if we do find a way to accommodate a few more folks, those seats will almost immediately disappear, too. Those who wanted to wait until the last month to register are going to be disappointed. I won’t even tease you with the fabulous new speakers that we are adding every week. The lineup just keeps getting better and better. And since I can’t take everybody to Austin for the amazing local music scene, we are working on bringing Austin music to Dallas. It’s going to be fun! Just a little Texas ambience for y’all.
By the way, I was looking through the list of attendees. There are almost 100 people from outside of the US already registered. I see a lot of familiar names, and we could easily put together a fascinating conference just from the attendees. We are evaluating two different computer apps that will, among other things, significantly enhance attendee networking. One of the things I have heard over the years is that people would like to be able to meet more of the other attendees but are not sure whom they want to meet. Whichever app we choose, it is going to allow you to find and grow a network of people who share your interests.
Just for the record, I can’t write about your favorite market every week. But I am paying attention to the possible bottoming of the commodity markets and to what looks like a significant new bull market developing in gold and gold stocks. I continue to be mystified by continually lowering projections of future earnings almost across the board … and a rising stock market. Past performance says that perverse trend should not endure; but then, markets can be perverse longer than you can stay solvent.
As readers know, I am immersing myself not just in the economics of the future but also in the technology of the future as I put together my new book, The Age of Transformation: What the World Will Look like in 20 Years. I will leave you with this Ted Talk about some of the latest developments in augmented reality. I suspect that it’s not as easy as Meron Gribetz makes it look, but this technology is coming to a home near you (and if you have millennials in your family, it may come to a home near you very soon).
As cyberpunk science-fiction writer William Gibson said back in 1993, “The future is already here. It’s just not evenly distributed.” I am increasingly drawn to thinking about the implications of an unevenly distributed future. It’s not something that we can prevent or should necessarily want to. But it is a transition that is going to force a great deal of uncomfortable change and adaptation on many of us. Oh well, full ahead warp five, Scotty.
Have a great week as the seasons, too, began to change.
Your really worried about Europe analyst,
John Mauldin
John Mauldin is editor of Mauldin Economics' Outside The Box.