Europe is doomed.
With the U.S. following twenty years later.
However, the idea of one final debt fueled party on the way out the door sounds like fun.
From Bond Vigilantes:
Compared to one and a half years ago, when the prevailing narrative was still revolving around global synchronised growth, the economic outlook for Europe has darkened significantly. From ‘peak optimism’ levels in late 2017, Euro area real GDP growth has slowed to 1.2%, while Eurozone manufacturing PMI has dropped by more than ten points. Even the notoriously optimistic ECB eventually had to come to terms with reality, slashing their 2019 GDP growth forecast from 1.7% to a dismal 1.1%.
One possible way for Europe’s limping economies to brace themselves against these negative trends and perhaps prevent full-scale ‘Japanification’ would be to suspend austerity and dial up fiscal stimulus to boost economic activity. As Europe’s biggest economy and long-time growth engine, the onus lies first and foremost on Germany, some would argue. And, of course, funding costs would be exceptionally cheap. At current yield levels, Germany would only have to pay around 0.7% in interest when borrowing money for 30 years. Even when taking today’s low inflation expectations with the 30-year euro area breakeven rate at c. 1.4% at face value, funding costs would be negative in real terms. When borrowing over shorter periods, interest rates would be negative even in nominal terms with Bund yields below zero up until nine years to maturity. Investors do actually pay Germany for the privilege of buying the country’s sovereign debt!
Clearly, Germany should seize the moment and issue tons of Bunds, right? A large portion of my fellow German compatriots would vehemently disagree. They’d argue that a balanced federal budget – the proverbial ‘schwarze Null’ (black zero) – and a debt-to-GDP ratio in compliance with the Maastricht criteria of 60% should take priority over boosting the economy via fiscal expansion. There are valid reasons for this position, of course, above all financial stability in the euro area: If Germany abandoned austerity and went on a debt-fuelled spending spree, it would be politically difficult, if not impossible, to demand fiscal discipline of other euro area countries. This would increase the risk of another eurozone debt crisis, followed by expensive bailouts and ultimately debt mutualisation or monetisation.
However, I believe that there is more to Germany’s fervent debt aversion. Without wanting to indulge myself too much in kitchen sink psychology, for many Germans the issue of national debt seems to raise deep ethical concerns, perhaps amplified by the close proximity of the German words ‘Schulden’ (debt) and ‘Schuld’ (guilt). It’s a widely held belief that a responsible government ought to live within its means. Issuing debt is often regarded as unscrupulously borrowing money from future generations, irrespective of attractive funding costs or use of proceeds....MORE
