The European Economy Is in Real Trouble
Several countries are dealing with impossibly high inflation. The latest data shows Eurozone July inflation at 8.9%, which is a record high. Turkey has 79.6%, and Moldova is 33.55%. Latvia, Estonia, and Lithuania all have inflation higher than 20%. The U.K.’s inflation is at a 40-year high, 10.1%. Ukraine is 22.8% inflation and Russia is 15.1% (link-e). An alarming number is Germany’s PPI. Germany’s PPI is up 37.2% from July 2021. The Japanese global financial service, Nomura, call Germany’s PPI “apocalyptic.” The U.S. is Germany’s largest trading partner.
The United States imports more than $450 billion annually from Europe. The top five European importers are Germany ($127.5B), Ireland ($62B), France ($57.6B), Italy ($57.3B), and the Netherlands ($29.7B). The top four import categories are pharmaceuticals ($77B), machinery ($75.6B), vehicles ($44.2B), optical and medical equipment ($30.1B) . One of the most likely places Americans will feel Germany’s PPI will be increased healthcare costs.
Before the Russian invasion of Ukraine, Europe imported 2.2M barrels per day of Russian oil. Since the Russian invasion of Ukraine, the Dutch TTF (natural gas exchange) and U.K. natural gas prices have hit all-time highs. The natural gas price in Europe would be equivalent to $410 a barrel of oil. The chart to the left represents European buyers of Russian oil in November 2021. Germany was 63.7% dependent on Russian oil for energy needs, whereas the European average was 57.5%.
The Europeans expect the Russian conflict to last for a while, leading to winter energy and heating shortfalls. In addition to Russia’s invasion, Europe has been experiencing a record heat wave disrupting energy since June. In response, Europe has instituted legislation forcing rationing of certain goods and reducing oil consumption by 15%. Some of the legislation requires cold showers, unheated swimming pools, closed stores, and dimming street lights. It is anyone’s guess what inconveniences the legislation will require should Europe see the shortages they are predicting. It is safe to say it will be worse than cold showers.
High inflation and energy shortfalls are not Europe's only economic woes. The Euro has fallen to the lowest exchange rate against the Dollar in two decades. The Euro is trading at 0.9903 against the Dollar. The day before the Russian invasion, the ratio was 1.1305. In six months, the Euro has lost 12.4% against the Dollar. Analysts predict the Euro will continue to decline.
In July, the E.U. raised interest rates for the first time in 11 years. The E.U. plans on raising rates later this year but has little economic room to raise rates too high. The E.U. is in the proverbial "perfect storm" and might become like Japan. It is foreseeable, like in Japan, that investors will abandon E.U. bonds for higher-yielding U.S. Treasury bonds. To understand the Japanese bond problem.
Investors in E.U. bonds will flee to the Dollar. The Dollar is not strong. The other currencies are just more devalued and mismanaged. As Peter Schiff says, the Dollar is the cleanest dirty shirt in the hamper. Since Europe's inflation is worse than ours and higher prices are coming, the Dollar will likely continue to appear strong over the next few months. The FED will likely raise interest rates again, creating a more extensive spread between the U.S. 10-year and European and Japanese bonds. The Dollar will appear stronger as the FED raises rates but will inadvertently stand on the necks of friendly economies. The stronger Dollar will be good for short-term Dollar-backed assets. However, destroying other economies is long-game suicide in a globalized economy. It is like three people drowning in the ocean fighting over a life jacket. The Dollar may get the life jacket but will kill its friends.
The European Union represents about $17.9 trillion annual GDP, or about 1/6 of the total world GDP. There is no way to sugarcoat it. If Europe's economy is destroyed, the global markets will follow. The European problems represent yet another clear and present danger to paper-backed assets. Stocks, bonds, retirement accounts, real estate assets, cryptocurrencies, healthcare, and food supply chains are all vulnerable to Europe's economic struggles.
If things continue as the last few months have gone, Europe will be in real trouble by winter.
Do you want to keep watching your hard-earned savings lose value? If so, do nothing. If you want to take action to protect yourself, call the U.S. Gold Bureau for a free consultation.