EU woes could be where the worst near-term risk lies as the Fed’s latest hawkish talking in Jackson Hole plays out.

Fed Chair Powell said on Aug. 26 that to bring down inflation, “there will still be a pain to households and businesses,” which was enough to pour ice cold water on the Fed pivot rally. 

Meanwhile, Federal Energy Stimulus checks offering up to 1,800 USD per household in Assistance to cover the adverse impact of rising prices are available to US households.

In other words, lockdown stimulus checks have been replaced by US energy stimulus checks. 

So when Powell spoke about pain to households and businesses, perhaps that was meant for an international audience. The strong USD combined with the US having ample farmland and energy fields mean America is in an enviable position of food and energy self-sufficiency.

EU Woes
Fed Chairman Jerome Powell

“there will still be a pain to households and businesses”


Not all is well on the old content, and EU woes are moving on the investors’ radar again

In Germany, the latest policy-driven energy crisis, in the wake of the escalating Russian-Ukrainian war, has resulted in banning Russian energy imports and has triggered another type of austerity. 

The German government is advocating rationing hot water, dimming street lights, and special heated halls will be established for those unable to afford central heating.

German households are panic buying stoves, firewood, and generators causing a depletion of supplies across the country. 

Across the border, in Poland, people are rummaging in the forest to gather firewood for the coming winter. 

Even Spain, which does not depend on Russian energy, has announced new energy-saving measures, including limits on air conditioning and heating temperatures in public and large commercial buildings.

Across the Iberian Pyrenees to France people are preparing for rolling blackouts.  France is more vulnerable than Germany to blackouts once the weather turns colder due to its aging nuclear reactors.

Germany - dimming street lights

“The German government is advocating rationing hot water, dimming street lights, and special heated halls will be established for those unable to afford central heating”


EU woes not only entail plunging household living standards

A recent piece in DW questions whether the energy crisis is the final nail in Germany’s export-dependent economic model.

“Globally there is no economy that is more exposed to the changes in globalization than Germany,” Andreas Nölke, a professor of political science at Goethe University Frankfurt, told DW.

EU woes worsen when the globalization model is destabilized

Germany is the motor of the European Union, a political-ideological trading zone. When the third country with the largest exports in the world, Germany, stumbles because of a policy-driven energy crisis, EU woes worsen.

Massive German balance of trade surpluses is recycled by the banks in the form of EU loans, which financed the development of infrastructure projects and also built political cohesion amongst its EU member states.

So the lower productive peripheral countries were able to borrow cheap finance to develop tourist coastal regions. 

“Expansion of the peripheral members of the EU was driven by massive public spending and the creation of unproductive public jobs with an unsustainable trajectory of debt” – Win Investing

Mal investments were also a feature of this recycling of the German trade surplus into cheap loans for property developers and to finance the public deficit. Airports where the runway is built never see a plane land, ghost towns, and the concreting over of the Mediterranean, over construction, are all examples of malinvestments.

So the peripheral deficits were part-financed due to being able to access cheap finance. In other words, the peripheral states of Europe grew not through enterprise, innovation, or an increase in the productivity of the private sector. Expansion of the peripheral members of the EU was driven by massive public spending and the creation of unproductive public jobs with an unsustainable trajectory of debt. 

The takeaway is that EU woes reach a crisis point when this circular model of recycled German trade surplus, banks funneling them into loans, which finances investments, creates jobs and economic prosperity shuts down

An engine deprived of fuel eventually grinds to a halt.

Affordable Russian energy aided and abetted a windfall in German exports, and when the engine halts, the EU freezes up.

EU woes will reach a crisis point unless EU policymakers understand that globalization means fostering a policy of peace and trade with Russia.

“Economic hardship leads to political polarization and extremism” – Win Investing

Russia is commodity rich, and Germany, the motor of the EU, is commodity poor. Frankly, both would make a match made in heaven because neither are rivals, so mutually benefit from trade. 

EU prosperity has a lot to do with trading with Russia.

But the battleground for US hegemony is in Europe, which is why EU woes are likely to worsen. If the EU had truly independent energy and foreign policy it would not be supporting the war in Ukraine, which is a self-inflicting wound on living standards and businesses. The EU has remained an occupied US territory since WW2, with more US military bases in Europe, than anywhere else. 

A military-occupied territory has no independent foreign or energy policy, which walks in lockstep. 

US hegemony can not allow its colonies and satellites to form a trading relationship with Russia. Russian energy in Rubles, then the EU eyes trade along the new booming silk road, all outside the US dollar sphere of influence. 

EU woes are likely to worsen, and in the worst-case scenario, we could see the balkanization of the EU

Economic hardship leads to political polarization and extremism. 

The Italian far-right is gaining ground in the pending elections.

We remain bearish on the euro and EU sovereign debt going forward as a more acute peripheral crisis than in 2013 could be brewing.

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