European economy facing generational shift down

By Leith van Onselen

Above is an interesting video interview screened earlier today on CNBC with Paul Drake, Founder of View from the Peak: Macro Strategies.

In the interview, Drake argues:

  • The European economy is facing a generational shift and a ‘lost generation”, whereby growth will be structurally lower for at least another 10 to 15 years.
  • Monetary stimulus won’t work to heal the economy. Instead, genuine structural reforms are required.
  • Japan’s QE program is a potential disaster and deflationary for everywhere else. The rest of Asia, Germany, and certain US corporates, in particular, will be badly effected.

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Unconventional Economist


  1. How about tearing the Euro currency into pieces and letting the Eurozone print sound money? At the same time let the banks in Europe (and the World) fail.

    All this crap about banks being systemically important. Apart from depositors funds banks are the most unimportant organisations in the world. They are the most simple to start up should the current banks fail. Lending can be done at the click of the fingers from a bench in the middle of a park.

    When you hear how important banks are, those comments are made by people who have been totally corrupted by owners of the current banking system.

    The people in Europe need (honest) money, not debt, problem solved.

    Debt based monetary system = slavery coming to a town near ya soon.

    • ” …letting the Eurozone print sound money”

      “The people in Europe need (honest) money, not debt, problem solved.”

      I´d be more worried about the printing presses in Japan, US, UK. If Euros are unsound, how about everybody else´s? Money is a social contract which works as long as people believe that it has an intrinsic value. The issue in Europe is that they are trying to tackle all the issues front-loaded, with all the pain and misery it entails. Others are trying to hide it under mountains of paper. In the end a developed economy with a stable or declining population cannot grow in the traditional, GDP-measured way, unless you are willing to go through endless boom-bust cycles relying on ever increasing money velocity (which is not really growth). We are all headed for Japan style GDP stagnation (an economic homeostasis if you will) so it will be interesing to see what the future will bring after Japan buries everybody in depreciating Yens.

  2. At some point the populations have got to react you would have thought.

    Tha Spanish Greeks and Italians have major unemployment problems, as do some nations in the Balkans (not EU members) and Cyprus is en route back to the land of olives and donkeys and not much else.

    My take is that at some stage we get the mob rally around some form of representative not of the european elites. My personal take is they have gone a fair way to selling out their own punters.

    • Alex Heyworth

      May not take all that long. Even in the UK, Nigel Farage’s star is rising.

      • My money is actually on the Italians, and seeing as temperatures are warming up there at the moment. It could be fairly soon.

      • Alex Heyworth

        The problem is that what the mob want is equivalent to squaring the circle.

      • “The problem is that what the mob want is equivalent to squaring the circle.”

        Yep, we would seem to be near the last phase of one of those “civilisational cycles” described by the likes of Lord Wodehouselee…..

  3. Europe’s a gonna, not only don’t they have jobs, but job skills are going to be lost and those poor young folk won’t be able to gain job skills. Think about any job you do, if you have been out of work for between 1 to 2 years you start to lose a significant amount of your knowledge.

    They are going to face a skills problem once the EU gets back on it’s feet, then they will import skilled migrants which will make it worse. What a mess.

  4. It is interesting that this Krake guy talks about the dislocation between asset prices and economic fundamentals – it is all very well to see asset prices rising on the back of monetary expansion, but what does that do for productivity, the tradables sector, and wealth creation rather than transfer?

    One of the most sensible assessments I have ever read, just came from a Prof. Nicholas Crafts of the University of Warwick:

    He points out that monetary easing in the UK in the 1930’s, WORKED because it had somewhere productive to GO:

    “…….Obviously, for the cheap-money policy to work it needed to stimulate demand – a transmission mechanism into the real economy was needed. One specific aspect of this is worth exploring, namely, the impact that cheap money had on house-building. The number of houses built by the private sector rose from 133,000 in 1931/2 to 293,000 in 1934/5 and 279,000 in 1935/6 – many of these dwellings being the famous 1930s semi-detached houses which proliferated around London and more generally across southern England. The construction of these houses directly contributed an additional £55 million to economic activity by 1934 and multiplier effects from increased employment probably raised the total impact to £80 million or about a third of the increase in GDP between 1932 and 1934. House building reacted to the reduction in interest rates and also to the recognition by developers that construction costs had bottomed out; both of these stimuli resulted from the cheap-money policy (Howson 1975).

    Why was house-building so responsive in the 1930s? Two factors stand out. First, the supply of mortgage finance grew rapidly and became more affordable in an economy in which there had been no financial crisis that curtailed lending.
    Building society mortgage debt rose from £316 million with 720,000 borrowers in 1930 to £636 million with 1,392,000 borrowers in 1937 when about 18% of non-agricultural working-class households were buying or owned their own homes. In these years, deposits fell in some cases to 5% and repayment terms were extended from around 20 to 25 or even 30 years reducing weekly outgoings by 15% (Scott 2008).

    Second, houses were affordable to an increasing number of potential buyers.
    85% of new houses sold for less than £750 (£45,000 in today’s money). Terraced houses in the London area could be bought for £395 in the mid-1930s when average earnings were about £165 per year. Houses were cheap because the supply of land for housing was very elastic which in turn meant that there was no incentive for developers to sit on large land banks. Underpinning the availability of land for house-building was an almost complete absence of land-use planning restrictions which applied to only about 75,000 acres in 1932 – the draconian provisions of the 1947 Town and Country Planning Act were still to come……”

    This aligns exactly with what I have been saying for some time. It also fits with what Peter Hall says about urban development in the UK – much of the housing stock of bigger and better suburban homes – automobile based development, in fact – date to THAT era – i.e. the 1930’s…… the Town and Country Planning Act 1947 killed the UK’s automobile-based-development economic booster and stabiliser that should have lasted several decades, as it did in other countries. Ed Glaeser’s recent paper, “Nation of Gamblers”, suggests the significant role that automobile based development played in the unusual new cyclical stability in urban land markets following the 1930’s crash. This is a most heartening sign of mainstream awakening; this too is something I have been trying to suggest for a while.

    • Glaeser says (in “Nation of Gamblers” – 2013)

      “……Almost everywhere, prices in 1970 were below 1950 prices plus this construction cost related price increase. Even after the most stupendous change in America’s mortgage history, and a post-war economic boom, housing prices had gone up less than construction costs would warrant.
      The natural explanation for the missing boom in prices after World War II is that there was an enormous increase in housing supply over the same time period. During the 1950s, America permitted 11.84 million housing units, which is roughly the same as America permitted during the twenty-six years from 1920 to 1945. The construction was disproportionately on the urban fringe (Jackson, 1979) and disproportionately in the Sunbelt.

      The post-World War II era demonstrated exactly what textbook economics predicts should happen when robust demand meets relatively elastic supply. Quantities rose and prices stayed relatively flat. The relatively elastic supply owed much to the rise of automobile-based living on the urban fringe, which can be seen as either a shift in housing supply or a change in supply elasticity. For example, in an open-city formulation of the Alonso-Muth-Mills model, with supply costs that increase with density, lower transportation costs will increase supply but not change supply elasticity. Yet it is possible that the automobile made supply more elastic as well. On the urban fringe, lower cost, low density housing can be built in massive quantities, essentially using a constant returns-to-scale technology……

      “……..The missing post-war price boom is not a problem for conventional economics, but it does present a challenge to those who seek to explain bubbles as the outcomes of a stable process where readily observable exogenous variables translate into the presence of a bubble. The 1950s had easier credit for homeowners than the 1920s and economic conditions were at least as good. Any model that suggests that there is a stable relationship between either of those variables and price bubbles has difficulties with this epoch……”

  5. Parts of Europe will continue to thrive e.g. Germany, central and northern Europe, helped by planning, immigration and education.

    Issue for most now are declining yet ageing populations, skills shortages and shrinking tax bases (Turkey too is now planning for ageing population, demanding Germany encourages guest workers to return etc.).

    Serbia has 2 million pensioners yet only 1.5 million working in private sector….. too many southern and other Europeans are highly educated university graduates, with no prospects for related employment.