Tags: European | Union | Different Speeds | Long-Term Investors

European Union at 'Different Speeds' May Thwart Long-Term Investors

European Union at 'Different Speeds' May Thwart Long-Term Investors


By    |   Monday, 06 February 2017 07:17 AM

Gary Cohn, director of President Donald’s Trump National Economic Council, has made a rather interesting statement. “We’ve been told we need deregulation to grow jobs in this country. We are not anti-regulation. We want smart regulation that allows our financial services to be the envy of the world,” he said.  

In simple words, Cohn’s statement means, “In the US, regulation on banks will be reduced.” At the same, in the EU regulation on banks will be increased” and that will be important for investors.

It’s remarkable that when we look at statistics by the Federal Reserve of St. Louis in “Commercial and Industrial Loans, All Commercial Banks,” we see that at the moment total loans stand at $2.099 trillion and the ascending curve of the total amount is close to similar as the one we have seen in the run-up to the crisis from April 2004 to November 2008. The data are, in my opinion, food for thought.

Unsurprisingly, markets reacted positively on Friday with the S&P 500 Financials Index advancing 2 percent. Goldman Sachs rose 4.6 percent and Morgan Stanley reacted similarly with a plus of 5.5 percent, which was the biggest gain since the Trump election.

Besides that, German Chancellor Angela Merkel said European leaders may commit to a union of "different speeds" when they make a major declaration on its future at the next summit in Rome at the end of March, of course without Great Britain. That declaration of Rome should mark the 60th anniversary of the EU and in which they will have to set out the EU’s post-Brexit roadmap.

If you ask me, yes this is important for long-term investors notwithstanding it got very little attention in the media.

Merkel said: “We certainly learned from the history of the last years, that there will be as well a European Union with different speeds (!), that not all will participate every time in all steps of integration (!). I think this may be in the Rome declaration as well.”

Merkel said the idea was to set out a plan for the next ten years of the EU, which has been buffeted by the Eurozone crisis, Brexit, migration, the Ukraine conflict and now faces a new challenge in the form of US President Donald Trump. 

By the way, Belgium, the Netherlands and Luxembourg, a group of the EU's founding members, also issued a statement on Friday backing a two-speed EU.

On March 25, we can expect a EU “Declaration of Rome.” Interestingly, the meeting in Rome will come just after the Dutch will have had their general elections on March 15.

Now, suppose the EU heads of state follow, which is to be expected, Mrs. Merkel idea that we could get a EU that should work at different speeds (!) because there is no other choice, then the legitimate question that arises is how could economies of the same union can perform well, not forgetting they all had their own currencies not so long ago, with a single currency whereby the euro has the same value for everybody?

We don’t know if ECB President Mario Draghi hinted at something like “Changes are in the air”, but anyway in a prepared speech he gave last Thursday, which was before Mrs. Merkel comments, he stated: ““The euro area relied heavily on the notion that the integration process would itself create the incentives for sound policies. Faced with stronger competition through the single market and an inability to devalue, governments would be forced to address long-term structural problems and ensure fiscal sustainability.  That this did not happen was in part because the single market process stalled…”

Finally, German Finance Minister Wolfgang Schauble said in the German daily “Tagesspiegel”: “The euro exchange rate is, strictly speaking, too low for the German economy’s competitive positionWhen Draghi embarked on the expansive monetary policy, I told him he would drive up Germany’s export surplus . . . I promised then not to publicly criticize this policy course. But then I don’t want to be criticized for the consequences of this policy.

Schauble’s comments came after last week Peter Navarro, US President Donald Trump’s top trade adviser, had told the Financial Times that Germany was exploiting the US and its EU partners by using a “grossly undervalued” euro to create a vast trade surplus.

Yes, it looks like there is some change in the air.


Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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German Chancellor Angela Merkel said European leaders may commit to a union of "different speeds" when they make a major declaration on its future at the next summit in Rome at the end of March.
European, Union, Different Speeds, Long-Term Investors
Monday, 06 February 2017 07:17 AM
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