Fasten your seatbelts, Europe!

“Fasten your seatbelts, Europe!”
The world’s most prosperous continent is on the verge of deteriorating. Europe must prepare itself for an economic setback. There are several events coming up that could eventually lead to a new financial crisis in Europe, which will be discussed in this opinion piece. 

According to recent data, the euro area is currently growing at the lowest annual rate it has been in the last four years. Since the European Union got out of the Eurozone crisis, Europe’s real gross domestic product annual growth rate saw an upward trend. The bloc grew 1.6% in 2014, 2.1% in 2015 and 2.7% in 2017. In 2018, however, it dropped to an annual rate of just 1.2%. (Klein, 2018)
From this it can be concluded that Europe is in trouble. The following events will be the last push that will lead Europe towards a financial crisis.

The first event is the approaching end of the Asset Purchase Programme (APP). A few months ago, on 13 December, 2018, the European Central Bank decided to end the APP. (Mauldin, 2019)
Through this programme, private and public assets were purchased in order to reduce the risks of a long period full of low inflation. (ECB, 2019)
Since 2015, the ECB bought 2.6 trillion euros of debt, mainly government debt, across the euro zone, in order to avoid periods of recession.
The APP has been described as the backbone of the economies of the euro countries. The programme helped many Eurozone countries recover from the financial crisis which began in 2008. With the money the banks received for selling their government bonds to the ECB they could give out more loans to businesses which stimulated business activity. This eventually led to economic growth.

Mario Draghi, president of the ECB, has been carrying out his plan of cancelling the APP for a while now. At the start of 2018, the purchasing programme was cut in half, called quantitative easing, and then again in October. The current situation is that in 2019, the purchasing rate will arrive at zero. 

Timing couldn’t be worse, since Europe will now lose an institution on which it has become very dependent in the past years. The abolition of the APP is dangerous, since economic growth in Europe is clearly not stable. One of the main causes is the collapse of the industrial production throughout the Eurozone. This is very alarming as this industry has been the driving force behind many major European economies. With the abolition of the APP, the ECB will not be there anymore with a programme to financially stimulate the Eurozone economies. Europe is left to manage it economy on its own, something it clearly is not ready for yet, which could easily lead to an economic disaster.

Then there is Italy, where the economic situation, including the countries debt, is getting worse day by day. In 2018, Italy was startled by the populist government’s heavy spending plans, which triggered the European Union and boosted bond yields, due to concerns about the Italian budget.

Italian banks own government bonds of their country’s debt. When bond yields go up, bond prices go down and thus their value decreases as well. This results in a deterioration of their capital. The government bonds of Unicredit, Italy’s biggest national bank, have dropped in value to 12 euros, while a few months ago they were worth 18 euros. In an effort to safeguard their money, banks become more reluctant to grant loans. This results in companies having to pay higher interests or not obtaining credit in the first place, suffocating the economy. Economic growth will be slowed down, people will spend less money and unemployment will rise.
As a result, fewer people will pay taxes and the financial situation of the government will become even worse.

Since banks in Frankfurt, Paris and Madrid are currently holding more than 425 billion euros of sovereign and private debt, Italy’s debt is in hand of banks spread throughout Europe. (Giovanni Salzano, 2019)
This is a very risky situation, since Italy is Europe’s third largest economy and their economy accounts for 11% of Europe’s GDP, which is 10 times that of Greece. From this we can  conclude that, when Italy’s economy will collapse, so will all banks in the Eurozone. (Ewing, 2018)

Ten years after the financial crisis in 2008, Europe is still trying to get back on phase. However, it looks like another crisis is on its way. The crisis might set off in Italy, since their debt could eventually lead to the breakdown of whole Europe. 
Due to the abolition of the ECB’s Asset Purchase Programme, there is no longer a programme that can be used to stimulate Europe’s economy. How the Eurozone will perform in 2019 remains a question but one thing is for sure, there is a big possibility it could eventually result in a financial crisis. It looks like Europe is in for a period full of turbulence!

References

ECB. (2019). ECB. Retrieved from Asset purchase programmes: https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html

Ewing, J. (2018, October 12). Why Italy Could Be the Epicenter of the Next Financial Crisis. Retrieved from NY Times: https://www.nytimes.com/2018/10/12/business/italy-debt-crisis-eu-brussels.html

Furness, V. (2018, November 20). Reuters. Retrieved from Italy’s bond yields rise as budget tensions weigh: https://www.reuters.com/article/us-eurozone-bonds/italys-bond-yields-rise-as-budget-tensions-weigh-idUSKCN1NP1QH

Giovanni Salzano, D. P. (2019, January 4).Why Italy’s Debts Are Europe’s Big Problem. Retrieved from Bloomberg: https://www.bloomberg.com/graphics/2019-italian-banks/

Klein, M. C. (2018, December 28). Get Ready for Europe’s Next Crisis. Retrieved from Barron’s: https://www.barrons.com/articles/europe-economic-crisis-is-coming-51545951011

Martin, W. (2019, January 15). Business Insider. Retrieved from We now have conclusive proof that Europe is in an economic slump, and that two of its biggest economies are careering towards recession: https://www.businessinsider.nl/germany-and-italy-recessions-as-european-economy-slumps-2019-1/

Mauldin, J. (2019, January 4). These 3 Events Will Create A Perfect Storm For Europe In Early 2019. Retrieved from Forbes: https://www.forbes.com/sites/johnmauldin/2019/01/04/these-3-events-will-create-a-perfect-storm-for-europe-in-early-2019/#6224f8fc4069