Outside the Box


Outside the Box was retired on April 25, 2018, to make way for the new and improved premium research service, Over My Shoulder.

If you’re interested in joining John Mauldin, Patrick Watson, and the thousands of Over My Shoulder subscribers as they analyse important research several times a week, please click here to find out how you can subscribe for less than $10 per month.

World Money Analyst Update on Europe

February 27, 2014

For the last two weeks on Thursdays we have brought you special editions of Outside the Box featuring World Money Analyst Managing Editor Kevin Brekke’s interviews with WMA contributing editors. We heard from Ankur Shah on emerging markets and Alexei Medved on Russia, and this week we wrap up the series with a frank, hard-hitting interview with Dirk Steinhoff, who covers the European and Scandinavian markets for WMA.

Kevin and Dirk are both based in Switzerland, and so they lead off with a discussion of the recent Swiss referendum on immigration. Dirk’s interpretation of the vote, which imposes quotas on the number of foreigners allowed to enter the country, is that it has implications for the entire European Union:

[T]he Swiss people basically decided that they want to control immigration themselves and do not want to give up this control to the centralized administration in Brussels. I think that this is a clear signal to the Swiss government that the Swiss people don’t want to give up more sovereignty and that they would like to see more decentralization in the future.

Which leads Kevin and Dirk to take up the broader issues of the unresolved Eurozone debt crisis, unemployment mess, and the fate of the euro. With EU parliamentary elections coming up in May, there is change in the air! OK, let’s turn it over to Kevin and Dirk for the details.

John Mauldin, Editor
Outside the Box

Get John Mauldin's Over My Shoulder

"Must See" Research Directly from John Mauldin to You

Be the best-informed person in the room
with your very own risk-free trial of Over My Shoulder.
Join John Mauldin's private readers’ circle, today.

World Money Analyst Update on Europe

World Money Analyst: With me today is Dirk Steinhoff. Dirk is a contributing editor at World Money Analyst and covers the European and Scandinavian markets. Great to have you with us.

Dirk Steinhoff: Thank you very much for having me.

WMA: Seeing that you're in Zurich and I'm in Fribourg, let's start with a look at developments in our own backyard. The Swiss are known for their system of direct democracy via use of the referendum. The recent success of a referendum that will restrict immigration into Switzerland made global headlines. What’s your position on the immigration issue and the consequences of this vote?

Dirk: First of all, I should mention that I was born and raised in Berlin and moved with my family to Switzerland in 2007. One of the main reasons why I decided to leave Germany and come to Switzerland, next to the great Swiss landscape, was the strongly centralized development of the European Union, which reminds me painfully of the political system in the former DDR [communist East Germany].

European politicians live a life that is completely detached from those that don’t belong to this elitist political class. Their decisions are based on distorted experience and lobbyist influence and not on real life experience and independent judgment. The strong, centralized power of Brussels, in combination with the desire to regulate everything in life, increasingly limits personal freedom, limits the development of entrepreneurship (and therefore the creation of non-government-related workplaces), and eliminates local, regional, and national characteristics.

The state is much less dominant in Switzerland, mainly due to its federalist and decentralized political system, which limits the power of the federal government. Due to my own background and my own moral conviction, I personally believe that every human being should be able to live and work wherever he or she wants, as long as they are self-reliant, willing to integrate, and do not become a burden to the community they recently entered.

My interpretation of the referendum is that the Swiss people basically decided that they want to control immigration themselves and do not want to give up this control to the centralized administration in Brussels. I think that this is a clear signal to the Swiss government that the Swiss people don’t want to give up more sovereignty and that they would like to see more decentralization in the future.

It also interesting to note that most of the media in Europe (even Swiss media) were shocked by the outcome of the vote. In sharp contrast, other polls in various European countries actually show that most citizens would have voted similarly to the Swiss, and some by an even higher margin than the outcome of the Swiss vote. I think that in the long run more and more of the European people will ask for the Swiss model of democracy to be implemented in their home countries.

Although the rhetoric used by politicians in Europe might change to the negative in the short term, I do not think that the referendum will have a long-term negative effect on the relations between Switzerland and Brussels. I believe that Brussels has to come to terms with our form of democracy and has to respect our sovereignty, even if they might disagree with some of our decisions.

WMA: The immigration debate is not unique to Switzerland, of course, and is a divisive issue across Europe. This seems to be part of a trend where we've seen a rise in popularity of nationalist and anti-euro parties? What's your view?

Dirk: You are right. The severe criticism of Switzerland because of the outcome of the referendum has eclipsed the fact that many European countries face the same issue. People are not only unhappy with the immigration politics within the EU, they are becoming more EU skeptical in general.

The political parties critical of the European Union – like the UK independence party in Great Britain, the Finns Party (formerly the True Finns) in Finland, the Lega Nord in Italy, the FPÖ in Austria, the AfD in Germany, the French Front Nationale, the Golden Dawn in Greece, and the Party of Freedom in the Netherlands – are gaining popularity. Of course, the reasons for and the scope of their EU criticism vary a lot. 

I think this trend can be summed up as follows: the people want to have a voice and be able to decide their own fate! Pretty much everybody in the EU is unhappy about one issue or another. The Southern European countries are unable to cope with the austerity measures, and on the other hand you have a large part of the German population that is simply unwilling to continue financing the complete EU.  I believe this trend will gain momentum, and it will bring some surprises in the elections to the European Parliament in May 2014.

Europe has so many different cultures that centralization just doesn’t work, because there isn’t a one-size-fits-all answer to most issues. The euro is a perfect example of this!

WMA: That's an important point on the euro. With the continued rise of anti-euro sentiment, what is your outlook for the currency? Will the euro survive?

Dirk: I don’t know. There are different scenarios that I can imagine for the euro: strong countries leaving the Eurozone, unwilling to pay for a bottomless pit of EU debt; weak countries leaving the Eurozone in order to be able to devalue their currencies and regain competiveness; or a split into a strong northern euro and a weaker southern euro. Or some combination of these. As you can see, there are many possibilities, and what we will see depends on economic and political developments in European countries over the next several years. In my view, something will happen and we won’t have the same euro in five years time that we have today.

WMA: The adoption of the common currency has limited how individual countries can respond to fiscal stresses. News about the euro debt crisis has been very quiet lately. What is the situation?

Dirk: As you say, there has hardly been any news recently regarding the troubles in the EU, which does not mean that the problems are solved. They are still bubbling under the surface. With the current papering-over and continuation of indebtedness, the need to address the problems, with their inherent negative consequences for most people, has been postponed. Because of that, most of the harsh protest has faded and turned away from the streets and is canalized into the euro-skeptic political parties. And when there have been noteworthy protests, such as last November in French Brittany, media coverage was excluded.

What has changed in the last year? Absolutely nothing fundamentally! So the euro crisis will at some point reappear with all its inevitable consequences.

WMA: You mention France, so let's continue down that path. The small and mid-sized Eurozone countries – Spain, Portugal, Italy, and Greece – are essentially bankrupt as measured by GDP and in receivership by Brussels. Today, there is growing speculation that France, too, is headed for trouble soon. What do you think?

Dirk: I totally agree! They have too much debt, a radical socialist government, and absurd, business-unfriendly regulation. I have several friends who are business owners in France, and they are all contemplating leaving the country and moving their businesses abroad.  The quantity of regulation they have to comply with simply cannot be handled by a normal business, and the labor laws are so strict that no business owner in their right mind wants to take on the risk of employing someone.

Taking into consideration the unhealthy debt levels they have, the unsustainable social programs they offer, and the complete lack of any growth impulses, I have to believe that the French are indeed headed for trouble soon. And, as the second largest economy in the EU, France matters. If France stumbles, the EU is at risk.

WMA: Drawing on your comments about strict labor laws, the unemployment numbers in many EU countries are mind-boggling. You discussed this situation in your recent article for World Money Analyst. Can you talk about this for a minute?

Dirk: As we have seen since 2008, the trillions in newly created fiat money have mainly fueled asset bubbles. However, the real economy has not profited from it, because this money has not been lent to private industry. We are still facing 30% lower money velocity than before 2008 and that means that more than 30% of credit in circulation has disappeared. This is also why the real economy is still going down the drain.

Most jobs have been created within the government or government-related entities; and as we all know, these jobs are paid for by the taxpayers and are not a source of production. Therefore, I personally believe the situation in the labor market will further deteriorate, especially among the young generation, below 25; they are going to suffer the most. The current youth unemployment rates in Spain and Italy are just shocking: 58% and 42%, respectively. We are losing a whole generation, and we cannot predict how drastically the damage we are doing to them will play out in the future.

WMA: High and sustained rates of joblessness can lead to frustration and anger by the unemployed that turns to civil unrest and protests. We've seen riots in several EU countries, including France, Greece, and Bosnia. Is that also a real danger for the stronger European countries?

Dirk: Yes, this is a real danger. As soon as the deterioration of people's personal economic situations reaches a certain level they will be on the streets, and that includes the streets of the stronger countries. At the moment, most people still believe that all the debt and all the rescue programs come for free.

WMA: What does this all mean for the outlook for European stocks and bonds?

Dirk: That you have to watch closely what the European Central Bank and governments do. It’s a tricky situation – you don’t want to miss any upside rallies in equities and bonds induced by loose monetary policies. Yet, on the other hand you know the party could end at any time. Risk management is essential.  The day of reckoning can be postponed by governments and central banks much further – as we know from the US and Japan – than common sense would allow for.

WMA: In your opinion, what European countries have the best economic outlook?

Dirk: The countries that have been strong in the past, with competitive industries and with sound current-account and budget balances. Countries like Germany, Austria, Denmark, Sweden, and Norway. And Switzerland. 

WMA: As you mentioned above, in May 2014 there will be the EU Parliament election. Will that change anything?

Dirk: The potential increase of parliamentarians that are critical of Europe I mentioned before could intensify tensions within the EU and complicate the functioning of the EU system. But I don’t expect a quick change.

WMA: We must talk about the un-loved Swiss franc. Since Switzerland began intervention in the currency markets to halt the rise of the franc against the euro, the mainstream consensus has it that the franc is doomed. But the performance of the franc against other currencies, in particular the US dollar, has been very strong. What's your take on the Swiss franc going forward?

Dirk: It’s hard to say. In a euro crisis I would expect the Swiss National Bank [the central bank] to remove the floor to the euro. In such a situation the power of the SNB to keep the floor would be simply too small, I think. There are also attempts in Switzerland to once again constitutionally back the Swiss franc by gold. We’ll have to see. The Swiss franc, to me, still belongs to the upper class of paper currencies.

WMA: Do you have any last thoughts for our readers?

Dirk: Globally, we have entered a time when substantial corrections of past misadventures are likely to occur. It’s not the end of the world, but it's worth being prepared.

WMA: I really appreciate your insights on the European markets. Thank you for taking the time to speak with us today.

Dirk: The pleasure was mine.

Discuss This


We welcome your comments. Please comply with our Community Rules.


David Oldham

March 1, 2014, 4:17 p.m.

Difficult to write about any one facet of the European monster in so few words. I find it a little frustrating that Mauldin Economics has not see fit to employ someone like Nigel Farage to contribute articles on a regular basis. After all the EU represents the mother of all next crises and one such as (brave) Nigel Farage knows the workings of that crazy power hungry corrupt euopean parliament in Brusells intimately.

There are many folk who need educating about the May elections, the downside of free migration (the subject of this OTB), 101 other important issues which I can say folk in the UK typically have little if any real understanding. Btw, the issue of EU migration is extremely topical in the UK and has nothing to do with racism I hasten to add. Other northern european countries likewise.

Sometimes it seems as if Schauble is the only voice worth listening to coming out of the EU, all others repeating the same ole nonsense like dumb parrots. It’s like if they repeat it often enough they will convince themselves. The EU lacks leadership now, shame that Merkel has been weakened.

There are many things that the people never voted for when the union was set up and in subsequenyt treaties. Farage or someone like him would enjoy exposing the scandals and educate in the process.

Bahman Jalali

Feb. 28, 2014, 12:33 p.m.

Dirk Steinhoff seems to believe the Suisse decision, to limit the movement of labor, is a good decision both for EU in general and for the Euro zone in particular. This makes me wonder what the Europeans were thinking when they voted for the union. Wasn’t the original idea, behind the European Union, to create something similar to the United States of America? And how can you achieve this without the free movement of labor and capital? Every country in EU need not be like Germany or Switzerland. Just as every state in USA is not like California and Massachusetts. Perhaps countries like Greece and Portugal, in EU, will eventually become like Florida and West Virginia in USA. A place to take a vacation. A place with orange groves and Disney Worlds to play and relax. People will move to where they can work. People will invest their capital where they believe it will produce. Freedom of movement for capital and labor will eventually create an acceptable equilibrium.  If decisions, like the one made by the Suisse, to limit freedom of movement become more widespread, it makes me wonder what were these people thinking when they voted for the union?