The fragmentation continues. Political fragmentation in France, societal fragmentation in the United States, monetary and financial fragmentation in the euro zone with this ongoing bond crisis.
In the United States, the Supreme Court’s decision to give states the right to decide for themselves on their own abortion policy seems to leave the door open to other decisions of the same nature.
In France, the political landscape also seems blocked after the legislative elections of last week, which delivered an extremely fragmented landscape.
At the same time, in the bond market and financial markets, corrections are giving way to an improvement, but all this seems only temporary.
However, it is also on a global scale that this fragmentation must also be observed. The BRICS who have come together on their own and have just completed a summit in virtual form. The BRICS (Brazil, Russia, India, China, South Africa).
This summit usually takes place in Beijing and represents the most visible form of the new structure put in place by China around the Asian Bank for International Investments and all the infrastructure projects, better known as the new Silk Road Initiative. The BRICS therefore held their virtual summit and it was an opportunity at the highest level, at the level of heads of state, to confirm their solidarity with Russia, each with more or less different degrees. But it is all the same a certain solidarity however this summit. But this BRICS summit is not just about these 5 countries. It is also all the countries which have subscribed to the AIIB and which are, directly or indirectly, involved in new silk road projects.
With the new international developments, it seems that this project is now crystallizing much more around emerging countries which continue to strengthen their adherence to this project.
On the other side, there is the G7 which is currently meeting. These two blocks, G7 and BRICS now seem to balance each other out in an explicit way. On the one hand, the BRICS much more inclined to take their destiny firmly in hand and on the other hand the G7, which is currently meeting.
This is therefore the state of the world, in the middle of the year 2022, with alliances and partnerships that are gradually being put in place, along commercial, societal and military lines. NATO will also bring together its 30 members in Madrid from June 28 to 30.
So that’s where we are; on the one hand, the United States is grappling with a societal crisis which does not seem to be over and which does not spare Europe either, since this decision of the Supreme Court of the United States on abortion raises fears of similar developments in other countries. These challenges will not stop there and seem to indicate new lines of fracture and fragmentation unsuspected until now.
The other political fragmentation in France is this internal challenge that President Macron encounters in forming a new government. If it is not resolved, we must not exclude a radical decision which could include the dissolution of this new National Assembly. However, this could only occur after multiple attempts by President Macron to form a government, trying to associate all goodwill as much as possible to form a new government. For the moment, we are not at that point, but it is not excluded, especially after many attempts on the part of President Macron.
And then, for the months to come, we must not ignore the current fragmentation in the financial markets in the euro zone. With the inflationary pressures manifesting themselves from one country to another, we are therefore witnessing a change in the position of the European Central Bank, with a tightening of monetary policy to come. However, there too, tensions are exacerbated within the area itself. To fight inflation, the European Central Bank will of course need to tighten its rates, just as all the other central banks have done, whether in industrialized or emerging countries.
The ECB will therefore have to fight inflation, but at the same time we can clearly see that this decision will come up against the need to remain vigilant to the needs of certain countries in the euro zone and in particular of countries whose debt ratio is extremely high, and who in this context of growth have no interest in seeing rates rise so quickly.
We therefore have for the first time in a very long time a divergence of interest between Germany and the countries of the North on the one hand, and those of the South whose indebtedness is reaching its climax. This tightening of monetary policy could be fatal to them. The European Central Bank is therefore faced with this divergence and this dilemma that is extremely difficult to resolve. This is a new element of this fragmentation which risks dealing a huge blow to the euro zone and to the European Union as a whole.
Moreover, such a divergence and such a crisis, such a rise in interest rate differentials between Germany and the other countries of the European Union, the last time this kind of crisis happened was in 1993. It was just at the time of the reunification of Germany. It was therefore during a period when the euro zone had not yet come into force. This was when the Maastricht Treaty was signed.
We haven’t seen such a rise in interest rate spreads since the early 1990s when Germany reunited, of course we also had 2008. Even if the rate level in absolute value is not as high, we are in a much more critical situation today than in the early 1990s and 2008.
This brings us back to the signing of the Maastricht Treaty.
The Maastricht Treaty, for those of you who were not there, was the decision to set up a monetary and economic union, provided that the member countries met a certain number of criteria in terms of budget deficit and debt ratio, these famous Maastricht criteria decided by François Mitterrand and Helmut Kohl; 3% of GDP for the budget deficit and 60% of GDP for debt ratios.
We are very far from it today since we are now at a debt and budget deficit rate for France which is now double what it was at the beginning of the 90s. The stock of the debt is therefore gigantic and any rise in rates means that debt service cannot be covered by the income generated by sluggish growth. The situation will be even more dramatic if we find ourselves in stagflation. And this observation does not only apply to France. It is also valid for practically half of the Euro zone. The European Central Bank is therefore faced with a lethal fragmentation and an insoluble dilemma.
So that is the state of this fragmentation. It doesn’t show anything really promising.
That’s what I wanted to share with you for the time being,
Let me know if you have questions and I look forward to hearing your thoughts. Feel free to comment.