Just a few weeks ago, the outlook for the eurozone was better than it had been at any time since 2011. But political risk had not gone away, says Matthew Lynn. The continent is as unbalanced as it has ever been.
Just a few weeks ago, the outlook for the eurozone was better than it had been at any time since 2011. Political stability seemed to have returned, and investors started buying back in. But political risk had not gone away. It had simply been swept under the carpet for a few months.
The most serious of the ructions is the threatened breakaway of Catalonia from Spain. The heavy-handed response of the Spanish government has only heightened nationalist sentiment and its departure now looks likely over the next few years. For the European Union (EU), that would make Brexit look like a mere overture. Should it allow Catalonia to join and use the euro? What would the European Central Bank do about Spanish banks which are only tenuously solvent at the best of times? There are no easy answers. If it accepts Catalonia, it risks a permanent rift with Madrid. If it takes a hard line, it will take a generation for the newly independent state to forgive Brussels and another region will have splintered away.
Over in Austria, the fiercely euro-sceptic Sebastian Kurz won elections last weekend and is likely to end up governing in coalition with the far-right Freedom Party. Alongside radical tax cuts, Kurz campaigned on a platform of restricting immigration, and standing up to Brussels. He has aligned himself with eastern Europe in refusing to accept migrant quotas, and has said the UK is likely to benefit from Brexit. He will be the first avowedly anti-European prime minister of a major EU country.
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In Poland, the EU is engaged in an increasingly bitter fight with the ruling Law and Justice Party. A conflict over reforms to the judicial system has turned into an escalating power struggle, with the European Commission threatening sanctions. Where that is going to end up is hard to say. The Poles are committed Europeans, and its economy has benefited hugely from inward investment from the western half of the continent. It has far more to lose than the UK ever did. Even so, it shows no signs of submitting meekly to Brussels. Meanwhile, Germany is not the rock of stability it once was. Angela Merkel had a bruising election, and no coalition has yet been formed. While she remains chancellor, she is a weakened figure, and will have less ability to impose solutions on the rest of the continent.
When the eurozone crisis blew up in 2011, it exposed the fault lines in the euro. Huge trade surpluses were built up in a hyper-competitive German economy. There was no way of adjusting for that through the currency, and neither was there an effective mechanism for recycling the money. Germany kept on growing, while much of the rest of the continent was plunged into a depression. Italy has not grown since it joined the euro, and in France industrial production is still below its 2007 level. In the last three years, the European Central Bank has thrown €2.2trn of freshly printed money at the economy. That has papered over the cracks, but not fixed any of the underlying problems. The German surplus keeps growing, and has now reached an unsustainable 8% of GDP. Spain has recovered, but the rest of the periphery remains in trouble.
Merkel and French president Emmanuel Macron might have made a start on fixing that. A eurozone finance minister with powers to raise taxes and spend money across the bloc might have worked. But we will never find out for the simple reason it is not going to be tried. The political momentum has disappeared. So the eurozone will remain as unbalanced as it has ever been. And that means it will remain potentially unstable. The eurozone crisis is back.
Nice work if you can get it
With their clothing lines, beauty collections and millions of social-media fans, the Kardashian-Jenners can make money without lifting a finger. According to an online calculator by UK fashion brand Missy Empire, Kylie Jenner, 20, earns an estimated $18m a year, which means she could earn the equivalent of the UK average annual salary (£28,200) in only 18 hours. Kim Kardashian rakes in the same amount in just six hours 30 mins. Kim is the highest earner in the family, pulling in about $51m per year. The bulk of the money comes from her apps, including her mobile game, Kim Kardashian: Hollywood, which has brought in a reported $100m since its launch in 2014. Kourtney Kardashian brings in just over $10m per year.
Who's getting what
The chief executive of HSBC, Stuart Gulliver, could walk away with almost £50m in cash and shares when he leaves the bank in February. This includes an expected £5m pay package for 2017, a £21m share pot he has built up during more than three decades at the bank, as well as £24m in bonus stock that will vest in coming years.
Footballer Lionel Messi has reportedly been offered a record bonus of around £80m to extend his tenure with FC Barcelona, on top of his base salary of £500,000 per week. Last week the Catalan paper L'Ara claimed the club's wage bill as a percentage of overall revenue is now at 84%, up to £430m.
Satya Nadella, the chief executive of Microsoft, raked in more than $20m in cash and stock over the company's most recent financial year after delivering strong results. This included a $7m bonus and over $11m worth of Microsoft stock, as well as a base salary of $1.45m. Nadella made $18.29m and $17.69m in total compensation in 2015 and 2016 respectively.
The new vice-chancellor of Cambridge University, Stephen Toope, has said he is not prepared to take a cut to his £365,000 salary. Toope described his pay packet, which is more than double that of Theresa May, as "reasonable, given the scope of the job" and has recommended that colleagues take a similar stand.
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Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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