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The center of the chart compares total intra vs extra EU-28 trade. Members export a good deal more to each other than  they import from each other.  For example, the three well performing non-Eurozone members of Poland, Hungary and Czech Republic are heavily dependent on intra EU trade and to no one’s surprise. Each is heavily dependent on manufacturing trade with the continent’s most industrious economy, Eurozone member Germany. The impact of the expanded March 2015 ECB QE had a clear impact on those three economies. The ECB effort to weaken the Euro relatively strengthened the Polish Zloty and Hungarian Forint as well as others (Sweden for example). Note the difference with EUR/CZK; the Czech National Bank intervenes in FX markets to maintain a floor on the Euro; i.e., to maintain parity vs the Euro. (Building up Euro reserves in the process8).

The Power, Perception, Why the Euro, might, well, outperform, expectations, 2016, Fundamental Analysis, fx trader, forex Grid Comparison Fig.4. Commitment to the Exchange Rate Mechanism (ERM II)

All four central banks noted in the grid on Figure 4 indicate in writing their future commitment to the Exchange Rate Mechanism (ERM II9). The Czech Republic, as noted, maintains a currency intervention ‘floor’ at 27 Koruna per Euro, thus protecting purchasing parity with the Euro. The Hungarian National Bank and Polish National Bank, on the other hand, use a traditional base rate policy regime10, and technically, must wait for the next policy meeting to react.

The lack of a trade weighted parity policy, or any kind of Euro exchange parity policy is a potential fracture point in the European Union. True, ERM II places the burden of maintaining the legacy currency in a ‘central band’ around the Euro, as Denmark has diligently adhered to; however, there are eight non-Eurozone members not yet actively committed11 to ERM II. All eight maintain an intra-EU trade surplus. Weakening the Euro without regard to the non-Eurozone members is tantamount to imposing a tariff on those members; i.e., their exports suddenly cost more in Euros, thus forcing the hand of those non-Eurozone central banks. Shouldn’t maintaining exchange parity for non-Eurozone members be the responsibility of the ECB, particularly in light of these extraordinary measures?

Further, it seems that maintaining exchange parity between Eurozone and non-Eurozone members would be in the interest of the EU. In the realm of EU macroeconomics, it would make for a more perfect union. Just as important is the realm of politics on this issue. An externally imposed policy which negatively affects fellow members and intra-union trade partners creates the perception of unilateral action against the non-Eurozone members! In particular, it gives fuel to populist rhetoric.

The ECB needs the authority to intervene in FX markets within the borders of the EU. If the ECB had the authority to do so last March, it would have been an affirmation of its commitment to those non-Eurozone member nations, thus stabilizing inter-EU trade and perhaps expediting active ERM II participation. So, to be sure, the European Union does have its faults. Unfortunately, there is no statistical ‘problem ranking’ among the advanced economies.

Problems are not quantifiable; they can’t be metricized. However, neither can they be ignored. Which begs the question, is the EU the only region with ‘problems’?

It’s proper to give credit where credit is due: What China’s government has accomplished in the past decade seems to rank among its greatest accomplishments over its entire 3000 year history. The industrialized PRC has created wealth, perhaps 213 billionaires, and millions of citizens have gone from essentially subsistence agriculture to wage earning employment and discretionary spending. Foreign capital investments and partnerships have decreased product costs, globally, for consumers. However, outsourcing manufacturing to China has actually slowed growth in many advanced economy nations and slowed global growth, collectively.

Unfortunately, the short sighted perception that China could possibly maintain a 14% – 15% average annualized growth rate, ad infinitum, may have been popular, but clearly delusional and may have contributed to the secular stagnation currently being experienced by the major advanced economies. Most likely, a restructured Chinese economy will have far more sustainable growth and return some outsourced manufacturing to those stagnant advanced economies in the process.

Japan is mired in a classic liquidity trap, frustrating both government and BOJ planners. The Asia-Pacific is Japan’s main trading region. Not to mention that 18% of exports totaling £89.933 ($133.100) billion and 21% of imports totaling £110 ($162.80) billion are with China. It seems that Japan’s recovery is very dependent on the regional economy. The Yen may have reached a point at which BOJ actions mean little. In particular, it may take a complete restructuring of Japan’s economy as well as a global recovery to lift the Yen.

New technologies have led to an extreme over production of petroleum. In spite of the price collapse, production continues full throttle literally pushing global storage facility capacity to its limits12. Some of the continued production may be political, some simple hard-nosed business tactics. The point is that oil production will remain high and prices will remain low for at least for the upcoming year. On one hand, this is weakening the petroleum producing cartels; on the other this will leave more discretionary capital in the pockets of petroleum importing nations.

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