December 14, 2022 - 10:00am
Back in October, the Telegraph reported that the eurozone was at “risk of financial meltdown”. According to experts, the European Central Bank could soon have “no choice but to follow the Bank of England and step in to prevent market disaster.”
Except that, while the British meltdown was bad enough to topple Liz Truss, there’s been no equivalent upheaval on the continent. And for that, we should all breathe a sigh of relief.
The last thing we need right now is another eurozone crisis. The first one was bad enough — and taught us there are no quick fixes when it comes to something as fiendishly complicated as the European single currency. Unlike recent events in the UK, ending the first eurozone crisis required a lot more more than a swift change of prime ministers.
Despite the multiple impacts of Covid, the cost-of-living crisis and Putin’s invasion, the eurozone is currently holding it together. Unlike 10 years ago, we haven’t seen the interest rates on public debt diverge uncontrollably between Germany and the so-called “peripheral” member states like Italy and Spain.
However, there is another indicator worth keeping a wary eye on. It concerns TARGET2 — which can be thought of as a running tab between the central banks of each eurozone member state. If there is a net flow of euros from country A to country B, then that would be recorded by TARGET2 as a negative balance for A and a positive balance for B.
Normally one would expect these balances to shift back and forth with the free movement of goods, services, people and capital. Except that’s not the way things have worked out. The imbalances between eurozone nations have become permanent and they’re growing year-by-year.
You can see the long-term trend in the chart above from Osnabrück University. Countries like Italy are going deeper and deeper into negative territory — while other nations accumulate ever-larger positive balances. Germany alone now has a positive balance of more than a trillion euros.
It is sometimes claimed that this isn’t real debt, just an accounting quirk of the system. But this is wrong. Money is quite literally a promise by a central bank to pay the bearer on demand. Money circulating in a national economy has to be backed up by assets held by a country’s central bank, otherwise the bank would be insolvent.
Therefore there can’t be a net flow of euros from, say, Italy to Germany unless the German central bank acquires a balancing claim on Italian assets. This is what TARGET2 is actually keeping tabs on. It’s a special kind of debt, but still a debt.
The big question for the eurozone is how long can this great divide — between creditor and debtor nations — keep growing? Anyone who says forever is fooling themselves.
Peter Franklin is Associate Editor of UnHerd. He was previously a policy advisor and speechwriter on environmental and social issues.
peterfranklin_
Join the discussion
Join like minded readers that support our journalism by becoming a paid subscriber
To join the discussion in the comments, become a paid subscriber.
Join like minded readers that support our journalism, read unlimited articles and enjoy other subscriber-only benefits.
SubscribeI’m sure Donald Trump has a plan where this shock-and-awe tariff war ends in something good. But everybody, said boxer Mike Tyson, has a plan until they get punched in the face. We’ll see what happens now that the stock market has landed a haymaker right on Donald Trump’s fake-tanned face.
I think Donald Trump’s plan will fail. The global economy is a complex system, and its dynamics are inherently nonlinear and chaotic. That means that whenever you do something, you cannot confidently predict what the result will be. It doesn’t take much to go from a simple system to a complex system. In physics, just going from two bodies—like planets, moons and stars—to three bodies takes it from a simple system to a complex one.
The global economy is not only complex, but it is adaptive. In complex adaptive systems, outcomes are shaped by the interactions and adaptations of countless agents—individuals, businesses, governments, and so on. These agents have diverse goals and behaviors, and most importantly, they constantly respond to changes in their environment. This makes the system as a whole highly dynamic, non-linear, and often unpredictable.
That’s why economics, as a field, doesn’t have laws or equations in the same way that physics does where physical systems can be reduced to their essentials. Instead, economics operates more on principles or tendencies—patterns and models that often hold true but can vary depending on the context. This variability arises precisely because the economy is a complex adaptive system.
What works in one context might not work in another, which is why economic “laws” like supply and demand are more like guesses. or at best general guidelines with exceptions. Equations and models in economics are unreliable simplifications of complexity, and they can never be relied on as true of the real world.
So what should the US government do if it wants to improve its national economy, say with tariffs? The first thing is to recognize that tariffs like these can ripple through the global economy in unpredictable ways, precisely because it’s a complex adaptive system. In such systems, the reactions of countries, companies, and consumers to changes often leading to emergent behaviors that are hard to foresee.
For example, these tariffs might aim to protect domestic industries, but they could trigger retaliatory measures from other nations, disrupt supply chains, or even shift global trade patterns. Over time, as the system adapts, companies might relocate production, consumers might change buying habits, and new trade alliances could form. But the outcomes are rarely linear or straightforward, and they cannot be predicted.
So what to do, when even small policy changes can cascade into unpredicted and unexpected large-scale economic shifts? In a complex adaptive system change works best from the bottom up, not the top down. Let people make free choices, experimenting to see what happens but letting failure be an option. Some will fail, and others can learn from that, as long as failure is a survivable option. To do something completely untested in a complex system, and to bet the farm on it, is so risky as to be foolish.
By allowing individuals and organizations to experiment and make their own choices, the system evolves organically. These decentralized decisions often lead to innovation, resilience, and emergent solutions that top-down approaches overlook or stifle. Failure in such systems isn’t catastrophic—it’s a learning opportunity that fuels adaptation and growth.
Betting everything on untested, sweeping changes imposed from above can destabilize the system. It risks unintended consequences, particularly in a complex, interconnected environment like the global economy. Small-scale, incremental changes that arise from local experimentation often produce results more sustainable and aligned with what is possible in the real world instead of just in theory.
That means that free markets and free trade should be the basic principle in the global economy. Free market economies have always outperformed planned economies, and they always will. In dealing with a complex adaptive system you can never know what the outcome of any change, any experiment, will be, so most experiments will fail. We need to act accordingly.
As a businessman used to dealing with the real world, and with plenty of failures under his belt, Donald Trump knows these principles. But with this shock-and-awe move, he has bet our farm on a hugely risky top-down restructuring of global trade. I am not optimistic.
How dare you write a reasonable comment on this site, besides most of his wealth was inherited and he almost blew it more than once , blowing up the country is a whole different matter.
USA trade imbalances should be addressed. What would you suggest be done?
I don’t have as much a problem with what was done as I do with how it was done. Shock and awe tariffs imposed with no reasoning behind them and no time to prepare? No one knowing what they have to do to comply with Donald Trump’s demands?
That leads to no confidence and turmoil. Lose trust and we all suffer. There’s no reason why Donald Trump could not have been upfront about what he wanted and given other countries a chance to respond.
The baseline 10% tarris will endure. Countries such as the UK will just have to adapt. The reciprocal tariffs (the 30% +tarrifs) will decrease via negotiation in most cases. I suspect, however, that the tarrifs levied on the EU and China will stay in place for some time as Trump won’t show any mercy on that front. Globalisation has runs it’s course.
One issue that I have not seen addressed (though Trump did mention it briefly in his Liberation Day speech) is the problem of re-industrialising a country with low birth rates. Sure, automation and robotics can reduce the labour demands to some extent but you will still need a lot of workers to build all the cars and washing machines and lawn mowers etc that your consumers buy. Do these potential American workers exist or do they have to be imported? If so, does re-industrialisation require another round of mass immigration? If so, won’t these immigrants push up housing costs, healthcare costs etc. And if mass immigration is resisted, then will labour costs spiral out of control as more and more employers chase a diminishing pool of labour?
If you rely on a globalised system, then production moves to countries that have the labour available. And ideally, those countries become wealthy enough that their best and brightest can be employed at home rather than trying to migrate to richer countries.
I would have thought for rich countries a policy of specialisation and focusing your limited labour force on sectors where you have the greatest competitive advantage would make sense. Obviously you lose some level of security (and perhaps there are some strategic sectors where retaining non-competitive industries makes sense).
Trump has chosen Main Street, at least the manufacturing sector, over Wall Street, and Wall Street doesn’t like it.
I don’t think he’s done it out of any heartfelt affinity for the American working classes, but strategically American needs to build up its manufacturing base. They’re having terrible problems building ships while the Chinese are churning out hundreds. If it really goes south with the PRC, being able to print dollars to buy actual stuff, which is on the face of it a simply amazing deal (and why Americans get to have so much stuff), won’t help you if the people who make the stuff won’t sell, or are actively using it against you.
Yes. As part of the 3 arrow strategy, the tariff impact reduces relative to the building of new manufacturing plants in the US. Some big players are also putting spades in the ground … the skill will be in pulling the levers synchronously and having the courage to hold your national nerve.
Having listened to Scott Bessant several times I believe there is a cogent plan here. I simply wish that our politicians had the cahonies and smarts to lead, pursuing our own national interest.
“Everybody has a plan until they get punched in the face.”
Like the US, the U.K. has hollowed itself out – factories and workers – on the altar of globalisation over the last 70+ years. Net Zero will kill what is left.
So much for Donald Trump the Anglophile, although cultural Anglophilia has never necessarily translated into pro-British politics in the American elite, of which a second term President is indisputably a member. File alongside the supposedly close intelligence relationship, no British participant in which heard a whisper of the impending Trump Tariff on this country. And even including the United States, is there any State other than Israel that we would allow to treat our MPs as Abtisam Mohamed and Yuan Yang had been treated?
Thoughts and prayers are with the once-New Right that dominates the Conservative Party and defines Reform UK, and with the Old and New Labour Rights alike, which are now as good as the entirety of the Labour Party, as will be shown once and for all by the Commons Divisions on the cuts to sickness and disability benefits.
In stark contrast to what was once the Old Right, which now barely exists anywhere, and to what was quite recently the Labour Left, which remains highly active everywhere except Parliament and the Labour Party, all three of those tendencies are Atlanticist and Zionist supporters of globalisation as first principles. In any other terms, the world simply cannot make any sense to them. Therefore, they now need to get out of the way. Mohamed and Yang were travelling under the auspices of the Council for the Advancement of Arab-British Understanding, which was once a pillar of High Torydom. That world is long gone. But the one that replaced it is also rapidly on the way out.
There was a time perhaps when ‘Anglophilia’ was a thing. There was much to admire in British, mostly English culture – a set of behaviors, an outlook on the world, a sense of civility, etc. However, one wonders how much of that is left today – re: a wokeism that seeks to downgrade historical British achievements & milestones, an Oxford University that has abandoned the ‘Classics’ major! Pakistani rape gangs, knifings & crime, uncontrolled immigration, a London with fewer and fewer ‘real English’ living there, a royal family that continually degrades itself. It’s all quite tragic. So can Anglophilia still exist today for a country that seemingly has given up on itself?
Even Englishmen (like me) are rapidly losing our own Anglophilia. We urgently need a leader with certain contentious characteristics.
Trade is beneficial because it enables a country to get goods it either cannot produce or are cheaper because they are made with cheaper labour. This is favourable if the country depends on that supply or has a better use for its own labour making higher value goods. Whilst a balance in trade helps ensure a stable currency it only needs to be an overall balance, in total goods and services, traded with all of its trading partners. It is counter productive to seek a balance with every country.
There is no such thing as totally free trade. The book that Trump waved at his audience is the 2025 National Trade Estimate Report on FOREIGN TRADE BARRIERS. Produced annually it is 397 of pages of detailed analysis of the trading practises of every country. It does not make any proposals, that I can see, in favour of the tariffs that were announced.
His hour long address followed the usual pattern and in it Trump described the proposed tariffs as specific to the trading problem with each country. This not how they were actually calculated. The tariffs announced penalised each country entirely on its individual trade balance with the US. It did not address why there was an imbalance and it did not appear to take account of trade in services. Poor countries got hammered because they have cheap labour and cannot afford American goods. That could have been beneficial to the US in freeing up labour to make goods that other countries can afford. Everybody got at least a 10% tariff, even if they bought more than they sold. The tariffs were imposed with immediate effect which is likely to lead to serious bottlenecks in processing them and certainly long before the US can build a supply of its own. The most likely retaliation is countries holding the US hostage on goods it needs because it either cannot produce them at all or it has a long lead time to such production. China on rare earths for example.
It seems clear that whoever chose the method of calculating the tariffs and the timetable for implemnting did not serve the best interests of the US or Trump. Did they do it naively or knowingly?
Knowingly I suspect. We will have to wait and see what happens to non-tariff trade barriers over the next 12 months. It’s also worth considering what non-trade foreign policy objectives get achieved during negotiations. The “success or failure” of this shock will be measurable by the amount of re-shoring of manufacturing jobs over the next few years – a core pre-election policy promise.
It may well prove to be in the interest of rust-belt town inhabitants – at the expense of the higher earners in secure jobs.. These are the Trump/Vance constituents.
Democracy in action.
He’s banking on the fact that these international and domestic groups that oppose him so much are a performative alliance. They don’t really like each other despite all the solidarity virtue signaling.
If true than they will eventually break down and pursue their own self-interest. Its a game of chicken.
I’m sure the wizard has it all figured out, everyone else is a moron, it’s truly awesome
How about you pay your defense bills in something other than maple syrup, ey.
Donald Trump’s Liberation Day was last Wednesday, April 2, not last Thursday.
April 1st would have been more apt
Mate, if the Republicans took the legs out from under Trump like that, they would most certainly NOT be making him into a perfect conservative president, they’d turn him into a lame duck.
Free trade WAS a conservative mantra 40 years ago, and all the way up until it wasn’t. Libertarianism and conservativism often overlap massively in America in today’s zeitgeist, but free trade isn’t a good fit for that overlap. It’s hard to conserve anything when the core fundamentals of a nation’s independence are being shipped abroad to the lowest bidder.
Democrats have already indicated that they are willing to do exactly that. If you observe their behavior regarding 80/20 issues like men in women’s sports or paying for male prisoners to transition to get into women’s prisons, you can see it right now. They are totally willing to attract contempt from the middle of their party by leaving the room en masse or voting as a block for policies they know lost the election last time.
I like the idea of the Democrats as political Thornbirds.