Self-Inflicted Economic Contraction Plagues the European Union

The gap between the higher curve (financial aggregates) and the lower one (physical economy) in Lyndon LaRouche’s “Typical Collapse Function” keeps growing, approaching the day of reckoning which, as the great American economist has forecast, will inevitably occur, either in the form of a chain-reaction collapse or of a hyperinflationary blowup. This is the dynamic underlying the global strategic crisis and the danger of war.

While central banks delude public opinion that inflation is under control, signals from the commodity markets are very different. Commodity prices have been rising for about two months. Gold has gone above $2,300 (up 11% since the beginning of the year), silver has crossed the $26.6 mark (up 12%) and copper the $4.2 mark (up 7%), while WTI quality oil is at $85 the barrel (up 19%).

Remember, the recent big inflation wave was caused by rising commodity prices, which usually hit consumer prices with a 3 to 6 month delay. That commodity price bubble was fed by free central bank liquidity. The so-called opposite, or Quantitative Tightening, was supposed to bring inflation under control through a traditional monetary squeeze, with a combination of higher interest rates and progressive reduction of central bank balance sheets. But a deeper look shows that central banks actually continued to increase liquidity.

At the same time, the contraction of the real economy, especially in Europe, has gained speed, as indicators such as the S&P Purchasing Managers Index (PMI) shows. PMI indicates the physical economic activity level of companies, and is therefore a better indicator of the actual state of the economy than GDP, which is inflated by financial values. A PMI above 50 means expansion; a PMI below 50 means contraction.

The comparison between major EU economies and Russia is ruthless. Germany’s Manufacturing PMI went from 42.5 in February to 41.9 in March. More importantly, it has been below 50 for a year, recovering from 38.8 in July, 2023 to 45.5 last January, but never rising further. In France, the EU’s second largest economy, the Manufacturing PMI has also been below 50 for a year, and after a “peak” of 47.1 in February, dropped to 46.2 in March.

On the other hand, Italy’s PMI has somewhat recovered, going from 44.4 in November to 50.4 in March, which has economists looking for explanations. Among those advanced are lower production costs (123.3 vs. 127.6 for Germany), less “Green” bureaucracy, and more opening up to the Mediterranean, Africa and the Americas. But this is merely hypothesis: The recovery might well be a temporary one, as Italy is a major trade partner of Germany, and a large part of its industry supplies German manufacturers, especially in the automotive branch. Therefore, a crisis in Germany will have inevitable repercussions in Italy.

For comparison: Russia Manufacturing PMI has been consistently above 50 for a year, and was at 55.7 in March. Even if military production has played a role, the same can be said of the three EU countries.