Europe is not recovering like markets had hoped in 2013, and there’s little mystery as to why. The peripheral PIIGs are debt-ridden and core countries like France are severely under-performing. Charles Gave has an interesting take on the continent, stemming from his statement that “Germans might as well load much of their auto exports headed to eurozone countries on to a boat and sink it outside of Hamburg.”

Charles Gave

The reasoning behind that statement may seem preposterous, but it bears out in a macroeconomic analysis. According to Gave, Germany is selling Audis to Eurozone countries in exchange for IOUs. Those IOUs are based on very little economic recovery in countries like Greece. The end game, according to Gave, is that actors will stop accepting the IOUs at face value, and the whole experiment ends.

Eurozone debt troubles

The Eurozone is running on debt from the IMF and the core countries. An analysis from Natixis published earlier in September showed that industry is falling off in Europe, and almost all of the recovery is taking place in the New Core, Germany, Austria, the Netherlands, and Belgium.

Gave reiterates this point in his report, but he concentrates on Germany. Capital is more productive in Germany than it is in France. All else remaining equal, investors will invest in the German economy over the French. A second report from Natixis showed that the French economy is likely to suffer from its poor return on capital for the next decade, and it might grind France to a halt under a ton of debt.

Austerity is bound to fail

Austerity in European countries that are suffering under debt is bound to fail according to Gave. The private sector is de-leveraging in most of Europe, because the interest rate is above the growth rate. There is a negative return on capital across the board. The governments are increasing their investment to fill-in for the private sector by using transfer payments and other tools.

This is, according to the report, destined to result in unbalanced budgets well outside the criteria set up under European law, and well outside sustainable borrowing levels. The eventual undermining of the credit of the entirety of Europe and its currency is what the market is expecting, unless some exogenous factor saves the continent.