The best seat in the opera house – but what is the performance that is about to be staged?


Boaz Shoshan kindly invited me to write for Capital & Conflict for the few days that he is away from his keyboard.

Boaz sensibly chooses to work in places that are cultured, scenic and/or historic.

I have one additional criterion: a climate that is conducive to growing wine – and that is a part of the reason why I’m based here in Vienna.

As it happens, my colleague Nickolai Hubble over at Fortune & Freedom is today providing a link to a video entitled “Socialism Sucks”.

That’s not a title that would play well here in the City of Music…

A quick glance at Red Vienna

About 100 years after it was known as Rote Wien (1919-1934), Vienna is a place where 24% of the housing stock consists of apartments that owned by the City: communally owned apartments account for another 14%.

And that’s not all.

The most famous (and the longest) apartment block that the City owns is called Karl Marx Hof – and it’s less than a kilometre from where I am working right now.

You can take trams and buses from Karl Marx Hof and quite a few other places to Friedrich Engels Platz in the 20th District.

While you’re doing that, watch out for the eagle that appears on the Austrian state flag and coat of arms and see what it’s holding in its claws: a hammer and a sickle.

So, Vienna is different to Edinburgh, Buenos Aires, Tokyo, Wolverhampton and all the other places where you can find the editors of Southbank Investment Research.

A big show – and it’s not an opera…

Of all these cities, Vienna could well be the best one from which to observe a very dramatic performance that could begin shortly.

I’m not talking about watching a performance of Rigoletto at the Wiener Staatsoper, or of Die Fledermaus at the Volksoper Wien, from a seat in the front row of the dress circle.

I’m talking about something that’s much bigger than opera.

The performance in this metaphor is the potential break-up of the euro area.

Specifically, that means the decision by the government of one (or more) of the euro area countries to stop using the euro and to reintroduce its pre-euro currency (or a new version of that currency).

This is something that Nick Hubble looks at in detail in his book How the Euro Dies.

You can hear what Nick has got to say in an interview with Nigel Farage that Southbank Investment Research recorded recently.

The break-up of the euro area is something that another colleague, John Butler, has revisited in three consecutive editions of Fortune & Freedom this week.

The author of The Golden Revolution, John is an expert in financial history…

… and he understands the practice as well as the theory: he has been a fintech CEO, a hedge fund CIO and a managing director at Deutsche Bank and Lehman Brothers.

The story of the problem, how it might be solved and what opportunities could appear is not a simple one.

However, in John’s hands, it is a clearly told one and a very good read (which you can find here, here and here).

Mind-numbing numbers…

As John explains, there are several key numbers to keep an eye on.

Some of these are mind-numbingly large.

For instance, there are TARGET2 balances.

TARGET2 is an acronym for “Trans-European Automated Real-time Gross Settlement Express Transfer System”.

In plain English, this mouthful means how much each of the national central banks within the euro area owe to each other.

The TARGET2 balances are held with the European Central Bank (ECB).

The balances can be positive (if the national central bank is a net creditor) or negative (if it is a net debtor).

The balances themselves and movements in the balances point to problems within the euro area.

There has basically been huge capital flight from various countries with structural economic problems to Germany and Luxembourg.

From the end of 2013 to 30 April this year, the balance of Germany’s Bundesbank rose from +€510.2bn to +€1,024.7bn: for the Banque centrale du Luxembourg, the corresponding figures were +€103.7bn and +€299.7bn.

At the other extreme, the balance of the Banca d’Italia went from -€229.1bn to -€480.7bn, while that of the Banco de España moved from -€213.7bn to -€498.7bn.

To put these numbers into some kind of context, bear in mind what are the sizes of the (stagnant) Italian and Spanish economies.

According to the International Monetary Fund (IMF), the annual GDP of Italy was €1,613bn in 2013 and should be €1,729bn this year (i.e. 2021): for Spain, the numbers are €1,020bn and €1,200bn.

Moreover, the TARGET2 numbers do not include government debt.

The IMF reckons that, as percentage of GDP, Italy’s general government debt has risen from 119% of GDP to 144% from 2013 to 2021.

In Spain, the debt/GDP ratio has risen from 81% to 105%: the figures are similar to this in France.

Towards the final scene

In short, the problems of the euro area can persist without a crisis as long as: the ECB is willing remain the buyer of first and last resort for government bonds; and Germany’s government is prepared to allow a continuing rise in the Bundesbank’s claims on other central banks.

Here in Austria, the numbers are much smaller and much less frightening.

That is why being in Vienna is much more like being in the dress circle – observing the performance – rather than being on stage and actually being the centre of it.

In an opera such as Rigoletto or Die Fledermaus the audience always knows in advance how the story will end.

In the euro area break-up, there are several scenarios for the final scene, as John explains in yesterday’s edition of Fortune & Freedom.

With best regards,

Andrew Hutchings
Managing Editor, Southbank Investment Research

PS If you had asked the people running Red Vienna in the 1920s about a Revolutionary Trend, they might well have assumed that you were talking about the ideas of Karl Marx and Friedrich Engels. In the 2020s, Southbank Investment Research’s Revolutionary Trend Investor sees the opportunities from special purpose acquisition companies (SPACs), cryptocurrencies and much more.

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