Euro Area


Money Supply Growth Accelerates, Credit to Private Sector Still in Decline

While money supply growth is slowing down in the US, it has recently continued to accelerate somewhat in the euro area. The effects of the ECB’s “QE”-type debt monetization activities in the form of covered bond and ABS purchases have not yet impacted aggregate money supply data much as of yet, but the 12-month growth rate of the narrow money supply aggregate M1 (currency and demand deposits, essentially equivalent to money TMS-1) has nevertheless continued to increase:




1-M1, euro area,annThe 12-month growth rate of the euro area’s money supply supply has recently accelerated from an interim low of 5% to approx. 6.5% – click to enlarge.


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The Press Takes Notice of a Small Problem

We have previously discussed the plans announced by EU commission president JC Juncker to “rescue” the euro area economy by means of € 300 billion of state-directed spending (see Juncker’s Solution for details). Now the mainstream press is also beginning to wonder where the money for this ambitious spending plan is supposed to be coming from.

A report by Reuters contains a few points worth commenting on:


“New European Commission President Jean-Claude Juncker is preparing a 300 billion euro ($375 billion) investment plan he will present as a cornerstone of efforts to revive an ailing economy. But history suggests the program risks becoming an exercise in financial engineering rather than a conduit for the new money the region needs to help boost output and create jobs.

A flagship project of the new European Union executive, the investment scheme is due to be unveiled before Christmas. It is still being finalized and few details have been made public. If all the money it promises is raised and spent, it could provide the 28-nation EU with roughly an additional 0.7 percent of GDP in investment per year over three years.

“It is significant,” said Carsten Brzeski, economist at ING bank in Frankfurt. “You would expect some kind of a multiplier effect from investment on jobs and purchasing power and it would increase the growth potential. The downside is that public investment can take years before it gets started.”

But even more than “when?”, the big question hanging over the plan is “how much?”. The 300 billion euros is an overall target for both the public and private money that the Commission hopes to mobilize. The Commission itself does not have any money and is funded through annual EU budgets that must be balanced. Of the region’s 28 governments, only Germany seems to have public finances strong enough to significantly increase investment. But in its drive to have a balanced budget, Berlin is not keen to spend more.

So the Commission plans to use what little public money is available to lure bigger private funds into projects that would otherwise seem too risky or with too low a rate of return.

“Our aim is to ‘crowd in’ private money for big infrastructure projects in the energy sector, transport, broadband or research and development. The private sector cannot take all the risks,” Commission Vice President Jyrki Katainen told Reuters.


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The Tax Loophole “Scandal”

It seems that for once, Mr. Juncker actually did something right: during his time as the prime minister of Luxembourg, he allowed, to paraphrase Mises, “capitalism to breathe”, by making it possible for companies to save on their tax bills. These tax loopholes (which the establishment press propaganda refers to as “tax avoidance”, or even worse, “tax evasion” schemes, even though they are perfectly legal) are a subject that plays into the hands of statists like few other. Only protectionism may be a fallacy that enjoys even greater populist appeal.

It should be perfectly clear that consumers can only benefit when companies manage to escape the avarice of governments to some extent. But envy is a powerful political motivator, and the fact that the average citizen as a rule cannot arrange his affairs to enjoy the same tax advantages is cunningly employed by etatistes to create a populist outcry over the “unfairness” of it all.

Let’s be serious though. The average citizen, resp. consumer cannot expect any advantages whatsoever from an increase in corporate taxation. What it will mean to the average citizen is only this: the prices consumers pay will rise, fewer jobs will be created, and the returns of pension funds (which invest in the shares of these companies) will decline. There will be zero offsetting benefits from the fact that the State will enlarge its loot. On the contrary, that enlargement will only benefit political cronies and will lead to even greater waste of scarce capital.

Surely no-one seriously believes that everybody else’s taxes would be lowered if these tax loopholes were closed? There’s not even a sliver of a chance of that happening. One would have to be quite naïve to actually believe that. And yet, judging from the reader comment sections of articles about these loopholes in the mainstream press, there is a hue and cry as if these companies were snatching the milk from the mouths of hungry babies.


juncker_2140199bWe dislike almost everything about JC Juncker – except the stuff he is now attacked for.

(Photo via DPA)


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Arrogance Waiting for Comeuppance

Bloomberg informs us that there is a “Yellen Message to Europeans Divided on QE: Do Whatever It Takes”. The belief that central bank bureaucrats can “rescue” the economy by printing more money evidently remains as firmly ingrained as ever. As Paul Singer, the head of Elliott Management, remarked on this in a recent letter to investors (note that Mr. Singer has an excellent track record as an investor spanning four decades):


“Central bank manipulation of prices and risk taking has become the norm over the last six years, because it is so hard for investors to see the downside. QE and ZIRP have been ‘free,’ as far as most people are concerned, in terms of stability, asset price and economic growth, and economic recovery. ‘Free’ in this context means devoid of future countervailing negative consequences. Unfortunately, this particular magic bullet is illusory — the negative consequences are only in their early stages of unveiling…

“Central bankers do not understand that it was their tinkering, manipulation, bailouts and false confidence that encouraged and enabled the insanity that led to the fragility and collapse. Partially as a result of that misunderstanding, the developed world has doubled down on the same policies, feeding the central bankers’ supreme self-confidence. Political leaders have been content to stand aside and watch the central bankers do their seemingly magical and magnificent work.

The believers in the wisdom of this central-banker-centric economic world have been crowing and gloating that those (like us) who have raised concerns about the risks posed by the post-crisis, monetary-dominated policy mix (inflation, distortions, growing inequality, lower growth) are just ‘wrong’ and should apologize for a ‘massive error.’ This, shall we say, ‘Krugmanization’ of a substantial portion of the economics profession and punditocracy is in its triumphalist phase, and whether its smug non-stop ‘victory lap’ ultimately represents an embarrassing high-water mark is for subsequent events to reveal.”


(emphasis added)


paul singerPaul Singer of Elliott Management – his warnings will of course be ignored.

(Screenshot by FOCUS Online/Wochit)


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Anne-Elisabeth Moutet on France’s Sclerosis

French “refugee” Anne-Elisabeth Moutet – one of the many French citizens who have fled the economic paralysis of France for the welcoming shores of Albion and made London the sixth-largest French city in the process – has written another very interesting article on the situation in France. She compares the current environment in France to that in Britain in the late 1970s. The main difference is of course that no equivalent to Margaret Thatcher who could pull the cart out of the mud is in sight anywhere. Instead, France has Marine Le Pen waiting in the wings, whose mercantilist, statist economic philosophy is mainly characterized by being just as bad as the socialism of Francois “Welfare State Incarnate” Hollande.

Hollande, who as we previously noted, has nothing to lose anymore given his record low 13% approval rating, has recently replaced the catastrophic crypto-Marxist “economy minister” Arnaud Montebourg with his polar opposite Emmanuel Macron (for details on this, see: “Reform in France – Mission Impossible?”). The latter apparently at least appears to know a thing or two about the laws of economics. He is also not afraid to voice uncomfortable truths in this context, to the chagrin of France’s left, which is howling with righteous indignation. As Ms. Moutet writes:


“France’s new economy minister, 36-year-old Emmanuel Macron, who has been tasked with tackling long-delayed reforms to reverse the country’s decline, is having a hard time. Every statement of his, it seems, provokes a storm of abuse from the politicians to the public.

Mr Macron, a former investment banker who was given his cabinet job less than two months ago, almost immediately suggested that the 35-hour working week – introduced by the Socialist government in 2000 with the aim of reducing unemployment by “sharing” the available work – could be done away with. He was roundly insulted.

Shortly afterward, he mentioned that 20 per cent of a Breton pork abattoir workforce, laid off because of a plant closure, would find it difficult to get new jobs because they were illiterate and couldn’t, for instance, pass a driver’s license exam, barring them from a number of available jobs. The reactions were so venomous that he was nearly punched in the face on the floor of the House by an MP from his own party, Olivier Dussopt. “You’ve grievously insulted my mother! She’s a laborer, she’s got no degree, she’s been laid off twice already!” Mr Macron had to issue a lengthy public apology.

Mr Macron favors workfare over the current long-term benefits handed out to France’s 3.5 million unemployed and suggested in a recent interview that recipients had “duties” as well as “rights”. Cue more outrage, with L’Humanité, the Communist daily, howling that he was hand in hand with the employers’ federation to “guilt” the jobless.

Mr Macron seems to specialize in straight-talking: in identifying core problems of the French economy and naming them. This is making him one of the most unpopular people in France, because saying blunt truths is seen here as an unforgivable act of aggression.

“The banker Macron? We don’t know him, he’s never said or done anything that was remotely of the Left,” the maverick Socialist defector, Jean-Luc Mélenchon, said in a radio interview. “He’s not one of us,” a columnist in the left-leaning Le Nouvel Observateur thundered. “He’s not just from any bank: he’s from Rothschild’s.”


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A Little Bit of Zwangswirtschaft Won’t Hurt

The EU commissariat in Brussels seems largely a tax-payer funded sinecure for political has-beens from EU member countries. We suspect it represents a kind of extra-expensive pensioning off of people who could, were they to remain in their countries of origin, still do significant damage there.

This wouldn’t be a big problem if they were really out of everybody’s hair as a result, sadly that is not the case though. One of the new EU commissars appears to be feeling an urge that he “must do something”. This automatically means that economic liberty and the wallets of consumers and tax payers are in grave danger, so it would be a lot better if the good man had remained idea-less.

We are referring to the EU’s new digital commissar, Mr. Günther Oettinger. We honestly have no idea where they have found this guy. He has some residual entertainment value on the occasions when he decides to rape the English language, but other than that, he seems to be genuinely dangerous.

According to a recent report in the Austrian press, “EU Commissar Oettinger wants to restrict people from changing internet providers”.


“EU Digital Commissioner Günther Oettinger wants to restrict the way in which customers can change their Internet provider. In an interview with the Stuttgarter Zeitung he said that the profitability of the investments of providers in network expansion will thereby be increased.

“I’m not talking about monopolies lasting forever, but for several years, during which you one will have planning security as an investor. Similar exemptions also exist for energy networks,” said Oettinger. Providers often shy away from investments because customers might switch to another provider. Companies that meet the requirements with respect to yardsticks such as data security, speed and capacity are to receive EU funding.


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EU Disharmony on the Upswing

The bureaucracy in Brussels finds itself more and more often in rows with prominent European politicians. This decline in political harmony is actually fairly typical for a period of secular economic decline. It is indirect confirmation that said decline is far from over.

It can be observed throughout history that common projects involving large disparate communities tend to splinter when economic boom times are giving way to sizable busts. As people tend to become more and more exclusionary in hard times, entire empires can break apart. Large, diverse groups and their common undertakings increasingly lose support, as it is “every man for himself”.

This is a socionomic observation, which can be confirmed empirically. There are both advantages and disadvantages to this kind of development. Among the worst potential disadvantages is a rising probability of all sorts of war, from trade wars to “cold wars” and ultimately “hot” wars.

Nowadays, a few noteworthy potential advantages must be considered as well. For instance, the trend to introduce economically extremely damaging “anti climate change” legislation should be expected to be on the retreat in future. Since climate change is a non-problem that is barely influenced by human conduct, the costly fight against it is apt to produce sizable setbacks in terms of economic progress, while producing zero net benefit for society at large. This is not to say that no-one is benefiting of course. Sufficient closeness to government’s climate gravy train ensures quite sizable benefits for a number of people – alas, to the detriment of everybody else.

Similarly, the perverted modern-day idea of the EU, the goal of which seems to be to create a socialistic super-state is likely to be challenged more and more often. Note that the EU’s founders were actually mainly concerned with bringing back the liberal Europe of pre-war times, restoring free trade and free movement of capital and people, combined with strong subsidiarity. They had no interest in creating a kind of “USSR light” (for more details on this see “The European Idea”).


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Spain’s Electorate Movies Sharply to the Left

Prime minister Rajoy has only himself and his own party to blame. Spain’s electorate may well have agreed to some extent with the necessity of austerity measures, but the ruling party has been involved in way too many scandals. Rajoy and his closest political allies have all been tainted by these scandals, as they have done their level best to cover them up. The slush fund scandal was especially egregious (for details on this particular event, see our previous article “The Fish Rots from the Head). Recently yet another major scandal has emerged, and as the FT reports, Spain’s voters now see political corruption as one of the country’s biggest problems.

Recent political polls reveal that Spain is now experiencing a political shift that is every bit as dramatic as the one that has occurred in Greece. According to a recent survey published by El Pais, the new far-left party Podemos (which means “we can”), which received 8% of the vote in the recent European parliament elections, would get the majority of votes if a general election were held in Spain today. The next general election is scheduled for December 2015.


Spain PollA recent survey of Spanish voters by El Pais: Podemos has 27.7% support, the Socialist Party 26.2% and prime minister Rajoy’s conservative People’s Party has slipped into third place with only 20.7% – down from 44.6% in 2011. This is quite a meltdown. Chart by: El Pais


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Non-Confirmations Still Persist

The S&P 500 has recently made a new high, in short the rebound from the mid October low has not failed at a lower high. Therefore, the clock has so to speak been reset. However, as our updated comparison chart between SPX and the major euro-land indexes shows, there is now a third divergence in place between them, and this one is even more glaring than the first two. Keep in mind that there such divergences have not always been meaningful in the past. However, when global markets are drifting apart, it is a sign that the global economy is no longer well-synchronized. Given that the Fed’s “QE inf.” is in relative pause mode (we hesitate to say it has ended), the situation is certainly worth keeping an eye on.


1-Euroland vs. SPXA third divergence between the SPX and the major continental European stock markets is now in place – click to enlarge.


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Italian Bankers are Not Amused

Italy’s banks were among the hardest hit by the ECB’s “comprehensive assessment” and the associated demands to increase their capital. The protests of Italian banks which were even echoed by the Bank of Italy (i.e., Italy’s national central bank) are widely seen as a lending the stress tests legitimacy.

For instance, the FT reports:




“Analysts and investors have taken the howls of protest from Italian central bank officials on Sunday as evidence that the European Central Bank’s health check on the continent’s banking system is sufficiently tough.

Complaints from Rome about the outcome of the ECB’s comprehensive assessment have demonstrated how Italy has emerged as the biggest loser from the process, which was designed to restore confidence in the EU’s financial system.”


“The debate over whether the European banks have lots of holes in their balance sheets is over,” said Davide Serra, founder of hedge fund Algebris. “Banks didn’t know if they had enough capital to lend until now and this will change that.”

“We now know that we can have a 5 per cent contraction in the eurozone economy and the banks will still have more than 8 per cent capital – that is very positive for the sector,” he said.


Alas, as this Bloomberg video shows, the debate is far from “over” – not least as numerous banks just sort of scraped by.

In fact, there are other reasons to doubt the toughness of the stress test. We already discussed the large amount of legacy NPLs in the European banking system yesterday, which implies that if a severe downturn were to occur in the near future, this amount would skyrocket to an even more astronomical level.

Moreover, a post stress test aggregate capital shortfall of a mere € 24 billion is just not very believable considering all the other data, especially in light of the fact that the great bulk of this shortfall is concentrated in the tiny countries of Cyprus and Greece.


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Bribing a Voting Bloc Out of Existence …

In the EU parliament, forming a voting bloc requires that parties from seven different countries come together in a coalition. Whether one has such a bloc or not is actually quite important, both in terms of funding and in terms of influence. Earlier this month, socialist EU commissioner Martin Schulz tried to sabotage the bloc formed by euro-skeptic UKIP and Italy’s 5-Star movement by allegedly bribing a lone member of a Latvian party (the Latvian Farmer’s Union) by offering here a post (presumably a well-remunerated one).

Readers may remember that in spite of their huge electoral success, UKIP initially found it difficult to form a coalition, as Mr. Farage refused to get into bed with the far right French Front National. Nevertheless, the supporters of the socialist EU-superstate are quite disturbed by the successes of EU-skeptic parties like UKIP and 5-Star, so the allegations may well have merit. Mr. Farage has become a bit of a celebrity on the internet. His speeches in the EU parliament regularly gather far more views on You-tube than any delivered by establishment apparatchiks like Mr. Schulz. How can one not like someone who dishes out speeches like this one?


Farage’s famous “Who are you Mr. President” speech in 2010, where he notes en passant that Herman van Rompuy had “the charisma of a damp rag”.


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25 Banks Failed, Sort of …

We noted on the eve of the publication of the ECB’s “comprehensive assessment” of European banks (here is the ECB’s complete report, pdf) that the central bank’s review would likely be more stringent than the EBA’s stress tests during the euro area crisis, because the central bank will become their supervisor.

However, it would also not be too harsh in its assessments, as it probably wants to avoid unnerving the markets. Apparently, this is precisely what happened. For instance, the WSJ informs us that “ECB Says Most Banks Are Healthy”. 25 banks failed the test technically, but only 13 of them actually need to come up with additional capital. A similar feelgood article appeared at Reuters, entitled ECB fails 25 banks in health check but problems largely solved”.

The WSJ writes:


“Hoping to quell years of anxiety about Europe’s financial health, regulators said Sunday that all but 13 of the continent’s leading banks have enough capital to ride out another economic storm.

The European Central Bank and the European Banking Authority announced the results of a nearly yearlong effort to assess the finances of 150 banks, identifying 13 that still need to come up with a total of €9.5 billion ($12 billion) in extra capital. Overall, 25 banks technically failed the so-called stress tests, facing a cumulative shortfall of €24.6 billion. But most have already taken steps to solve their problems since the end of 2013, the cutoff date for the exercise.

To pass the tests, banks had to show that they had ample capital to survive a crisis that would cause Europe’s economy to fall 7% below current forecasts and the unemployment rate to rise to 13%.

The exams are part of an effort to reassure investors and the public that, following years of destabilizing banking meltdowns and long after the U.S. defused its financial crisis, Europe’s lenders are back on solid footing. Restoring that confidence is a top priority, because the continent’s sluggish economy needs healthy banks to provide loans to households and businesses.

For the ECB, Sunday’s results are the final milestone before it takes over supervision of major eurozone banks on Nov. 4. Turning the ECB into the currency union’s bank watchdog is a key step to setting up a so-called eurozone banking union. The hope is that moving control over important banks out of national hands will prevent the kind of banking crises that rocked Ireland, Spain and Cyprus in recent years.

Investors and analysts mostly applauded the tests, saying they appeared to be much more rigorous than previous years’ versions. But some expressed disappointment that European Union supervisors didn’t take the opportunity to get more banks to thicken their capital cushions.

Philippe Bodereau, global head of financial research at Pimco, said the regulators’ strictures were a step in the right direction. But “I would have preferred they be a bit tougher and force more [banks] to raise capital,” he said.


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ECB’s Comprehensive Bank Assessment Finalized

A considerable level of apprehension was noticeable in the financial press in recent days, as the ECB just finished its “stress tests” and its comprehensive assessment of 130 systemically important banks in the euro are. This time, the stress tests are a bit more interesting than previous exercises of this sort were.

Contrary to the white-wash attempts that characterized the laughable stress tests performed during the euro area’s sovereign debt crisis by the EBA (European Banking Authority), the ECB is forced to walk a slightly finer line. The reason is that it will become the regulator of these 130 large banks and will therefore be held responsible if anything goes wrong. On the other hand, the ECB is also eager to avoid a panicky market reaction to the results, and will therefore presumably try not to be too harsh in its assessments. In fact, looking at press reports, it certainly appears as though the criteria have been watered down quite a bit. Some observers argue that the ECB is far too beholden to political and market expectations to make its assessment credible (see also further below).

To this it should be noted that no fractionally reserved bank can be regarded as truly solvent, for the simple reason that such banks cannot actually fulfill their payment obligations to holders of overnight deposits. It works only as long as only a small percentage of depositors attempt to withdraw the money that they have been promised to receive “on demand”. Under normal conditions, this doesn’t pose a big problem, as banks continually receive new deposits and most deposit money tends to stay inside the system. Up to a point, a bank threatened by a run on its deposits can also rely on the lender of last resort (i.e., the central bank) to supply it with liquidity by discounting its securities.

Since money is nowadays a mere token signifying nothing, there is also no limit on its production. The ECB seems quite confident with regard to this aspect of the banking system, as its minimum reserve requirement for demand deposits stands at a mere 1%. In theory, the European banking system could multiply every deposit a hundred-fold by creating additional fiduciary media on the back its existing deposit base. In practice, this is highly unlikely to happen, but it shows that it is nowadays not seen as necessary anymore to even pretend that deposits are sufficiently “backed” with standard money (in the fiat money system, standard money = currency and bank reserves with the central bank).

The banks themselves have already received the results of the ECB’s assessment yesterday, but they will only be made public on Sunday – apparently the intention is to avoid roiling the markets. European bank stocks have recently tested an important short term technical support level and rebounded from there over the past few days:


1-Euro-Stoxx Banks, STEuro-stoxx Bank Index, daily – click to enlarge.


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Will They Ever Learn?

Europe’s economies are once again on the verge of a downturn, which in the euro area may as well mean “another crisis”. The establishment has lost the confidence of the voting public some time ago. The leader of France’s statist brain trust, Francois Hollande, enjoys the lowest approval rating of a French president ever, at 13%. If an election were held tomorrow, Marine Le Pen of the Front National would probably win it.

In that sense, Jean-Claude “we lie when occasion demands it” Juncker, the new EU commission president is not entirely wrong when he states that:


“Citizens are losing faith,” he said in remarks to an assembly to which many new Euroskeptic members were elected in May. “Extremists on the left and right are nipping at our heels. “We are last-chance Europe. Let’s seize this chance.”


So what does the grandiose plan to rescue Europe consist of? Simple: let’s throw money at the problem:


“Designated European Commission President Jean-Claude Juncker called on Tuesday for a 300 billion euro ($409 billion) public-private investment programme to revive the European economy, create jobs for the young and stimulate growth over the next three years.

The money should be mobilised from existing budget resources, the European Investment Bank and the private sector, without changing the bloc’s strict rules on budget deficits and debt reduction, he told the European Parliament during a debate on his confirmation to head the EU’s executive.

“We need a reindustrialization of Europe,” the former Luxembourg prime minister said, promising a work program in February 2015 for investments in energy, transport and broadband networks and industry clusters.”


(emphasis added)



(Cartoon via


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Nothing to Lose …

Europe’s all-too-predictable relapse into recession is gathering force, threatening not only the pipe dream of economic and political unity, but eroding grandiose illusions that have helped prop up the world’s financial house of cards. The unwillingness of France in particular to play by the EU’s — i.e.,  Germany’s — rules appears to have doomed the EU dream.

The idea of a border-less Europe bound by a common currency and a shared desire to forever banish war from the Continent was a lofty one, but it was mired from the start in deeply rooted political animosities, grass-roots skepticism and bureaucratic overreach. Now these problems, along with a great many others, have turned the EU project into a Tower of Babel. A million pages of meticulously codified EU rules might as well have been written in cuneiform, so inscrutable and arcane have they become.

And useless as well. France’s prolonged economic death rattle has been made possible by running annual deficits larger by half than the 3% “allowed” by Brussels. And now, channeling  de Gaulle for what could turn out to be France’s last hurrah, the French have flouted Merckel’s authority, and common sense itself, by proposing to remedy the problem by hiring more government workers and expanding tax breaks.

Portugal, Greece, Spain and the other deadbeat rabble have been cheering them on, and why not? They think they have nothing to lose — that Germany is the only country with any skin in the game. Their folly is about to be laid bare, however, unless Germany gives in and allows Europe’s Central Bank to monetize the collective debts of Europe Fed-style.


france-government-debt-to-gdpFrance’s public debt to GDP ratio. Flaunting Maastricht since forever and a day – click to enlarge..


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