After eight years of negative interest rates and an average annual GDP growth of 1.3%, the European trade bloc is firmly on course of a recession induced by a virulent inflation.

Negative interest rates are part of a history of monetary policy blunders in response to Germany’s resolve “to teach a lesson” to Southern spendthrifts by imposing deep government spending cuts on sinking economies.

That was mean, un-European and, above all, very bad economics.

Undeterred, Germany sued the European Central Bank at the country’s highest court, followed by the same complaint submitted to the European Court of Justice.

After losing both cases, Berlin’s political credibility was shattered.

But it seems that all that just kindled Berlin’s ire. Germany set out to devastate Greece – a lynchpin of NATO alliance with military installations controlling the Mediterranean, north Africa and Middle East -- by throwing Athens out of the monetary union.

Tim Geithner, the former Secretary of the U.S. Treasury, told President Obama he was “horrified” when he heard of that plan by its German architect. Luckily, the French smartly outmaneuvered the Germans to keep Greece in the euro area.

A “union” riven by irreconcilable, centuries’ old enmities

That, however, was not the end of the dispute. The Greek parliamentary commission presented Germany with an unsettled €289 billion war reparation claim. As expected, that was promptly dismissed by Berlin – although the parliament’s lower house (the “Bundestag”) found in 2019 that the Greek claim “had legal weight.” For Greece, the issue “remains open until our demands are met … demands are valid and active, and they will be asserted by any means."

Poland now followed suit. Remembering last week the sad 83^rd anniversary of Germany’s unprovoked invasion on September 1, 1939, Warsaw forcefully came forward with a 6.2 trillion zloty (€1.3 trillion euro) war reparation claim against Germany.

All that serves as a reminder that Europe’s old demons are far from dead.

Germany’s former Chancellor Helmut Schmidt was aware of that. Working closely with his French friend, President Valery Giscard d’Estaing, they built the common currency, the backbone of the “neverland” project of the European economic and political union.

But Schmidt, whom the former Chancellor Merkel eulogized as “Referenz” (a go to person), never stopped warning German politicians that the country’s history compelled a very careful and sensitive approach in dealing with European affairs.

That was a wise advice in a closely knit customs union, but Merkel followed a different statecraft by sowing the seeds of the currently unfolding economic crisis.

And here it is: A decade of an extraordinarily loose monetary policy to offset a Berlin-imposed pro-cyclical fiscal restraint brought Germany’s highest inflation (8.8%) since the country was reunited 22 years ago. And, instead of a hot, inflation-driven economy, Germany had a stagnating 0.4% quarterly growth in the year to last June. Those growth dynamics were three times below the E.U.’s 1.1% over the same period.

Killing the E.U.’s large export markets is a fatal mistake

Now, looking at that darkening outlook of Europe’s flagship economy, investors are voting with their feet. Over the last twelve months, the euro lost 15% against the dollar, and the stock index of Germany’s 40 elite companies is down by nearly the same amount.

Those large asset losses will get worse as a result of a deepening recession and corporate profit confiscations to prevent the looming social and political disorders. Having created supply shortages with inept economic policies, the E.U. governments now want to tax away “super-profits” with inflation they created.

That’s the chaos in a trade bloc which accounts for 15% of world economy.

Is there any way out it?

The answer is no. Policy options for a credible economic stimulus don’t exist. The E.U.’s monetary and fiscal policies are facing binding constraints of unbridled inflation and large public debts and deficits.

Exports will also be a drag on economic growth owing to weakening world economies and a confrontational stance of Western democracies against the rest of the world. A universe of arbitrarily labeled “despotic and illiberal democracies” leaves markets inhabited by 85% of global population mired in massive trade limitation measures, reinforced by economic and financial sanctions, extraterritorial judicial procedures and various forms of social unrest fomented by hybrid and proxy wars.

As a result of that, the E.U. trade picture has radically changed: From a €41.1 billion trade surplus in the first half of last year, the EU trade balance swung to a €180.4 billion deficit over the same period of this year.

Killing the E.U. exports is a fatal mistake because domestic growth factors are structurally weak and unstable. Low rates of growth of productivity and labor supply keep the E.U.’s potential and noninflationary economic growth well below 1%. That makes those economies very much inflation prone, because any attempt to apply meaningful measures of fiscal and/or monetary stimulation promptly generates rising prices rather than real output.

The E.U. economy is now being hit from all sides. A sharp monetary tightening is a coup de grâce, with rising trade deficits accelerating an irretrievable tailspin.