The ECB’s Financial Suttee
Its response to Brexit and the pandemic, where it is now threatening emergency powers in order to secure vaccines is a latest throw of the political dice. Even before this development markets were getting the message with capital flight worsening. The only thing that holds the Commission together is the magic money tree that is the ECB.
This week, the ECB took the next step towards its inevitable destruction of itself, its system and its currency. This ending, a sort of financial suttee where it joins the failing EU Commission on it funeral pyre, is plainly inevitable, and will increasingly be seen to be so. On 3 March, Bloomberg reported «European Central Bank policy makers are downplaying concerns over rising bond yields, suggesting they can manage the risk to the euro-area economy with verbal interventions including a pledge to accelerate bond-buying if needed». What had happened is that bond yields had started to rise, threatening to bankrupt the whole Eurozone network if the trend continued.
That was when Mario Draghi, the ECB’s President said he was ready to do whatever it takes to save the euro, adding, «Believe me, it will be enough». The euro started with the promise of being a far more stable currency replacement for national currencies, particularly the Italian lira, the Spanish peseta, the French franc, and the Greek drachma. His was a political appointment, promoted by the French on a mixture of nationalism and a determination to neutralise the sound money advocates in Germany. Unlike the Bundesbank which closely monitored the money supply and paid attention to little else, the ECB adopted a wide range of economic indicators, allowing it to shift its focus from money to employment, confidence polls, long-term interest rates, output measures and others, allowing a fully flexible attitude to money.
Our attention returns to the statement from the ECB this week, because rising bond yields threaten the ability of the ECB to finance in perpetuity increasing government deficits in the PIGS and France.
The socialist ideal is coming unstuck
Financially, it follows from redistribution policies whereby the majority of the Eurozone population is subsidised by savers in the Northern countries, centred on German’s savers. From 2000, Eurozone debt has risen from €5.2 trillion to €12.04 trillion in the third quarter of 2020, representing 97.3% of euro area GDP. In Italy, government expenditure is 60% of GDP, leaving a bare 40% in the private sector to pay the taxes and service the debt. A high proportion of the private sector is insolvent, with non-performing loans hidden in the euro system.
Over the last year, the greatest debt to GDP increases were in Cyprus 22.9%, Italy 17.4%, Greece 17.3%, Spain 16.6% and France 16.5%. And as the pandemic enters its third wave, national finances are still deteriorating. The damage done to the government finances of Greece, Italy, Portugal, Cyprus, Spain, France and Belgium by pandemic shutdowns has been substantial. Free markets can be expected to recover more rapidly with the virus’s passing than those dominated by the state.
Where free markets are supressed and the profit motive despised by the general population, which is the case in socialistic countries such as France and Italy, recovery is likely to be very slow. Forget the mollifying words about economic growth in the future. Along with most of the Eurozone members, France and Italy require accelerating bond sales to balance the books which are deteriorating by the day. They are already deeply ensnared in a debt trap, it being impossible to fund mountainous government debt on such small tax bases.
With the level of interest rate suppression this deal implies, even a moderate correction towards proper market pricing of bond yields threatens a systemic collapse of the whole euro system.
Source: Alasdair Macleod | GoldMoney