The ECB’s Financial Suttee

The European Commission is failing. 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.

Following the recent change in the Commission’s leadership, the political dysfunction in Brussels is a new challenge for the ECB. It is already juggling with overindebted member states, a global rise in bond yields, a rotten settlement system and commercial banks both over-leveraged and with mounting pandemic-related bad debts.

It really is a horror show in the making.

Gray High Rise Buildings
Image Source: Pexels

Introduction

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.”

Then last week, the story changed: the ECB vowed that: “Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year”.[i]

What had happened is that bond yields had started to rise, threatening to bankrupt the whole Eurozone network if the trend continued. That network is like a basket of rotten apples. It is the consequence not just of a flawed system, but of policies introduced to rescue Spain from soaring bond yields in 2012. 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”.

It was. The threat of intervention was enough to drive Spanish bond yields down and is probably behind the complacent thinking in the 3 March statement. But as the other bookend to Draghi’s promise to deploy bond purchasing programmes, Lagarde’s promised intervention is of necessity far larger. And there is the market problem, encapsulated in the saying, “fool me once, shame on you; fool me twice shame on me”. Does the ECB really think it is above this logic?

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. The first president of the ECB, Wim Duisenberg, resigned halfway during his term to make way for Jean-Claude Trichet, who was a French statist from the École Nationale d’Administration and a career civil servant. His was a political appointment, promoted by the French on a mixture of nationalism and a determination to neutralize the sound money advocates in Germany.

From the outset, the ECB pursued inflationist policies. 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.[ii] Unlike the independent Bundesbank, the ECB is intensely political, masquerading as an independent institution. But there is now no question that its primary purpose is to ensure Eurozone governments’ profligate spending is always financed, “whatever it takes”. 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. Fool us once…

Business and money is beginning to leave

Traditionally, big business has loved big government. Not only is it a source of funds and preferences but it is an opportunity to lobby for regulations to the disadvantage of smaller competitors. In short, Brussels is the center of European crony capitalism, which is why big business was set against Brexit. The CBI, representing big British industrial interests, lobbied hard to remain.

But since Brexit, the EU has advertised its own insecurity by waging a trade war against British imports, tying them up in needless bureaucracy. At the same time, the successful fast-tracking of the Oxford vaccine and its rapid deployment in the UK along with the Pfizer equivalent, compares with the abject failure of the Commission to roll them out across its member states, leading to a panicked reaction. On 27 January, officials raided AstraZeneca’s facility in Brussels, following production problems which had reduced the amount of its yet to be approved supply to the EU.

The message sent to all big businesses was clear. Investing in EU production facilities had become less attractive due to the implied threat to property rights. The Brussels lobbying game fundamentally changed for both European and international corporations. At the same time, the Commission attempted to move financial market clearing services out of London. The threat to freedom of capital flows in the future became obvious to financial entities. According to HSBC, capital outflows reached €500bn in the fourth quarter of last year, representing an annualized pace of 20% of GDP, with half of it in December alone.[iii]

It is said that when you are in a hole you should stop digging. Not a bit of it: only yesterday, the Commission’s President threatened to invoke Article 122, allowing the EU to seize AstraZeneca’s factories and ban vaccine exports to the UK. There could hardly be a clearer threat to property rights for any multinational with offices and production facilities in Europe. Not only has the EU become a no-go for future industrial investment, but portfolio outflows seem sure to continue and accelerate further. And not only is the socializing Commission a failing organization, but its downfall is becoming increasingly obvious for its member states to see.

The socialist ideal is coming unstuck

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Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information ...

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