The European Central Bank Has Passed The Point Of No Return

The European Central Bank (ECB) is in a crazy race: by buying back sovereign debt, its balance sheet exceeds 70% of the GDP of the eurozone! This is double that of the Federal Reserve (35.3% of US GDP) or the Bank of England (37.7%), and certainly far behind Japan (129.1%), but the debt is held entirely at the national level, which is not comparable (and the yen does not seek to become a global reserve currency, unlike the euro).

These repurchases are made by creating ex nil money, by a simple game of writing. This deluge of liquidity with no counterpart in the real economy produces bubbles (shares, real estate in particular), crashes, and eventually a bubble on all prices, i.e. inflation, then hyperinflation if things really get out of hand.

Can the ECB stop these purchases and then deflate its balance sheet? One central bank has already tried recently and it ended very badly, it's the Fed: markets (stocks, corporate bonds) have fallen, corporate investment and housing purchases have declined following the rise in long-term interest rates, and the dollar has appreciated, hampering exports.

A market downturn would have less of an impact in Europe since corporate financing is mainly channeled through the banking sector. Business investment and household housing purchases would obviously decline if interest rates rose, while the euro would appreciate. Above all, however, several countries would find themselves in great difficulty if the ECB no longer came to their rescue to buy their treasury bills. In fact, let's recall that the ECB has bought all the "Covid debt", and traditional investors have been fed up with it for a long time! One could speak of a suspension of payments for Italy, France, Greece, Spain... in short Southern Europe, in which France is now clearly part, whereas until now it stood in an intermediate position between the seriousness of the Northern countries and the laxity of the Southern countries (more in appearance and in self-persuasion than in reality, nevertheless).

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