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If the ECB re-sets the old rules after the pandemic, a euro zone crisis will ensue. : Economics


There’s a currency revolution going on right under our noses. With such a seismic rate, the uprising will force the EU to make a choice: either accept that in the future the ECB will continue to finance everything as it is now or will try to go back in time, asserting re-ideology of the Maastricht Treaty on government austerity and deficit.

The second option means the ECB will destroy its currency in a violent, self-inflicted crisis, causing billions of euros to leave Italy, Spain and Greece in a synchronous current account crisis. the biggest the world has ever seen.

Stakes could not be higher; and nobody seems to realize that.

Biden’s bidding package accounts for nearly 10% of US GDP and that’s just upfront. The implication is that there will be more. To understand what’s happening in Europe, we need America. The new Biden administration is starting to look like a 21st-century version of the FDR government of the 1930s. Franklin D Roosevelt took the United States off the gold standard and significantly expanded public welfare and investment. This sets off a series of events aimed at deeply reducing the income inequality of the United States, which soared in the tumultuous twenties.

Biden’s team announced a $ 1.9 trillion package through a combination of “check in the post” for the poor and middle income last week, plus a commitment to expanding social spending. The President calls the initiative a “down payment,” showing that he will see more.

It accounts for almost 10% of the US GDP – and it’s just a prepayment. The implication is that there will be more.

‘Finding’ money When governments spend such money, people often wonder where they “found” the money. This assumes that there is a fixed amount of money, hidden somewhere in the central bank that the government needs to unearth, as if monetary economics were a giant treasure hunt.

This is not how the interaction between governments and their own central banks works. A central bank is a government bank. The US government only needs to instruct the Federal Reserve to provide the money for it. The Fed prints money and the government spends it.

As part of good accounting, the government issues the so-called IOUs that are called anti-spending bonds and in fact it “pretends” that these work as a balance sheet. , so that new assets, money, are balanced by liabilities, new bonds.

This “construction” allows for a balance of national books. But it is purely fictional because the same entity – the US government – both prints money and issues bonds, so it owes itself money. To be fair, it sells “some” of these bonds to the financial markets, giving the impression that it owes someone and has “borrowed” money. But in reality, borrowers and lenders are the same, especially because holders of these bonds will eventually be paid by the state, with money that the state prints for free.

Related David McWilliams: On this St Patrick’s, Ireland should make a vaccine deal with the US David McWilliams: Ireland has too many stockbrokers and lawyers, not enough engineers David McWilliams: Why Ireland will recovery faster than other countries In America, the central bank is under the control of the state. In the euro zone, it’s not like that. Understandably, this little “trick” – the basic foundation of monetary policy – wears all kinds of rituals and rituals to hide its simplicity. version of it. But given that money has value only because we believe in it, rituals are so important.

Belief in money is not so different from faith in God. All the forms, sacraments, and glamor surrounding religion are ways of making pride more magical and believable. The same goes for money. It is a form of magic. The tabernacle of monetary magic is thus the central bank, because the central bank controls the money. It turns water into wine.

In America, the central bank is under the control of the state. In the euro zone, that’s not the case.

It can be said that the ECB is a person by itself. In the process of forming the euro – a French idea – by the way, the Germans had to be persuaded to give up their currency, and so the ECB was founded in the Bundesbank line with orange. Links never print money if asked. by the government.

Europe formalized this pledge by law, through the Treaty of Maastricht and its other descendants, leading to the abolition of national monetary sovereignty.

A country without a monetary sovereignty is a dependent country. In the medium term, this gives the country three options: either the country disappears when it is adopted (it is the EU federalist’s dream); or you restore sovereignty (the wishes of the Brexiteer); Or you do something else (most likely).

In fact, the ECB restored the monetary sovereignty in the euro zone.When the crisis struck, the rules written in good times would be skewed or broken, and this is what happened to the Maastricht’s hard rules.

However, one basic fact remains: the euro is everyone’s currency and not one’s own currency. The Irish Government cannot print it; Neither are German or Italian governments. As a result, we all incur debts that are denominated in someone else’s currency. This asymmetric dilemma is the “birth defect” in the design of the euro, manifested in default and bond market crises when weather changes.

How can Italy pay the debt if it doesn’t print money on its own? Calling austerity to pay off debt is like putting an anorexic on a restricted diet and expecting the person to get fat.

A living disaster Only the ECB can print the euro and it is an independent, political body. Without the ECB, everything would fall apart.

Over the past few months, in the face of the Covid disaster, the ECB (rather) became the lender of the last resort. Governments are spending to keep our limited groups from running out of money. Governments are spending, invoicing the ECB, and the ECB is honoring these IOUs.

Because the ECB is buying IOUs at extremely low rates, governments can deploy all kinds of infrastructure plans, green deal projects and Covid payments. This week, the Irish government took out a loan at the interest rate of 0.58%. The markets, the bit players in this game are now the ECB the ultimate backer, knowing they can sell these bonds to the central bank, so calm down.

In fact, the ECB has restored monetary sovereignty in the euro zone. Governments are acting as if we can reprint our own currency – and that’s glorious. Like in Biden in America, a lot of the things we used to want to do – build homes, schools, hospitals, railways, wind power infrastructure – can be funded now.

What if the ECB, after the pandemic, tried to re-establish Maastricht’s old rules of government deficits? Quite simply, the biggest euro zone crisis imaginable will ensue.

European governments cannot generate money internally to pay off these debts and, realizing this, the bond market – bond holders are based on the “tacit understanding” that the ECB is against – will sell off, leading to huge inflows of capital from several eurozone countries.

This is why it won’t happen. The ECB is in a binding state. It is the custodian of the euro and, as it is, it cannot go back without weakening its currency. The EU cannot move without causing a crisis. It is paralyzed.

However, like the US, the EU has the ability to spend. When paralyzed, this is not a bad condition. Unfortunately no one seems to realize that.

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