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Roughly one in five of the 75 central banks surveyed by the London-based OMFIF think-tank anticipate increasing euro holdings over the next two years, its recently published 2023 report showed.

While 7% looked to decrease euro holdings, net demand was higher than for any other currency during the period and a jump from the 2021 and 2022 surveys of reserve managers controlling nearly $5 trillion.

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Source: https://www.washingtonpost.com/business/why-croatia-sees-joining-the-euro-as-path-to-security/2022/12/30/faf50b4a-8833-11ed-b5ac-411280b122ef_story.html

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Public deficit and debt soared in the EU as governments massively supported their economies to mitigate the impacts of the pandemic, Eurostat said in a new publication on Thursday.

Among other striking figures, government debt in the euro area reached 98% of GDP, the European statistics agency noted.

“In the euro area, the government debt to GDP ratio increased from 83.9% at the end of 2019 to 98.0% at the end of 2020, and in the EU from 77.5% to 90.7%.”

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A historic rescue plan for economies left shattered by the coronavirus epidemic was hailed by French President Emmanuel Macron on Tuesday as “the most important moment in the life of our Europe since the creation of the euro”.

The deal is a special victory for Macron, who came to office in 2017 committed to strengthening the European Union but has struggled to deliver.

“This is the most important moment in the life of our Europe since the creation of the euro,” in 2002, Macron said, adding that France itself would receive 40 billion euros.

The 750-billion-euro ($858-billion) deal was sealed in the early hours of Tuesday after intense negotiations that saw threats of walkouts, vetoes, and fierce opposition from the Netherlands and Austria.

“These were, of course, difficult negotiations in very difficult times for all Europeans,” said EU Council chief Charles Michel, whose job was to guide the tortuous talks over more than 90 hours.

Germany and France strongly backed the package, which enables joint borrowing by the 27 members of the bloc to help virus-hit countries, particularly Spain and Italy.

While German Chancellor Angela Merkel said Europe had shown itself equal to “the greatest crisis” in EU history, Spanish Prime Minister Pedro Sanchez hailed “a Marshall Plan for Europe” that would boost his country’s economy by 140 billion euros over the next six years.

How will the debt be repaid?

However, there was criticism from MEPs, who broadly welcomed the deal but questioned the detail.

“The EU is now allowed to borrow funds but there is no certainty on how the debt will be repaid,” said a group of six MEPs who took part in the negotiations.

And teenage climate campaigner Greta Thunberg questioned whether the compromises were too great.

“As expected the #EUCO resulted in some nice words, some vague distant incomplete climate targets nearly impossible to track and a complete denial of the climate emergency,” she tweeted.

The initial call for solidarity was met with the fierce opposition from the “Frugals”, a group of northern nations led by the Netherlands that argued the package was unnecessary.

Dutch Prime Minister Mark Rutte had warned before the talks against the EU becoming a “transfer union” with a permanent north-south movement of wealth.

Afterward, he defended himself from accusations that he had accepted precisely what he had sought to avoid.

“This is a one-off, there is a clear necessity for this given the excessive situation,” he told reporters.

The frugals were also apprehensive about sending money to southern countries that they see as too lax with public spending.

To meet their concerns, payouts from the package will come with important strings attached – a hard pill to swallow for Rome and Madrid who resisted anything resembling the harsh bailouts imposed on Greece, Portugal, or Ireland during the debt crisis.

The frugals were also enticed with heavy rebates on their EU contributions.

‘Rule of law’

The recovery package will complement the unprecedented monetary stimulus at the European Central Bank, which has largely succeeded in reassuring the financial markets despite a catastrophic recession in Europe.

ECB chief Christine Lagarde welcomed the accord, saying it “shows that when most needed, the EU steps up and comes together to help the people of Europe”.

Overall, the deal will dole out €390 billion in the form of grants to pandemic-hit countries.

That was lower than an original €500 billion proposal made by France and Germany. Another €360 billion will be disbursed in loans.

Spending must be devoted to policies seen as compatible with European priorities, including politically difficult economic reforms as well as the environment.

The European Commission, the EU’s executive arm, will be in charge of distributing the funds, with the 27 member states able to turn down a spending plan if a weighted majority of them decide to intervene.

The rescue package was agreed along with the EU’s long-term budget, bringing the agreed spending to €1.8 trillion through 2027.

The package now requires more technical negotiations among member states as well as ratification by the European Parliament, which will begin its scrutiny of the deal on Thursday.

Source: https://www.france24.com/en/20200721-eu-rescue-deal-the-most-important-moment-in-the-life-of-our-europe-says-macron

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Image credit: Christian Wiediger on Unsplash

The French president Emmanuel Macron recently fired a warning shot across the bow of the European ship of state. He said that without making all EU countries mutually responsible for the debts of individual countries, the EU could collapse.

In March, Christine Lagarde asked Eurozone finance ministers to consider a one-off joint debt issuance of “corona bonds” to assist with the coronavirus pandemic. But this has been met with opposition by Germany and other northern European countries since they do not want to be responsible for the debts of other more spendthrift nations of the EU.

Before the crisis, Italy had a 135 percent debt-to-GDP ratio. Despite having more than a decade after the crisis of 2008 to reduce its debt, Italy has consistently postponed dealing with the problem. Without pain or serious voter revolt, politicians will never take debt seriously and their countries will inevitably fail to reduce their debt.

This is also true of the US, France, Japan, or even the UK. If a central bank can increase the supply of loanable funds at will, interest rates can be kept artificially low for a very long time. Even before this coronavirus crisis, the ECB was buying up massive amounts of “quality” debt in the form of sovereign and corporate bonds. This lowering of the yield curves across Europe also lowered borrowing costs for countries like Italy. Without higher borrowing costs, there is no pain and thus no incentive to do anything about the debt.

The ECB actions were essentially pain killers for spendthrift nations like Italy, and do not deal with the underlying cancer of high debt levels. The ECB’s current policy to do whatever it takes, including massive purchases of Italian bonds, shows it has no concern preventing cancer from spreading, delaying the inevitable.

Why are Germany and others so worried about mutualizing their debt? Every Euro the ECB prints is a tax on cash balances. It is a tax on every person in the Eurozone. By monetizing Italian debt, the ECB is forcing every German citizen, or any person using the Euro, to pay for Italian profligate spending. The German government is obviously more concerned about its bondholders than its citizens; otherwise, they would have vehemently opposed current ECB printing of bogus money.

Excessive debt is not just an Italian problem. France has a debt-to-GDP ratio of 98 percent but has already indicated that this will increase to 115 percent after promising Christmas presents in April. Of course, with the world economy slipping into recession, or possibly depression, a ratio of 150 percent is probably a more realistic number. This is even worse for Spain or Italy. Without a mutualization of debts, another Greece-like situation is a certainty.

Macron’s concerns are perfectly justified.

Like any obese person who sets weight goals for his diet, European countries have quickly forgotten the 60 percent debt-to-GDP target set in the Stability and Growth Pact. Europe was already a dead man walking. The coronavirus crisis has simply exposed Europe’s underlying dysfunctional economic policies.

The clock is ticking on the continuing existence of the EU. European nations will soon have the bleak choice of either ending the Euro or being permanently stuck as a group in a low growth rising inflation environment.

A mutualization of debts means higher German interest rates. If Germany and other northern European countries hold to their positions, a sovereign debt crisis will probably lead to the end of the euro, and a return to national currencies. This would obviously be a shock to the world economy, but not necessarily a disaster. We have many examples of countries switching currencies without disastrous consequences. The US went from the continental back to gold and silver. Germany went from the Reichsmark to the Rentenmark in 1923, and the French went from the Assignats to the gold franc following the hyperinflation of 1790-1797.

Would the end of the Euro mean the end of the EU? It is hard to envision seeing large expensive EU institutions surviving the coming economic upheaval. Yet, nothing stops countries from returning to the original costless intent of the EU which is the free movement of people, goods, and capital between member nations. The end of the EU as a super-state with its myriad of regulations may not necessarily be a bad thing.

The coronavirus pandemic did not cause the cascade of economic events to come. The pandemic may be of short duration, but the economic ramifications of the lockdown policy will last far longer. Europe may be the first domino to fall, but others will surely follow. Japan’s current debt-to-GDP ratio is over 200 percent but is set to become much larger. The Japanese government still believes in the Keynesian monetarist nonsense that the solution to any economic problem is to print and spend more money.

Historians will look back on this period as one of the follies of allowing governments to control the money supply. As the adage goes, absolute power corrupts absolutely. In the past, kings and emperors debased their currencies in an ever-larger grab for power. Thus, nothing has changed. The late Roman empire primarily ceased to exist for this reason. We must return to sound money and divorce the government from any control over the money supply.

We currently have a plethora of economists in central banks and government-financed institutions, like the IMF, advising governments to print and spend more money as though taking from Peter to pay Paul or legal counterfeiting makes any economic sense.

We desperately need a return to sound economic judgment which can only come from a study of the logic and rationality in the works of the Spanish scholastics, or those of the French classical economists such as Cantillon, Say, or Bastiat—or more recently, those of Ludwig von Mises and other Austrian economists.

Source: https://fee.org/articles/will-the-death-of-the-euro-lead-to-the-death-of-the-eu/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+FEE-Freeman+%28Foundation+for+Economic+Education+-+Latest+Articles%29

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–Data from the Bank for International Settlements (BIS) showed that Spanish banks are due $83.3 billion by Turkish borrowers; French lenders are owed $38.4 billion; and banks in Italy are owed $17 billion, the FT reported.

–Perhaps, more importantly, the European Union (EU) relies heavily on Turkey to contain the flow of migrants trying to reach Europe.

The euro dropped sharply against the dollar on Friday morning, following reports that the European Central Bank (ECB) is concerned over the impact of a weak Turkish lira on European banks.

The euro also fell 0.5 percent to trade at $1.146 in the early hours of Friday. This followed a report by the Financial Times that Spain’s BBVA, Italy’s UniCredit, and France’s BNP Paribas could be particularly impacted by the ongoing depreciation of the lira. The ECB declined to comment on the story.

Over the last year, the Turkish currency has lost about 33 percent of its value against the dollar on the back of large fiscal stimulus, growing inflation and current account deficit, as well as intervention from President Erdogan on central bank policy decisions.

Lira’s depreciation could dent European banks that have invested in Turkey. According to the report, the ECB is particularly concerned that Turkish citizens might not be prepared to support the depreciation of the lira and will start defaulting on foreign-currency loans. These represent about 40 percent of the total assets in the Turkish banking sector.

Data from the Bank for International Settlements (BIS) showed that Spanish banks are due $83.3 billion by Turkish borrowers; French lenders are owed $38.4 billion; and banks in Italy are owed $17 billion, the FT reported.

Meanwhile, the cost of insuring exposure to Turkish debt rose on Thursday to the highest level since 2009. Turkey’s five-year credit default swaps rose to 379 basis points, hitting the highest since April 2009.

“Of course, a full blown Turkish banking crisis would have some negative repercussions on euro zone banks that have large credit exposure to Turkey or own Turkish banks. But overall, the euro zone banking exposure seems too small to cause a significant crisis,” Carsten Hesse, European economist at Berenberg bank said in a note to clients Friday morning.

“But even if we are wrong and a potential meltdown of the Turkish banking sector would cause serious trouble for some euro zone banks, bank supervisors in the region would have sufficient tools at their disposal to contain the damage. That the fallout from Turkey could cause any credit crunch in any part of the euro zone seems highly unlikely,” he said.

GIUSEPPE CACACE | AFP | Getty Images

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