The ECB cut its benchmark deposit rate by 25 basis points to 3.0%, while the interest rate on its main refinancing operations fell to 3.15%.

The ECB has already cut rates at three of its last four meetings. Nevertheless the debate has shifted to whether it is easing policy fast enough to support an economy that is at risk of recession, facing political instability at home and the prospect of a fresh trade war with the United States.

Continue reading HERE

Source: https://www.investing.com/news/economy/ecb-cuts-interest-rates-by-25-bps-as-expected-3768628

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The European Central Bank lifted its key lending rate by 50 basis points Thursday, defying market forecasts that the region’s simmering banking crisis, triggered in part by the failure of Silicon Valley Bank and accelerated by solvency issues at Credit Suisse, would prompt a pause in its inflation fight.

In a nod to the crisis, which was placated in part by a $54 billion lifeline from the Swiss National Bank to Credit Suisse earlier Thursday, the ECB said it was “monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area.”

The central bank also dropped previous references to where it sees future rate hikes, indicating decisions will now be more data-dependent.

Nonetheless, given that “inflation is projected to remain too high for too long”, the ECB lifted its benchmark refinancing rate by 50 basis points (0.5 percentage point), to 3.5%, while adding similar increases to its margin lending and deposit rates.

Continue reading HERE

Source: https://www.thestreet.com/investing/stocks/ecb-hikes-rates-as-bank-crisis-simmers-focus-now-on-fed-response

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The post Europe Raises Interest Rates; What Will the Fed Do? first appeared on Garner Ted Armstrong Evangelistic Association.

The ECB’s three key interest rates were each raised by 75 basis points.

“This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the ECB’s 2% medium-term target,” the bank’s Governing Body said in a statement.

It also flagged to markets that “over the next several meetings the Governing Council expects to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations.”

The move sees the ECB follow in the policy footstep of the US Federal Reserve which carried out two jumbo rate hikes of 0.75 points in June and July.

Continue reading HERE

Source: https://www.euronews.com/my-europe/2022/09/08/european-central-bank-announces-largest-interest-rate-hike-in-bid-to-fight-inflation

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Leaders of the European Union’s 27 member states are meeting for the second day of a summit on Friday to address the bloc’s inflation-hit economy.

The first day of the summit ended on a high note. The leaders agreed in Brussels on granting Ukraine and Moldova official status as candidates for EU membership — a move hailed by European Commission President Ursula von der Leyen as “historic.”

But the display of support for Kyiv comes amid wider economic consequences of Russia’s war on Ukraine.

Russia blamed for economic woes
A spike in inflation and lagging economic growth across the world has been blamed on Russia’s invasion of Ukraine. The West also accuses Moscow of “weaponizing” grain supplies and natural gas deliveries.

On Thursday, the European Commission said gas supply cuts from Russia affected a dozen EU countries. Germany, which is heavily reliant on Russian gas, triggered the second phase of an emergency gas plan.

The squeeze of Russian oil is pressuring the EU to find alternatives to prevent an energy crisis.

Germany running into gas supply issues is likely to have EU-wide repercussions, Belgium’s Prime Minister Alexander De Croo warned ahead of Friday’s meeting.

“If Germany gets into trouble, it will also have an enormous impact on all other European countries, including our own,” he said.

Christine Lagarde, president of the European Central Bank (ECB), is joining the EU leaders on Friday to address growing inflation and soaring prices.

According to the EU stats agency Eurostat, inflation in the 19-country eurozone is at a record high of 8.1%.

The ECB has pledged to raise interest rates in July — for the first time in more than a decade — in a bid to curb inflation.

The European Commission also cut its economic growth forecast for this year from 4% that had been expected before the war in Ukraine to 2.7%.

fb/kb (dpa, Reuters)

Source: https://www.dw.com/en/eu-leaders-talk-economy-as-russia-slashes-gas-supplies/a-62243088

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Cryptocurrencies, such as Bitcoin and Facebook’s digital currency Libra, may herald the future of payment systems, or even how we will exchange value over the Internet in the years to come. But for citizens across the planet and financial supervisors, these digital assets that have flourished over the past decade, are promising technologies but are, at best, difficult to grasp.

At worst, they have become synonymous with highly volatile assets that could put at risk the financial stability of the planet, and even the monetary sovereignty of nations, like many fear Libra could bring about.

The European Commission will unveil this autumn its long-awaited proposal on cryptocurrencies in order to seize the opportunities brought by these tokens powered by networks of computers: these include lower fees and almost instant transactions. Europe will become the first major jurisdiction to regulate these new means of payment.

“I believe that Europe is in a position to lead the way on regulation,” Commission executive vice-president for financial services, Valdis Dombrovskis, said in June.

In the EU executive’s thinking, new rules won’t scare developers and investors away, but rather the opposite.

The lack of legal certainty is often cited as the main barrier to developing a sound crypto-asset market in the EU, Dombrovskis recalled.

By becoming the first region to put its house in order, the EU expects to attract a market worth almost $350 billion spread over more than 6,700 digital currencies.

The Commission expects to achieve the holy grail of rule makers: to come up with legislation that will not only protect customers but will also spur innovation by designing a clear framework.

But before seeing what rules would be needed to rein in this fast evolving cutting-edge field, we need to take a deep dive into the past.

The ‘Tulipmania’

In February 1637, the Dutch were caught up in ‘tulipmania’. Tulip prices skyrocketed from December 1636 to February 1637, with some of the most prized bulbs seeing a 12-fold price jump. Tulips were not only exotic flowers but a speculative investment, with some wealthy individuals paying for bulbs what they would pay for a comfortable house.

The wild rush suddenly ended in February 1637, leaving some investors penniless in what is considered the first bubble-and-burst episode in investment history.

For some, the irrational fever that struck the Netherlands is a cautionary tale for the hype surrounding cryptocurrencies, as the story of Bitcoin reveals.

The obscure payment method became a primary target for speculators. The price of one Bitcoin skyrocketed almost 10-fold in the second half of 2017, reaching nearly 20,000 dollars (16,960 euro) at the end of that year. In December 2018, one Bitcoin was worth around 3,300 dollars (2,800 euro), around 75% less compared with the all-time high.

Since then, Bitcoin prices recovered some of the lost ground (price as of early September is just below €9,000), but doubts around crypto-assets persist.

Created in 2009 after the housing market crash by the mysterious Satoshi Nakamoto (a pseudonym), Bitcoin brought lower fees for online payments and a decentralized authority, aligned with the libertarian spirit firing the digital world.

Bitcoin balances are kept on a public ledger, supported by a network of computers that everyone on the network can see. This is the blockchain technology that powers every cryptocurrency.

For some, blockchain is the greatest technological breakthrough since the Internet. Author and consultant Don Tapscott told top EU analysts back in 2015 about its potential, when the technology was still nascent. While the first generation of the Internet enabled us to communicate information only, the second generation, based on blockchain technology, allows users to communicate value and money in a peer-to-peer way, he said.

Bitcoin’s rollercoaster ride in the markets eclipsed the potential of blockchain. But regulators across the world are not only concerned about the volatility of these digital tokens and the impact that the Bitcoin frenzy could have on users. They are also wary of some of its beneficiaries, as the anonymity provided by Bitcoin and other cryptocurrencies made them an optimal payment method for drug dealers and other illegal activities.

The slow progress of authorities in Europe and elsewhere to regulate it and the struggle to fully understand and legislate without killing it, significantly changed in the summer 2019.

Libra’s earthquake

That June, Facebook announced that it would launch in 2020 a ‘stablecoin’, a digital currency backed by the “best performing independent currencies”, to offer cheap and fast means of payment to users.

The announcement provoked an immediate backlash from governments and central bankers. Users were also uneasy with the social network’s intentions to build an alternative global system for instant payments, in light of its poor record respecting their private data.

Facebook’s Mark Zuckerberg testifies before the US House Committee on Financial Services in Washington, October, 2019. National authorities fear that their cryptocurrency project, “Libra” could destabilize the global economy, given the substantial reach by the social media giant.

The irruption of the social network pushed cryptocurrencies to the top of the priority lists for regulators across the world, concerned not only about their price instability and dodgy users, but also the implications for the global economy as a whole.

The reason is that Libra is a “stablecoin”, a type of cryptocurrency backed by a reserve asset, in this case a basket of sovereign currencies.

By being tied to national currencies, Libra wants to address the high volatility of cryptocurrencies. But national authorities fear that it could destabilize the global economy, especially when you can reach potentially 2.7 billion users around the world.

“We will not accept that Libra is transformed into a sovereign currency that can endanger financial stability,” French finance minister, Bruno Le Maire, told us in an interview in July 2019, on the eve of the G7 finance ministers meeting, where France sent a strong warning to Facebook.

Dante Disparte, deputy chair of the Libra project, said in December last year that “we have always said that the project would seek to be regulated.”

But he asked for the “same risks, same rules” principle that regulators defend in Europe.

“Don’t push Fintech innovations of any size offshore from the European market because, in the long run, it is going to be bad for the economic competitiveness of the region,” he stressed.

The concerns erupted across the world, and the withdrawal of some initial partners from the Libra project, including Visa and Mastercard, led the Libra Association this spring to lower its ambitions, by offering primarily stablecoins backed by only one sovereign currency, becoming in practice digital versions of national money.

By scaling down their plans, Facebook intends to convince financial supervisors of their reasonableness in order to win their approval when it is finally launched in the EU. But it won’t be easy.

While US authorities apply existing rules on cryptocurrencies, the Commission drafted new legislation (announced for autumn 2020) to rein in these digital assets.

The rules will come after more than two years of slow but steady progress to regulate cryptocurrencies, a Commission official told The Brussels Times magazine. “Libra was a ‘wake-up call’ to take seriously these developments.”

The EU executive was wary from the outset of the risks of over-regulating because of Libra, as Europe could strangle the innovation brought by smaller Fintech firms.

As a result, the Commission designed a set of rules that will be proportionate to the level of risks. Less risky cryptocurrencies will face lighter legislation, while for global cryptocurrencies such as Libra, rules would be stronger, given that they are likely to raise challenges in terms of financial stability and monetary policy, warned Dombrovskis before the summer break.

The new European framework will substitute the national rules that are starting to emerge in a few member states, including France, Germany and Malta. Once the cryptocurrencies win regulatory approval at EU level (by following a series of requirements, depending on their risks), they would obtain a EU-wide ‘passport’ to operate in the bloc.

Our central bank’s account

Libra also became a ‘wake-up’ call for central bankers. A recent survey among 66 central banks by the Bank for International Settlements showed that more than 80% are working on central bank digital currencies, including the ECB.

Yves Mersch, member of the executive board of the ECB said last May that Frankfurt wants to be ready “to embrace financial technological innovation, which has the potential to transform payments and money faster”.

Although most of the money issued by central banks is in fact already digital, it is accessible only for banks. Their new digital currencies could make their balance sheets accessible to citizens, a true game-changer. In other words, we could have a deposit account in our central bank.

This scenario would have major consequences for the banking industry, as savers would prefer to have their money in the safe hands of the ECB or the Federal Reserve, given the long history of banking crises.

For that reason, central bankers are thinking twice about how to design their digital currencies without provoking a financial earthquake.

The journey won’t be either short or easy, as every step forward in the crypto-world has brought new challenges. While ‘stablecoins’ addressed the volatility of Bitcoin and the first cryptocurrencies, Libra still does not meet the standards of commercial bank money.

Meanwhile, central bank solutions still raise “profound questions about the shape of the financial system and the implications for monetary and financial stability”, and their own role in the system, Andrew Bailey, the governor of the Bank of England, said on 3 September.

Like every new technology, cryptocurrencies must overcome numerous obstacles and address many outstanding risks. But the sense of direction is clear. The future of money is already here.

By Jorge Valero

Source: https://www.brusselstimes.com/news/business/135175/the-cryptocurrency-revolution-how-europe-could-take-the-lead-in-the-money-of-the-future/

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People wearing face masks walk in front of a euro sign in Frankfurt am Main, Germany, on April, 24. YANN SCHREIBER/AFP/GETTY IMAGES

Germany’s fiscal prudence hasn’t made the country popular. Over the past several years, economists have written countless op-eds blaming Germans for sucking demand out of the world economy. For example, the economist Paul Krugman has argued that “the whole world has a Germany problem.” The combination of Berlin’s “ruinous obsession” with balanced budgets and its considerable exports creates excess savings that need to be invested abroad. That, in turn, creates large trade imbalances with nations that take in the investments. Debtor countries such as France and the United States have thus argued that Berlin needs to loosen its purse strings to address global economic imbalances.

Now, if COVID-19 has done any good, it is that it has put such calls on standby. On June 3, German Chancellor Angela Merkel’s coalition government presented a 130-billion-euro ($145 billion) fiscal stimulus package worth 4 percent of German gross domestic product over two years. Coming on top of direct transfers to companies and employees starting during the lockdown, Germany’s fiscal response to the pandemic amounts to a whopping 13.3 percent of GDP. Berlin is finally spending.

Compare Merkel’s response this time to her policies during the 2008-2009 financial crisis. In those years, she reluctantly accepted the need for stimulus of under 2 percent of GDP over two years only after the economy had been contracting for three consecutive quarters. In the COVID-19 crisis, by contrast, Berlin has already put forward the second fiscal plan just three months after the first German COVID-19 fatality.

Beyond attempting to right the German economy, the stimulus spending will yield spoils for Germany’s EU partners. To see how consider not only the size but also the composition of Berlin’s latest national fiscal stimulus package. First, it dwarfs other euro area countries’ plans. France’s fiscal measures to date amount to mere 3.6 percent of GDP by comparison.

Further, with its focus on consumption incentives and government spending, the German stimulus will have knock-on effects on imports from other European countries. If German households, corporations, and the public sector buy more, demand for foreign goods will also increase. When the EU’s largest economy is spending big, not only German boats are lifted. Finland’s finance minister, for one, has noted that Helsinki should be “very grateful” for Germany’s national fiscal stimulus plan. “This sacrifice by German taxpayers will help us incredibly much,” the minister said this month.

What’s more, as Berlin taps into debt markets, it will also make it easier for the European Central Bank (ECB) to keep on financing the eurozone’s most indebted members. The reason is that the ECB is required to balance its asset purchases of government bonds among the 19 member states of the currency union. If there are more German treasuries on the market, it is easier for the ECB to buy treasuries from other nations.

By spurring imports into Germany and boosting investments, Merkel’s stimulus package is also a start to correct some long-standing economic imbalances within the EU. The flip side of Germany’s excess savings and export surplus that draws the ire of Washington and Paris is weak consumption and chronic underinvestment. Since the 2000s, investment by the public and the corporate sector as a percentage of GDP has fallen and been much below other eurozone countries.

The fiscal stimulus tries to tackle this structural problem. On the federal level, the plan outlines a public investment initiative to help Germany transition to a more climate-friendly economy, improve its health and education infrastructure, and even spur research in areas from artificial intelligence to quantum computing. At the sub-federal level, Berlin aims to alleviate structural bottlenecks to public investment by taking on the provision of more social benefits that had been paid by the municipalities. This frees up much needed fiscal space in poorer regions that have put off investments in the past.

Berlin’s investment priorities are aligned with the EU’s strategic sovereignty and climate agenda. Berlin aims to spend more than 7 billion euros ($8 billion) on fifth-generation telecommunications infrastructure and research alone. Another 9 billion euros ($10 billion) is earmarked to fund a hydrogen industry, with $2 billion of that slated for investment abroad. The plan also lifts caps on subsidies for solar energy and increased funding to upgrade shipping of liquefied natural gas. Other priorities are cybersecurity, health, and armaments procurement.

Finally, the stimulus may foreshadow a broader structural shift away from Berlin’s focus on Germany’s export-oriented businesses. Despite some pressure to do so, Merkel did not yield to business demands for a cut to the corporate tax rate. German corporations are already cash-rich. Profitability is not the problem; underinvestment is.

The chancellor even stood firm against demands for aid to the auto industry in the form of a scrappage scheme for internal combustion-engine cars. In 2009, Berlin helped jump-start car sales by handing out 2,500 euros to buyers that returned their older ones. Her refusal to repeat the scheme is remarkable. Auto executives and trade union leaders have German politicians on speed dial. But environmental concerns, along with a realization that blindly subsidizing Germany Inc. is not the way forward, outweighed vested interests.

Source: https://foreignpolicy.com/2020/06/22/germany-covid19-pandemic-stimulus-spending-savings-glut-europe/

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The German Chancellor has a record of defying orthodoxies and the Covid-19 crisis cries out for extraordinary steps

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COVID-19 is transforming the EU works in several ways, accelerating trends that were visible before the virus struck. These changes are good news for anti-EU populists.

It is far too soon to judge how COVID-19 will transform the EU – we are still in the early phases of a story that will last for several years. But one can tentatively say that six trends which emerged before the virus struck are now accelerating: greater economic autarky, a bigger role for national capitals, a strengthening of borders, a backlash against green policies and widening of both east-west and north-south divisions within the EU. In various ways, all these trends are likely to help the cause of anti-EU populists.

Deglobalization
COVID-19 has given extra ammunition to those arguing for greater national or European self-sufficiency. Long before it arrived, there was talk of ‘deglobalization’ and ‘reshoring’ supply chains.

This stemmed in part from politics: Donald Trump’s protectionist policies threatened international supply chains, as did the UK’s pursuit of a hard Brexit and EU plans for border taxes to reflect the carbon emitted during the manufacture of imports. The arguments of many green and other politicians that free trade agreements undercut European social and environmental standards were gathering traction.

But economics was also important. Wage differentials between emerging economies like China and rich countries were diminishing, reducing the advantages of offshoring production. Furthermore, new technologies such as 3D printing were promising easier and cheaper manufacturing at home.

Since the arrival of COVID-19, concerns about the security of supply of drugs, medical equipment, and even key components for the car industry have strengthened the hand of those arguing for more national or European autonomy of supply chains. Those concerns have blended with a general worry about dependence on China, which Huawei’s attempts to provide 5G telecoms equipment to Europe have reinforced. The European Commission is preparing a report on what it sees as Europe’s dangerous dependence on imports of rare-earth metals from a handful of countries, including China.

Before the virus struck there was a movement to make EU rules on competition policy more accommodating of ‘European champions’. The EU is considering revising the criteria for deciding the relevant market when considering proposed mergers; a focus on monopolies in global rather than European markets would encourage more European champions to emerge, but (as John Springford wrote recently) at the risk of reducing innovation and increasing costs for European consumers.

At the same time, EU governments have become more suspicious of Chinese companies that profit from generous state aid to buy up European firms – especially those that have pioneered advanced technologies. In April a new EU regulation introduced more stringent rules on screening foreign investments.

None of this is to say that globalization will go into reverse or that it may not deepen in some respects, such as international collaboration over vaccine development. But COVID-19 has contributed to shifting the zeitgeist away from the idea that the world’s destiny is ever-deeper globalization.

National capitals in charge
A second trend is for national capitals to gain clout vis-à-vis the EU’s institutions. Through much of this century, these institutions have been losing ground to the member-states, because capitals resent the powers that ‘Brussels’ has accumulated.

In hard times the key capitals assert their authority, as they did a decade ago during the financial and eurozone crises when they had to provide the bail-out money. A similar pattern is emerging with COVID-19. The Commission’s scope for leadership is limited by the fact that most of the key powers on health, fiscal policy, and frontiers reside at the national level. Furthermore, in a crisis, many people are inclined to rally around their flag and look to national leaders to navigate the difficulties.

The Commission has done its best to keep the 27 together and to promote the common interest, for example by relaxing rules on state aid and budget deficits, and by chivvying governments not to apply national export bans on medical equipment. But the Commission’s efforts to co-ordinate responses to COVID-19 have generally taken second place to the actions of individual member-states. In the long run, it is at least possible that governments will see the case for a greater EU role in dealing with health emergencies.

Stronger borders
Third, before the coronavirus struck, the EU had made significant efforts to strengthen the Schengen zone’s external border, after the surge of migrants seeking refuge in Europe that began in 2015. Frontex, the EU’s border agency, took on a bigger role in supplementing the work of national border guards. But this hardening of the external frontier did not prevent some member-states from imposing controls on intra-Schengen borders, to minimize the risk of irregular immigration.

The coronavirus has evidently increased suspicion of foreigners, and on March 16th the Schengen countries agreed that they would all close their external border to non-essential travelers – after some of them had already done so unilaterally. More obstacles to movement within the Schengen area have sprouted, including controls between France and Germany.

At some point, governments will have got the virus more-or-less under control, but they will then be very wary of softening the Schengen border. Visitors from parts of the world where the disease may still be rampant will not be welcome. The crisis is likely to hit some of the EU’s neighbors very hard, fuelling instability and further waves of migrants. Many politicians, and not only populists, will want to make life as difficult as possible for irregular migrants. The case of the Greek border guards who illegally fired on migrants in early March may become more typical than one would wish.

Anti-greenery
The fourth trend is hostility to policies that are designed to moderate climate change and make us live greener lives. Before the virus arrived, populists such as the Sweden Democrats, the AfD in Germany, Nigel Farage in England and the gilets jaunes in France were using hostility to green policies as a means of drumming up support – alongside fears of immigration, perceptions of growing inequality and general opposition to established political elites. The EU’s leaders were increasing their efforts to pursue climate-friendly strategies, but perhaps overlooking the growing resentment of some voters towards policies that may make them poorer and force them to change their lifestyles. In the May 2019 European elections, the greens performed well overall but won remarkably few seats in Central and Southern Europe.

The economic consequences of the coronavirus seem likely to strengthen opposition to climate-friendly policies. Many voters whose standards of living are falling dramatically will not want to take a further hit by embracing radical measures designed to lessen climate change. As the French economist, Jean Pisani-Ferry has noted: “Poorer citizens will likely be more reluctant to bear the cost of replacing obsolete ‘brown’ capital embedded in heating systems, cars and machines with greener but costly capital because this would destroy even more of the old jobs and leave even less income available for short-term consumption.”

For the time being, Europe’s leaders are adamant that their plans for curbing carbon emissions are sacrosanct. They are even trying to push them further – German Chancellor Angela Merkel has called for stricter carbon-reduction targets and the French government says that Air France must promise significant cuts in emissions if it wants a bail-out. But as the coronavirus-induced recession bites, the pressures on leaders to moderate their green agenda, including from industry, will strengthen.

East v West
Fifth, for several years an east-west division has been festering within the EU, with the ‘east’ consisting of Hungary, Poland, and sometimes other Central European states. The issues that have set east and west apart are the distribution of irregular migrants from outside the EU – with some eastern countries refusing to take any; targets for reducing carbon emissions, with several Central European countries heavily dependent on coal; and, increasingly, the ‘rule of law’, with Poland and Hungary defying the majority of member-states with their disregard for the independence of the judiciary and, especially in the case of Hungary, media pluralism.

COVID-19 has widened the rift. Central Europeans fear that in the arguments over the forthcoming EU seven-year budget cycle, structural fund payments will be diverted from them to the southern countries worst afflicted by the virus. Meanwhile, as Ian Bond and Agata Gostyńska-Jakobowska have written, Hungary’s Viktor Orbán has used the pandemic as a justification for introducing rule by decree, exacerbating fears that in his efforts to establish what he has termed an ‘illiberal democracy’ he is creating a de facto dictatorship. The EU cannot function properly unless all its member-states accept the rule of law, including the authority of the European Court of Justice.

North v South
The sixth and arguably most troubling trend is the north-south fissure which emerged in the eurozone crisis ten years ago. Then, and in subsequent years, Germany, the Netherlands, and their northern allies agreed to credits rather than grants to the southern countries in difficulty – channeled through institutions such as the European Stability Mechanism (ESM) – and demanded tougher rules and oversight in return.

The northerners’ concern was moral hazard: if Italy, say, knew that the EU would always bail it out, it would lack incentives to limit spending and undertake the painful structural reforms required to improve its long-term economic performance. In the end, it was mainly promises by the European Central Bank (ECB) to buy sovereign bonds that convinced the financial markets that Italy and the other crisis-hit countries would stay in the eurozone.

But the southerners remained resentful of the painful austerity that they had to endure, to reassure the markets of their credit-worthiness. Particularly in Italy, many people felt abandoned by the rest of the EU – not only over divergences within the eurozone but also over the influx of irregular migrants and refugees, many of whom ended up in Italy and Greece (as well as Sweden and Germany).

And then the coronavirus struck the EU asymmetrically. The southern countries – particularly Italy and Spain – suffered more deaths than most other member-states, started the crisis with higher levels of debt, and depend on industries such as tourism that are badly affected. Moreover, they cannot afford the levels of financial support that the northerners are pumping into their economies to preserve firms, jobs, and income – more than half of all the state aid approved by the Commission since the crisis began has been paid out in Germany.

Southern countries want solidarity from the north, ideally in the form of transfers and common European debt. This would involve the EU as a whole borrowing money, secured by member-states’ guarantees and a larger EU budget, and then disbursing grants to the countries most severely affected (one of the more serious proposals for such a mechanism is from Christian Odendahl, Sebastian Grund and Lucas Guttenburg).

EU leaders have moved some way towards the southerners’ wishes, agreeing on an ESM credit line to support health-related spending, a Commission plan to subsidize national short-time working or furlough schemes, and a new lending facility for the European Investment Bank. More significantly, the EU will set up a ‘recovery fund’ to support the worst-affected regions and kick-start a recovery. The precise workings of this fund have yet to be established but it is likely to provide more loans than grants. That is because the ‘frugal’ member-states remain unwilling to pay for large-scale transfers to the south.

Such stinginess delights populist anti-EU politicians such as Matteo Salvini in Italy, who is skilled at exploiting every perceived slight from the EU. One opinion poll in April (carried out by Tecnè) found that 49 percent of Italians wanted to leave the EU.

The southerners and their ally Emmanuel Macron, the French president, rightly fear that if in such an existential crisis the north cannot agree to a larger common budget, including transfer mechanisms, it never will. The alternative is to saddle the southern members of the eurozone with even more debt, and once again depend on the ECB to ensure that financial markets stay calm; that would call into question the currency’s ability to survive in the long term. The stubbornness of the northern governments is based on their voters’ hostility to transfers. But they need to make a stronger case for a more deeply integrated eurozone, which in the end would probably benefit the northern countries economically.

Unwelcome shifts
None of these six shifts in the character of the EU is to be welcomed. If Europe pushes self-sufficiency too far, it will impair the benefits that trade delivers to all continents. Closing frontiers within the Schengen zone or on its borders, once COVID-19 is under control, would achieve very little. And when the EU is faced with transnational challenges such as economic depression, a pandemic, or climate change, strong central institutions are in everyone’s interest. As for the climate emergency, EU leaders are right that carbon targets must be adhered to. The east-west rift is alarming and cannot be resolved by the EU allowing disrespect for the rule of law.

The north-south divide is particularly dangerous. At a technical level, the ECB may be able to do enough to keep Italy and other southern member-states in the eurozone, in a very sub-optimal way – despite the best efforts of the German constitutional court to tie the ECB’s hands. But the politics of an unresolved north-south rift may turn very nasty, increasing anti-EU sentiment across the Union – and could conceivably lead to a country leaving the EU or the euro.

Charles Grant is director of the Centre for European Reform.

Source: https://www.cer.eu/insights/coronavirus-pushing-eu-new-and-undesirable-directions

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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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• Three of Europe’s largest economies — Germany, Italy, and the UK — are either in recession or are on the verge of it, which could spell danger for the eurozone.
• Germany, Europe’s industrial backbone, is stuttering. The unemployment rate has risen for the second time in three months. 
• The UK economy contracted for the first time since 2012, as output fell 0.2% in April to June.
• Italy’s debt crisis is only being made worse by political uncertainty.
• View markets Insider for more stories. 

Europe could be about to hit a crisis, as three of its largest economies are tanking at the same time. What’s more, the European Central Bank looks like it’s out of bullets to fire the economy up.

What happened?

Germany is Europe’s biggest economy. Germany is very much reliant on foreign exports, which means that it’s a victim of slowing global trade from the China-US trade war.

On Wednesday, Germany reported that industrial production declined 1.5% month on month in June. According to Oxford Economics, “All the main sectors, excluding construction, fell over the month as trade tensions continued to impact the sector.”

In Q2 industrial production fell 1.9% quarter on quarter, which the economists said is “the largest quarterly decline since 2012.”

“Our German GDP indicator now points to a contraction in Q2,” as factory orders decline, it said.

That is having an effect on jobs. HSBC chief economist Stefan Schilbe wrote in a recent note that unemployment had risen in July, the second increase in three months. The slowdown, as Schilbe put it, is beginning to “leave a (modest) mark on the labor market.”

Oxford Economics/Haver Analytics

The post Three of Europe’s biggest economies are probably in recession — and the ECB is out of bullets first appeared on Garner Ted Armstrong Evangelistic Association.