The ECB fiddles while Europe burns


For a situation deriving from a multiplicity of complex causes – the expropriation of monetary policy from national governments, the consequences of the credit crunch, the ill advised bailouts of banks and nations, the accumulation of debt during an economic boom, etc – the Eurozone crisis has a remarkably simple solution: allow the weaker, debt-laden economies to escape the monetary union, regain control of their monetary policy and devalue their way back into the marketplace.

Greece, Ireland and Portugal – despite the insistence of European ‘leaders’ that such bailouts wouldn’t be necessary – have been bailed out to the tune of €300billion. The European Taxpayers’ exposure to Greece is €106billion. Ireland’s bailout has cost €90billion and Portugal’s €78billion. Cyprus’ bond yields maturing in 2014 are trading at 10.18%, with a debt rating descending through the junk statuses (from CC to CCC) – presumably they’re next.

The initial reaction of the European Central Bank (along with the Bank of England and the Federal Reserve) was increasing money supply through quantitative easing (QE). The prolonged policy (in conjunction with low interest rates) caused the development of an addiction to cheap money and inflation. As a result of QE, the ECB resembled the mint of a Western Roman Usurper, or that of a Third Century Roman Emperor, hopelessly debasing coinage to avoid the inevitable.

The latest policy, which is a forerunner to the European Financial Stability Fund (EFSF), sees the European Central Bank buying up bonds to prevent the crisis metastasising and spreading to Spain and Italy. The short-term consequences have been to decrease the current bond yields of each country (Italy’s bonds are trading at 5.58% – down 0.58 & Spain’s bonds are trading at 5.58% as well, down 0.68). It is little more than a temporary reprieve however, from the risks posed by two nations that between them possess €6.3trillion of public and private debt.

The most immediate concern therefore is not Cypriot exposure to Greek financial turmoil, but French exposure to Spanish and Italian debt (€472bn of Italian debt and €175bn of Spanish debt). What is the European Central Bank doing? Nothing, really, except to delay the inevitable. It can artificially inflate bond yields for a while – maybe – but the idea that the ECB can intervene in Italy’s €1.8tn (120%GDP) public debt bond market is, as Peter Oborne has commented, a joke. The EFSF – even if successful – will require an extra €2tn.

Fitch, Standard & Poor’s and Moody’s don’t evaluate central banks (such is the unprecedented, ultra vires nature of ECB intervention) but if they did; the European Central Bank would be beyond junk status, with a vastly overvalued portfolio and questionable accounting methods. To whom is this body accountable? What will the eventual cost be for this truly Faustian debt? Europe needs leadership. Once again, all we get is panem et circenses.