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Tuomas Malinen+ Your Authors @mtmalinen PhD econ. CEO of GnS Economics. Adj. Professor of Economics @ Uni Helsinki. Economic growth, economic crises, monetary unions and central banks. May. 12, 2020 4 min read + Your Authors

A thread, why the breakup of the #Eurozone is a near certainty.

The unfortunate fact is that the EZ has been an ill-conceived political project from the beginning.

And that's why it will fail. 1/21
@CNBCJulianna @iainmartin1 @GnSEconomics
 https://gnseconomics.com/2020/04/21/the-downfall-of-the-euro/ 

The key questions, the EZ now faces, are:

1) Will the ECB be able to provide support for sovereign bond markets through QE?
2) Will national authorities accept the terms associated with possible bailout loans?
3) Will national political leaders continue to support the euro?
2/

The decision of Germany's Constitutional Court (CC) basically crushed all hopes of debt monetization and 'helicopter drops' of money in the EZ.

But, it did do more than that. In its statement, the CC ruled that: 3/
 https://uk.reuters.com/article/uk-ecb-policy-germany-text-idUKKBN22H11E 

"Unless the ECB Governing Council adopts a new decision that demonstrates in a comprehensible and substantiated manner that the monetary policy objectives pursued by the PSPP are not disproportionate to the economic and fiscal policy effects resulting from the programme" 4/

This creates a massive headache for the #ECB for two reasons.

First, some of ECB:s own research shows that the PSPP has disproportionally affected the yields of sovereign bonds, and thus the fiscal policy, of the member countries. 👇 5/
 https://www.dnb.nl/binaries/Working%20Paper%20No.%20548_tcm46-353673.pdf 

Second, If CC:s decision would be upheld, the Bundesbank would need to exit from the PSPP meaning that the Bundesbank would have different monetary policy than the rest of the Eurozone.

So the Bundesbank would effectively exit the ECB. 6/

This, in turn, would imply Gerxit, or Germany's exit from the #Eurozone.

We can rather safely assume that this is something the #ECB will try to avoid at any cost, and thus the CC is now effectively drawing the boundaries of the monetary policy.

Moreover, the CC... 7/

... is enforcing the letter of the Article 123 of the TFEU, which bans all credit lines from the ECB.

This is something the, deeply politicized, European Court of Justice failed to do earlier. 8/
 https://www.ft.com/content/fc487cac-9105-11ea-9207-ace009a12028?desktop=true&segmentId=d8d3e364-5197-20eb-17cf-2437841d178a 

So, it's very likely that the, "unlimited resources" of the #ECB have become "very limited".

In the second key question, we step into a purely political realm.

The European leaders have agreed on a "massive bailout packaged", which is actually... 9/

... far less massive and functional looking closely. 👇

It's based on a massive leverage, like the EZ would not have enough leverage already! This shows the desperation of the #EU leaders.

Moreover, it seems unlikely that the funds would be... 10/
 http://www.eurointelligence.com/public/briefings/2020-04-27.html?cHash=5f771b74715e15aed9aabd8ab6872d9e 

...distributed as grants. This would mean that already suffering nations, like Italy, could be forced to accept austerity measures, which would mean a political suicide.

So, the answer to the second key question is very uncertain. 11/

Then, the most critical issue: political will and cohesion.

The defining moment in the history of some 200+ failed currency unions is always the same: the disappearance of the political will to push the integration further.

This, cohesion, is the glue of currency unions. 12/

How far down 'the rabbit hole' of disappearing political will of sustaining the euro "at any cost" you think we are?

I'd say that we are pretty darn far.

Almost all of the good-will northern member states were used up in the re-capitalization efforts of German... 13/

... and French banks in 2010-2012.

In the EU jargon this is known as the "debt crisis of the Eurozone", while in reality it was the most morally corrupt bank recapitalization operation in history.

For example, the Greeks only received around 10% of all the bailout funds. 14/

Now, what would happen if the leaders of the northern member countries would ask their people, already suffering from the massive economic hit delivered by the #coronavirus, to issue another bailout, likely, in the range of 3-4 trillion euros?
15/

We can rather safely assume that the political backlash would be massive.

In Finland, the support for True Finns would be likely to skyrocket, like that of the AfD in Germany.

Moreover, we would become insanely indebted fueling more public discontent. 16/

Effectively, saving the euro requires impoverishment of us all (in the #Eurozone). I'd say that price is way too deep, and I am sure many will concur. People are not stupid. They (excluding the MMTers) understand that money does not grow on trees.

So, the key questions: 17/

1) The ECB will, most likely, not be able to act as "limitless back-stopper" for the EZ bond markets.
2) National leaders of debtor countries are likely to be reluctant to accept austerity conditions, while creditor countries are unlikely provide lending without them.
18/

3) The support for the euro is waning among political leaders, and we are just at the beginning of the economic crisis.

And, things will get even more dire, also politically, when the European banking crisis gets going. 👇19/
 https://gnseconomics.com/2019/10/03/the-destruction-of-the-european-banking-sector/ 

Thus, there's very little hope for the survival of the euro.

However, if we dismantle it in a joint agreement, we may be able to save the #EU, in some form.

In an uncontrolled breakup of the EZ, the EU may very well disappear alongside it. 20/

Like in life in general, we should never mourn the passing of those institutions whose time has come. Euro is now in that category.

The Endgame nears. Be safe! /End
#brace
#Eurozone, #depression2020 #covid19
 https://gnseconomics.com/2019/09/10/q-review-3-2019-the-endgame/ 


You can follow @mtmalinen.



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