EU at “critical point” of euro zone future according to expert
EU banks have been left in a “death loop” following the introduction of the euro, the bloc’s currency, an economist said. Professor David Blake said the current situation also means that Germany owes more than £ 950 billion that it will never be able to recover, and that Italy and Spain each owe hundreds of millions that they did not. will never be able to repay.
Angela Merkel and Ursula von der Leyen face difficulties with euro area, Professor Blake said
Italian Prime Minister Giuseppe Conte
The euro has been a disaster from the start
Professor Blake, professor of economics at City, University of London, who believes there are serious question marks as to whether the euro will survive even in the long term, said Express.co.uk: “There was very little fanfare when he celebrated his 20th birthday a little over a year ago.
“This shouldn’t be surprising, because it’s been a disaster from the start.”
The euro’s problems stem from the fact that it does not meet the economic conditions to be an optimal currency area, a term given to a geographic area on which a single currency and monetary policy can operate on a long-term sustainable basis. , said Professor Blake. .
He explained: “The different economic cycles in the euro area, combined with poor labor and capital market flexibility, mean that systematic trade surpluses and deficits will accumulate – because interregional exchange rates cannot. no longer be changed.
“Before 1999, if Italy had a trade deficit with Germany, the lira would fall in value against the Deutschmark and this would help eliminate the deficit.
“With all euro area countries using the euro, surplus regions have to recycle surpluses to deficit areas via fiscal transfers to keep euro area economies in balance – as is happening in the UK.
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An Italian emergency service at the start of the pandemic
“But the biggest surplus country – Germany – formally refuses to accept that the EU is a ‘transfer union’.”
Nonetheless, deficit countries like Italy were treating it precisely like that, using a mechanism commonly known as Target2, he said.
The system requires that any deficit, despite being private sector bonds, be treated as sovereign loans “guaranteed” by a government from one member state to another.
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Angela Merkel, German Chancellor
The ECB in Frankfurt
Target2 started out as a simple payment system for cross-border transactions between the 19 members of the euro area.
However, it was now being used as a ‘giant credit card’ for eurozone members who import more than they export to other member states, Professor Blake said.
The crux was that there were “two differences from a normal credit card: the interest rate is zero and the loan never needs to be repaid.”
Initially, the system had worked quite well, smoothing out short-term trade imbalances between Member States.
Mapping factions of the EU budget
However, Professor Blake, referring to a chart showing Target2 balances since the start of the euro zone, noted that things fell apart due to three key factors: the global financial crisis in 2007-08; the euro zone banking and sovereign debt crisis that began in late 2009 and, more recently, the coronavirus pandemic.
Italy and Spain currently owe € 495 billion and € 457 billion, respectively, in Target2 debts that they can never pay, and Germany has € 1,060 billion in debt that they cannot pay. will never recover, says Professor Blake’s chart.
He added: “In addition, the size of the deficits that are accumulating causes the citizens of deficit countries to lose confidence in their banking system and they transfer funds to banks in surplus countries: those with bank deposits over 100,000. € are responsible for an eight percent “haircut” if their bank becomes insolvent.
“Target2 is also used to facilitate this flight of capital.”
The euro celebrated its 20th anniversary last year
As a result, banks in deficit countries either lacked funds to lend to businesses or viewed such business loans as just too risky.
He explained, “So insolvent banks buy the bonds of insolvent governments which should then bail out the banks if they become insolvent. This is known as the “doom loop”.
“The result is that the economies of the eurozone – especially those of the southern member states – are stuck in a permanent recession.
“Think of the reputation a British government would have if it announced that the British economy had not progressed in 20 years!”