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Sunday, 9 September 2012

The Euro: What's New?

The European Central Bank [ECB] has now put a modest amount of flesh on the bare bones of a contingency plan that is a long way from being implemented. If Spain or Italy [or France] asks for help from the EU - maybe something short of an appeal for a Greek-style bailout - and if the EU and the IMF agree terms with the government, the ECB may buy bonds issued by that government. These could either be bonds that are already in the market, or new issues of bonds that will have three years or less to run before they must be bought back by the issuing government. Some government spending in the target country [provided that the borrowing falls within the approved strategy] will be funded by new euros issued by the ECB, if any country qualifies for the scheme.

The ECB's balance sheet will be increased if this should happen; on the debit side by its liability for the new issue of euros and on the credit side by an equivalent notional 'value' of bonds. All the member-countries of the eurozone own the assets and liabilities of the ECB, and the bigger they allow its balance sheet to grow, the more deeply they will be committed to backing the whole dodgy structure. Many news media on 7 September 2012 copied the bizarre assertion [whose originator I have not yet been able to identify]  that this new policy would have the 'opposite effect' to that of the Reparations that were payable after the First World War. The sheer idiocy of this wild assertion makes it notable, and it may even prove memorable.

Reparations - money to pay for repairs - was demanded by the states that had participated in the war and had not collapsed at the end of it; as had the empires of Russia and Austria. Republican Germany was required to accept the Peace of Versailles, which included reparations; and Keynes made his name internationally by publishing The Economic Consequences of the Peace, a book that predicted the disaster that would inevitably follow. It is not clear how far, if at all, Keynes's analysis influenced members of the US Senate when they refused to ratify the Treaty; but history teaches that this decision - which seemed catastrophic at the time - was ultimately of no importance. The Treaty could be blamed for hyperinflation and economic catastrophe in Germany: and thus for the emergence of Hitler; and the Senate had no part in it.

The German electorate and the managers of the Bundesbank [the German central bank] are now united in regarding the ECB's new plan as being very adverse for Germany. By opening up the balance sheet of the common currency to weak regimes in southern Europe, the Germans and the Austrians and the Dutch [with others] find themselves forced into the situation where they will have to back the ECB, or withdraw from the eurozone: which would have catastrophic effects for the whole continent. The relatively feckless countries will have the power to undermine the strong: those who have worked hard and saved will be penalised to service the accumulated debts that were incurred by reckless welfare state awards [and by massive corruption] in another group of states. The European lie is well understood, now; but those who were conned cannot work out how the truth can triumph. The coming months will be extremely fraught for all who live in the eurozone: and for all whose economies rely on trade with the zone.

The USA and China, Russia and India, have a massive interest in this situation and have no influence over it. Britain, Sweden and Denmark have seats in all non-eurozone  EU gatherings: they could thus be in the unique position of power-brokers, but there is no sign that they have any useful advice or suggestions to offer to their beleaguered neighbours.

Keynes would have had an answer; but he was unique!

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