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Chronicle of an announced financial crisis (15): which fly has stung the European Central Bank?

By Georges Ugeux, Chairman & CEO | Galileo Global Advisors 

The puny frog
Swelled so well that she cracked.
The world is full of people who are not wiser:
Every bourgeois wants to build like the great lords,
Every little prince has ambassadors,
Every Marquis wants to have pages.

Jean de la Fontaine


Over the past few months, while having interviews and presentations on the occasion of the publication of my book “The Descent to the Underworld of Finance” – prefaced by Jean Claude Trichet and published by Odile Jacob – I had the opportunity to better understand the extent of misinformation by governments and central banks with respect to the buildup of sovereign debt. Denial has reached proportions that border on manipulation.

Given the decisions taken at the International Monetary Fund (IMF) in Bali last autumn, we would be entitled to expect more transparency and, above all, the implementation of the “normalization” of a monetary policy as we are approaching a potential financial tsunami. That is not the case. The ECB has taken decisions that run counter to this normalization.

The ECB’s contradictions

This time, we are entitled to say it openly: the latest decisions of the European Central Bank are outliers. Persistent in following a policy of negative interest rates, they perpetuate the perverse effects which are termed “unintentional consequences” that are in fact perfectly predictable. ECB’s monetary policy, in doing so, sinks into the abyss from which it will not emerge without creating a blood bath that threatens global financial stability.

Augustin Carstens, the Chairman of the Bank of International Settlement (BIS), urged the Central Banks to preserve their ammunition. This is a direct allusion to the ECB balance sheet, which is exploding and being increased by the organization’s whim. It has reached a level higher than the Federal Reserve, even though the Eurozone’s GDP is half the size of the United States.

While a rate hike of 0.25% would have had the advantage of sending a signal about the dangers that the Eurozone runs without any impact on the economy, the ECB continues to believe against all evidence that the rate cut can stimulate growth.  By favouring borrowers, the ECB continues to reduce the remuneration of savings, pensions, and life insurance policies to a skin of sorrow, without increasing the economic growth as originally intended.

The Eurozone has locked itself into a policy that expropriates (some would say taxes) savers and benefits borrowers. It’s unfair. It’s also intolerable. This imbalance must be corrected if we are to stop the impoverishment of savers and pensioners.

What’s more, the justification for past lax monetary policies had a legality that was hanging by a thread. The ECB’s latest wave seems to be tainted by irregularity, or even outright illegality. The Euro is not in danger, but the ECB has never been very keen on these peccadilloes. Who would dare pursue it or challenge it?

The succession of all dangers

In this context, big money makers and governments are looking for the rare bird: a President who has real credibility, not only in the Eurozone, but globally. He or she will have to manage Brexit and make European investment attractive to get the economy back on track. In short, a real international persona and not a Eurocrat. But of course, such a candidate would be tempted follow the same policy as Mario Draghi’s ECB to avoid squealing the countries of the south.

Europe will not find this President, because this mandate is unachievable. What it takes now is a leader who will not make all the compromises that the ECB has accepted in the name of an ‘alternative monetary policy.’” We don’t need a Doctor of Economics: after all, the IMF is doing well under the leadership of Christine Lagarde, a lawyer and former French Finance Minister. It’s necessary to find a person who inspires confidence, is courageous, and who will not be afraid to take urgent remedial action.

He or she must also be armed with courage to impose a new course.  The Eurozone ship, which is mired in negative interest and over-indebtedness, needs to be righted.

It is the largest indirect taxation or expropriation in history. It is necessary to turn the tide, if Mario Draghi’s successor is in place before the Eurozone deluge.

Political responsibility

But behind this question, we must put the over-indebted states before their responsibilities. France and Italy have a debt that collectively accounts for 50% of the Eurozone’s GDP. One chose denial, the other resisted. But the 4.6 trillion euros of debt were only made possible by the fact that their borrowing rates were subsidized by savers via the European Central Bank.

If the ECB has a share of responsibility in this mechanism, it is the sovereign borrowers who bear the political responsibility for a debt of 10 trillion euros.  

At a moment when the Italian budget measures should be decided, the Salvini government continues to buy time. Brussels will be on holiday next week for a month. The risk of a crisis in August increases in plain sight as an Italian public debt crisis is not to be ruled out.

That the EU council cannot find the successors of the current leadership only complicates matters even further.

Compliments of Galileo Global Advisors, a member of the EACCNY