The author could also have pointed out that that the money printing option would in practice offload the crisis onto China and other countries of the Global South who hold euro-denominated assets as well as fueling inflation at home and abroad.. This is exactly what QE in the US/UK has done. Europe is, quite rightly, beginning to see the resolution of its problems in terms of partnerships with the BRICS countries, in particular, and will therefore, shun the “neo-Keynesian” solution so beloved of both the City of London/Wall Street and most of the Western left.
Neurope
15th December, 2011
Over recent months, major English-language media have being promoting a scenario concerning how the Eurozone might disintegrate.
It goes like this – it all starts with Eurozone sovereign debt being further and dangerously downgraded by rating agencies for countries such as Italy or Spain (and, God forbid, France) dragging down some big lenders (major Eurozone banks) that are exposed to these countries.
The banks then have to be saved by governments, in order to avoid a run. Later on, however, treasuries become unable to honour all the debts (their own plus the banking sector’s), which leads to a second wave of toxic assets hitting banks and state budgets at the same time. Obviously, this vicious cycle would accelerate and finally explode, destroying all the major banks of the Eurozone together with the credibility of all sovereign borrowers.
However, note that it is the rating agencies that have kick-started the furore – at this point, it should be remembered that Germany did not support issuing Eurobonds because even all its own reserves of around €800-900 billion (from manufacturing trade surpluses), if being used to guarantee everybody’s debts through Eurobonds, may prove insufficient to stop such a vicious cycle from accelerating. And, in this deadly prospect, there will be nothing left to stop this destructive prophecy from materialising, since all of the Eurozone’s real money arsenal will be exhausted.
The media, however, seem to have forgotten that it was exactly this vicious cycle that was triggered in 2008 in Britain with the Northern Rock bankruptcy and in New York with the Lehman Brothers. In both cases, it was the corresponding central banks that saved the game, not the already over-subscribed treasuries. Washington and London spent a lot of borrowed money to directly support the capital of the major banks, but the ultimate saviour was in fact the central bank, which took care of the liquidity of both banks and treasuries, and this just by printing more money. The Fed and the Bank of England lent trillions to governments and banks and still kept feeding the financial industry with loans at almost zero interest, as if banking is a rare kind of activity that has to be safeguarded and supported by providing the raw material of their business (namely, money) for free.
The European Central Bank (ECB), however, is a different animal from the Fed and the Bank of England. Its statutes do not permit it to help governments by directly buying their bonds. However, the ECB can buy government bonds in the secondary market – for the time being, it is keeping such activity at relatively low levels, in the region of tens of billions rather than hundreds.
However, the ECB could jump to hundred of billions, if needed, so the institution can indirectly keep all 17 Eurozone governments liquid just as the Fed and the Bank of England are doing for Washington and London. Concerning the Eurozone’s banks, the ECB has already decided on a number of extraordinary measures to preserve their liquidity, with the latest and most significant being the extension of loan maturities to three years. That’s quite a long time for any crisis to last…
So, there is in fact no need for the English-language media to worry about the Eurozone, as the ECB will do exactly what the Fed and Bank of England have done, only we all hope that Eurozone will not find itself in such a pitiful position as London and Washington were in 2008
