European Central Bank (ECB) will buy sovereign bonds and will become the head of all commercial banks in the euro area. Within a few years, it will be the central financial institution of the “United States of Europe”.
Germany decided: Greece remains in the eurozone! At least for now or until German authorities decide otherwise. Until then, ECB is free to buy sovereign bonds of eurozone states. No limit. In other words, it is free to “print” money.
The last weeks showed that the eurogroup leaders are determined to resolve quickly the problem of public debt of countries in difficulty. Forced, evidently, by the recession that crosses the continent and unemployment exceeding 10% in the Eurozone and is on track to reach record highs. So it will do what Fed do, will implement solutions like “quantitative easing”. With a similar outcome, namely the United States of Europe.
As well as the control on economies in difficulty, achieved by setting macroeconomic targets and budgetary limitations, the European Union, through ECB will be the central authority for all banks in the euro area (about 6,000 financial institutions), but also of those outside the eurozone that want to join the union in the future. Although there is already in place the European Banking Authority.
Positive effects, but only on short-term
In 2008 there were in circulation worldwide $800 billion. The amount reached now $2,600 billion. The Federal Reserve flooded the U.S. and the rest of the world with dollars, the aim being to support the economy. The results are disappointing, the U.S. economy is out of recession, but growth is slow and unemployment remains high. Will the euro area be the same?
At least in words, no. Amounts necessary to purchase government bonds through the Outright Monetary Transactions (OMT) will not be achieved by printing money, according to ECB President Mario Draghi. But he has not explained in detail how the acquisition will be carried out.
ECB bought earlier this year, through Securities Markets Programme (SMP), government bonds of troubled states worth €209 billion. Back then the intension was to calm markets and lower the interest required for the issuance of bonds. The program has not achieved its goal and Italy and Spain borrowed at interest rates of up to 6%, while the ECB reference rate is 0.75%. It is hoped that OTM will succeed where SMP failed, but there are no guarantees. For now, the interest for Italian and Spanish bonds dropped significantly.
The United States of Europe
So far, Germany’s Supreme Court has approved only the European Stability Mechanism (ESM), worth €500 billion, with a German participation not less than €190 billion. OTM will be approved or rejected in December, when all details will be available. It is not mandatory that the program is approved, as Germany’s opposition is well known.
ESM can become active next month after Germany’s approval, for which markets are enthusiastic and yields requested to Italy and Spain will get lower. Short-term effect of measures announced by the ECB is thus positive. It will even save the euro, including keeping Greece in the eurozone. On medium and long term, however, the effects will be negative. All European analysts and economists find it hypocritical of Draghi to say that it will not print money, and the money obtained will be sterilized by withdrawing money from deposits. Inflationary danger does not disappear after money sterilization which, at some point, will be back in the market, otherwise it will reduce liquidity.
The bank union of Europe, for which Manuel Barroso, European Commission President puts his entire career in jeopardy, will likely be made next year. And it will be another step towards the “United States of Europe”, a easier way to control the debts and budget deficits. A “federation of national states”, as Barroso says, where the economic and political decisions are taken at the “center”, not in the “provinces”.
Reply