In a word, the Euro Zone potentially could collapse. As of now, it seems the Euro-élites have not sensed the danger they are in.
At 2% inflation, European sovereign bonds could be kept more or less aligned. At 8% they cannot. And the bond market is fragmenting. The spreads between states’ bonds have skyrocketed in recent weeks. As a stopgap, the ECB seems to be selling German bunds to buy Italian debt.
What does this portend for the future? A hint of what might be coming was when Christine Lagarde left no doubt that the ECB will at least try to tough it out.
She said during a conversation at the London School of Economics that the ECB would not subject itself to financial dominance.
Financial dominance is a broader concept than ‘fiscal dominance’ because it includes bailing out banks and other financial institutions, as well as government borrowing needs.
That sounds very much like her stating a readiness to throw either EU banks – or countries, or both – under a bus.
Hypothetically, the only remedy might be a mutualised Eurobond and full QE (though that would require EU treaty renegotiation).
QE would of course, exacerbate inflation and the spreads.
But would the northern frugal states acquiesce?
Might they not prefer to opt for a truncated, frugalist mini-Euro Zone by throwing Portugal, Italy, Greece, and Spain under the bus?
This effectively might at least, save a core to the Euro ‘project’ by winnowing out the weaker states, and reserving the Euro to the less indebted northern economies. The consequence would be a Europe emulating that which Wall Street did to Russia during the Yeltsin era: i.e., imagine it as Italy, with its assets ‘privatised’ and sold-off for $1 (as Draghi once did to Banco Popular, which he ‘took over’ as ECB chief, and then sold to Santander for Euro 1).
As of now, it seems the Euro-élites have not sensed the danger they are in.
They entered ‘a war’, and already three major geo-political tectonic shifts are visible.
Firstly, Putin’s ‘rebellion’ has prompted the Rest of the World to say that they have ‘had it’ with ‘Westification’ (by which is meant the predatory, grasping type of colonialism that has characterised western foreign policy). By all means, be ‘the West’, but not ‘Westified’; by all means be ‘European’, but not an ‘EU-values missionary’, the non-westerners suggest.
Secondly, European voters are not looking for more efficient markets or regulatory structures. As the cold winds of recession blow, they look to their leaders for protection from markets and regulatory absurdities. They sense the danger of unknown ‘doom-loops’ imploding parts of their economy. They are beginning to understand that in wars, rivals strike back too. War is ‘what it is’.
The risk coming from the cost-of-living crisis is easy to grasp.
The risk from additional food shortages is almost beyond calculation.
But what we observe from America, and the recent round of the French Assembly elections, is normal politics checkmated; social distrust; widening reservations toward the legitimacy of central authority; and increasing scepticism and doubts about ideologised SCIENCE.
In the U.S., there is evident a centrifugal separation reflected in migratory flows: The checkmating, the toxification of politics is leading Americans to want to live amongst their like-minded counterparts. It is, as it were, a political Ben Op – a literal and geographic mass movement to live within ‘encircled wagons’.
And in states such as Florida and Texas (with their clear ‘tribal’ immigration), an increasing self-definition in opposition to the Federal government.
Thirdly there is in America – as in Europe – fear, and anger too, at system disintegration.
Fear, as cities become both violent and mal-administered.
The situation at Europe’s airports in these last weeks of sheer chaos and unbelievable queues gives a foretaste of the angst that is unleashed toward remote, techno fragile systems that simply freeze solid under pressure, triggering both anger and grievance.
War – even a war of choice – always reveals the fragility of complex systems. An article in the Atlantic recently noted that if “you, as a typical urban professional Millennial, woke up on a Casper mattress, worked out with a Peloton, Ubered to a WeWork, ordered on DoorDash for lunch, took a Lyft home, and ordered dinner through Postmates only to realize your partner had already started on a Blue Apron meal, your household had, in one day, interacted with eight unprofitable companies that collectively lost about $15 billion in one year”.
It has been a Millennial lifestyle subsidy that may vanish in the twinkling of an eye (or in one hike of an interest rate). It is a mirage. One that reflects the absurdities of the ‘cult of tech’ in a zero-interest rate era. It will soon be gone.
Yet, if our various crises stop at such minor inconveniences, we shall be lucky. Rather, we may well see ideological movements (as likely upper middle class, as drawn from the blue-collar sphere) split – with one part staying mainstream, and others seeking violence and revolution, as did the Baader-Meinhof and the Red Brigade groups in 1970s Europe.
In the U.S., there are already intimations of such armed actions stemming from splinters of the pro-abortion movement, but in Europe (and particularly in Germany), we may see the anger deriving from radical Climate Activists, furious at finding that it is the Energy Transition that will be thrown under the bus, as states struggle to do as best, they can to keep a system afloat, as cheaply as they can. Self-survival invariably takes priority, pushing other interests aside.
A book by Swedish academic and climate activist, Andreas Malm, Wolfgang Münchau has noted, carries the title, ‘How to blow up a pipeline’. Its most important message was a battle cry for climate activists to burn and destroy all CO2-emitting machinery. It also invoked Meinhof’s most famous statement – that it was time for a transition from opposition to resistance.
Caveat: A violent late summer may be brewing.
From start of article –
The systemic basis to the Euro-zone has been the ECB’s absolute commitment to keep German 10-year Bund at a managed premium over 10-year U.S. Treasuries (these are respectively the two ‘value anchors’ underpinning the functioning of the Euro-zone).
And, as interest rates rise in the U.S., this must be reflected in the Bund (to preserve its ‘value’) – for sovereign bonds represent the highly leveraged collateral upon which the European banking edifice stands (or not). If the value of, say, Italian collateral declines, a financial doom loop sets in – as it did in 2012.