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The Crisis-Prone Eurozone Staggers Towards MMT

Jul. 04, 2020 3:06 AM ET
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Macro, behavioral finance, emotional finance, central banks,

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  • Whilst Benoit Coeure is ready for the next Eurozone crisis, the Eurozone and the ECB are not.
  • The ECB’s staffers and Executive Board are already looking forward to a full-blown trade war and bluffing that it will go well for the Eurozone.
  • The legality of the ECB’s pandemic emergency actions is based on the unrealistic premise that they will be temporary in duration.
  • The EU’s new joint fiscal plan is by default unsustainable from its inception.
  • MMT is the intended solution, for the unsustainable EU joint fiscal plan, sooner or most likely later.

(Source: Bloomberg, caption by the Author)

The ECB should have been smiling because of its recent political triumph. Instead, it was smiling in embarrassment at the latest antics of its president. Just as the ECB and its bond-buying appeared to get a break, in its attempt to be the German Constitutional Court rap, its controversial leader (once again) stole all the headlines and the central bank’s credible commitment in the process. The Eurozone, once again, staggers on from one crisis to the next. The next crisis is already looming according to ex ECB Executive Board member Benoit Coeure. In many ways, travails of Christine Lagarde have become a metaphor for the Eurozone.

(Source: ECB, caption by the Author)

The last report cataloged the global decline of the Euro’s significance as a reserve currency, against the backdrop of popular calls for the US Dollar to fall out of bed. The tone-deafness of Eurozone policymakers, to the single currency’s global demise, was also noted. Resonating with this cognitive dissonance, the ECB has recently released a further initiative in support of the narrative that the Euro is a US Dollar challenger. The ECB will now engage in Euro denominated global currency swaps in a similar fashion to the way the Fed engages in US Dollar currency swaps. The very big difference is that there is currently and has been, during any financial crisis, a lack of global US Dollar liquidity. The same cannot be said of the Euro. This is all the more embarrassing considering that one gets paid to borrow in Euros whilst one has to pay for borrowing in US Dollars. The Euro money supply is growing at a rate faster than the US Dollar, yet most of the Euros either remain on deposit or hidden away as physical cash to avoid negative interest rates.

(Source and caption by the Author)

It may simply be that the ECB is preparing for Euro liquidity tightness if and when the next leg of the pandemic health crisis becomes a credit crisis, as suggested in the last report. At this next crisis point, however, short-sellers will be lining up to borrow Euros from the ECB in order to sell them. The new ECB Euro swap facility is available until June 2021 so, clearly, the ECB is expecting the crisis to appear in the next year.

Evidently, the Danes see something kicking-off during this period also. The Danish banking regulator has instructed its banks not to do any buybacks or pay dividends during this period. This expected something, clearly, involves the banks and may lead to their ultimate consolidation. More on this later.

(Source: CNBC, caption by the Author)

From his vantage point, over at the Bank for International Settlements (BIS), former ECB Executive Board member Benoit Coeure is quite open about the fact that he expects a Eurozone solvency crisis to appear in the corporate sector in the near future. He is also clear that national governments should intervene, when the crisis unfolds, rather than the ECB.

There are a few potential crisis-triggers and catalysts currently pending.

(Source: ECB, caption by the Author)

One obvious catalyst and trigger involves a full-blown trade war with America. Unsurprisingly, the ECB’s economists are wargaming this out. Surprisingly, they believe that the erection of trade barriers isolates and inoculates each trade bloc from the crises and shocks in the other. The ECB would, therefore, allegedly welcome the outcome of a trade war. Maybe, the ECB even believes that said welcome trade war would resurrect the global importance of the Euro, as nations would be forced to use it in order to trade with the protected Eurozone bloc.

(Source: ECB, caption by the Author)

As far as the ECB’s Executive Board is concerned global trade fragmentation is a done deal so just roll with it. Executive Board member Yves Mersch recently explained how the Eurozone has reluctantly concluded that globalization is over, and moved ahead with insulating and inoculating itself from unilateral American actions. The ECB will enable the re-ordering of global supply chains, with liquidity from its balance sheet, in order to mitigate the disruption and negative impact on the Eurozone economy at a time when it is also dealing with the COVID-19 pandemic. The timing sucks, because of the pandemic crisis; which suggests that the ECB will overreact with excessive liquidity provision.

(Source and caption by the Author)

One other potential catalyst and trigger for the ECB’s anticipated financial crisis involves Germany and its participation in QE. This author has already noted that the ECB is acting as if Germany had left the Eurozone. The Germans are now bitterly agonizing over whether to go all-in with the Eurozone at the cost of losing America’s military protection. This is not a decision that can or should be made in haste. Unfortunately, President Trump needs to get re-elected so he has given the Germans no time to think about it. Whilst they agonize over this, just for good measure, their Constitutional judges have thrown them another curveball about the ECB’s QE program. Whilst recent events suggest that the Germans have thrown their lot in with the Eurozone, at the expense of relations with America, the almost simultaneous emergence of a Russian “president for life” will cause them to reconsider their decision.

ECB president Christine Lagarde recently adopted a great euphemism to describe all the said triggers and catalysts. She refers to them as symptoms of a “transformational recovery”. Confessing to a sense of “trepidation” about this phase, Lagarde opined that the recovery will be “restrained”, partially due to the “phenomenal” jump in consumer liquidity preference, and “incomplete”. These words could just as easily be used to describe a continued recession. Undoubtedly, much of Lagarde’s gravitas and sangfroid is aimed at the Germans to encourage their judges to temper their litigious enthusiasm for challenging the ECB. Despite this window-dressing, Lagarde’s words still portray worrying portents of things to come.

(Source: the Author)

Standing back and looking at the German Constitutional Court’s demands of the ECB, through the prism of the KeySignals process, this author observes that Germany is tightening the egregious governance worst practice at the ECB. Simultaneously, it is also putting checks and balances on the extreme concentration of power in the hands of the ECB president. Germany, no doubt, believes that these moves are necessary given the current pandemic environment in which there has been a tendency to overreact in monetary and fiscal policy terms.

(Source: Yahoo)

In the last report, this author noted how the ECB was moving Heaven and Earth at an accelerated pace to comply with the German Constitutional Court’s request for an explanation of its actions. Evidently, the German Judges have observed this and have relented somewhat. Their spokesperson Astrid Wallrabenstein recently began to make some concessionary noises. Judge Astrid has opined that further explanation may no longer be required if the ECB commits to wider transparency about its decision-making process.

Judge Astrid is a new appointment, on the Constitutional bench, replacing a noted Euroskeptic. Clearly, she is less skeptical. Over time, it is expected that the changing composition of the bench will make it less skeptical. Since the bench tries to make consensus decisions, Judge Astrid’s impact will already have nudged the style-drift away from skeptical. Thus, in the short and long-term legal opposition to the ECB may become softened.

Because of the German legal challenge, the publication of the account of the June 4th ECB Governing Council meeting assumed greater importance. It was seen as an opportunity for the ECB to demonstrate Judge Astrid’s desired transparency.

The last report also observed how the Bundesbank and its president Jens Weidmann have been nudged to the fore in the legal spat between the German Constitutional Court and the ECB. The wily Weidmann, however, is still refusing to potentially perjure himself by opining on the legality of the ECB’s actions.

In a recent newspaper interview, Weidmann would only commit to saying that, whilst the incipient German economic recovery has begun, inflation will remain depressed for some time. His comments on inflation are, thus, compliant with the ECB’s explanation of the reasoning behind its monetary policy actions. This is not what the German courts want to here, unfortunately. Want they want is express opinion on the legality of the ECB’s actions.

Addressing the German legal case directly, Weidmann avoided perjury by saying that the ECB is acting legally assuming that its actions are temporary in nature. These temporary actions are guided by the falling trajectory of inflation that makes them consistent with the ECB’s legal inflation mandate. He also gave a small warning that, since the Eurozone economy hit the bottom in April, this temporary situation has reached its limits. On the face of it, Weidmann has injected some balance into perceptions of the ECB’s actions. This impression is, however, disingenuous

It is impossible for Weidmann to know how long this temporary action by the ECB will be, under the current pandemic circumstances, but at least he has set the stop-watch running. Weidmann is, thus, un-perjured and the temporary charade lives on, for a little while longer, but its life is finite.

As the focus turned to Germany, ECB Vice President Luis de Guindos turned up the charm offensive in an interview with the German press. Whilst praising the Germans for their ability to deploy a massive domestic fiscal stimulus, thereby acknowledging the power and wisdom of “Black Zero”, de Guindos made a pitch for a joint fiscal stimulus for those lacking in Teutonic wisdom. The praise did little to quell the combative style of his German interviewer on this occasion. The interviewer constantly tried to trip de Guindos up in order for him to make an inflammatory comment about the German legal question and the ECB’s decision-making process in general.

De Guindos parried the combative and often interrogatory questions reasonably skilfully. He dodged the legality issue, by clinging to the ECB’s legal inflation mandate. He did extremely well in avoiding opining on the current price-level of risk-assets, vis-à-vis the size of QE, and commenting on the Bundesbank’s involvement in the legal issue. In view of his ability to acquit himself well, an objective viewer should give him and the ECB the benefit of the doubt and a slight initiative.

De Guindos’s country of origin has no similar respect for “Black Zero”. Nor does it intend to sit around, until the EU has negotiated a joint fiscal stimulus, and/or the ECB has convinced the Germans that everything is Kosher on deficit monetization. Spanish policymakers are at an enhanced stage of deliberation on how to extend pandemic support to personal and commercial loans made by Spanish banks.

Emboldened by his successful bout, with the German press, de Guindos went onto the front foot. Unchained, from the shackles of hostile interrogation, he spelled out for German consumption exactly why the ECB acted. Apparently, the central bank acted because inflation was becoming deflation and the credit transmission system in the Eurozone was broken. Looking ahead, he notes with some caution that the disparate national stimulus packages, and legislation enacted to fight the crisis, may lead to deeper Eurozone fragmentation by favoring specific economic agents. For fragmentation, the German judges should read Eurozone breakup.

(Source: ECB)

ECB Chief Economist Philip Lane has even blogged for the German judges’ edification. His blog was a chronology of pandemic-related events and responses from the ECB. The gist of his thrust closely follows that outlined by De Guindos. Basically, liquidity tightened severely in early March, and deflation risk dramatically increased. The rest is history, as they say in Germany. What followed, in the blog, was a further list of charts and explanations in support of the thesis. Lane concluded that, had the ECB not acted, the Eurozone would have faced economic Armageddon.

(Source: ECB)

Not content, just to blog about it, Lane then drove his message home, to the German judges, via Princeton webinar. His delivery was couched, in risk management terms, with charts and bullet points to emphasize the various threats to the Eurozone’s capital markets and real economy.

The German judges had asked for an explanation and they were getting it in spades from Lane.

(Source: ECB)

Just to be sure, that the Germans had understood that he was taking them seriously, Lane then delivered a further explanation to a Frankfurt Financial Centre webinar breakfast. He served up a meal of charts and explanations, which showed that financial conditions had substantially deteriorated between the March and the June 4th Governing Council meetings. In his view: “the economic ramifications of the pandemic have been amplified by the tightening in financial conditions compared with levels that prevailed at the turn of the year” … so that “against this backdrop, the case for monetary policy action was clear”.

Underlining and resonating, with Weidmann’s earlier key signal, Lane stated that the pandemic response is temporary and not open-ended. Swiftly dampening any hopes, that temporary implies a short-term monetary stimulus, Lane then said that expectations of a swift economic recovery should be tempered. The duration of the monetary policy stimulus, will furthermore, be controlled by the final level of fiscal stimulus that the EU can agree to. Thus, be seeming to hint at a tactical pause to pandemic bond-buying Lane was, in fact, strategically preparing the way for a more permanent strategic bond-buying response.

(Source: ECB, caption by the Author)

Executive Board member Isabel Schnabel has previously tried to frame the German legal problem as a communication one. Firstly, she alleges that the ECB’s communication could be better. Secondly, she alleges that German understanding and reciprocal communication could also be better. Her allegations have been neatly encapsulated in a recent Powerpoint presentation that uses pictures and large headings that will not get lost in translation. The gist of her thrust is that the ECB’s actions effectively prevented tightening liquidity from leading to Eurozone fragmentation.

The ECB has also taken on board Schnabel’s spin-doctoring that it has a simple communication problem. In consequence, two research papers were produced to address the ECB’s forward guidance conundrum aka Schnabel’s communication problem.

(Source: ECB)

The first paper empirically explained that forward guidance can be enhanced by the provision of more data to and the engagement of the audience in surveys. In effect, the self-reinforcing bias of the audience can be aligned with the guidance by tricking audience members into believing that they have a stake in research and guidance authorship.

(Source: ECB)

The second paper alleges that the ECB now has a model for optimizing enhanced forward guidance under various sets of audience-perception states of awareness. All the ECB, thus, needs to do is put it to the test and find a control audience against which to test it. At least the paper shows that the ECB is working diligently on communication issues. Hopefully, the German judges are an audience that will be convinced by both the sincerity and the veracity of the ECB’s output.

All the working papers and speeches would have accounted for naught, in the event that the release of the account of the June 3rd/4th ECB Governing Council meeting had not lived up to its billing and German expectations.

(Source: ECB, caption by the Author)

The decision taken at the meeting was almost less important than the way that it was made.

Ostensibly, the account of this meeting was the first real opportunity for the ECB to demonstrate, unequivocally, that it had taken the German judges seriously. By default, it was also the first opportunity for Christine Lagarde to demonstrate that the old days when Marion Draghi could play hard and fast with monetary policy and his extreme power are over. The account was, thus, a clean sheet of paper for Lagarde to write the new rules of the game, collectively with her colleagues and peers. The account did not disappoint this author. He cannot speak for a German Constitutional Court judge though.

The account was exhaustive and inclusive. An account of all viewpoints was given in addition to the chronology of background events triggering the ECB’s thought process and decision making. Draghi and Lane’s old trick of using generalized opinions to be framed as unanimous consensus was consigned to posterity. Instead, the account was replete with references to “broad agreement”.

This “broad agreement” was in relation to deteriorating financial conditions and global uncertainty that required the ECB to act proportionately to the risks, and with full knowledge and acceptance that there would be unintended consequences of doing so. The account was also written, in the way that board meeting minutes are normally written, with the participation of all members involved. This collegiate writing of the account also extended to the scripting of Lagarde’s press conference introductory statement to go with the decision made.

All-in-all, this was a “transformation”, to use Lagarde’s own words, from the infamous Draghi meetings of yore. Even the most myopic German judge cannot fail to notice the “transformation”.

Governing Council member Ollie “Rehnfeld” Rehn then signaled that the ECB has not missed the German legal point at all. On the contrary, he believes that the point is that the ECB’s action has been “necessary” and “proportionate”.

It transpired that the main burden, of answering the German legal question, was left to Isabel Schnabel. As a German and an Executive Board member, she is both conflicted yet also perfectly placed to address the issue. The pressure on her to remain objective was immense. Her unique position, in practice, qualifies her to see the issue from both sides and to answer the German question so that nothing can be lost in translation.

With Germany rotating into the position of EU presidency, the chances of the legal challenge derailing the Eurozone Project and breaking the Eurozone were and still are admittedly small. This erecting of a legal hurdle was more of an opportunity for Germany to seize the initiative and regain some control politically and economically. Schnabel’s comments should, thus, be looked at in this strategic context.

Germany’s halo was slipping because of the Constitutional Court’s challenge. The halo was then dragged lower by the breaking Wirecard fraud scandal. The confluence of the two events portrayed a potentially malevolent actor, selfishly pursuing its own pecuniary interest to the detriment of its neighbors. Gone are the days when Germans can righteously demand that Europeans become more German. Gone are the days when Germans can berate the ECB for its poor corporate governance given the total lack of it and regulatory oversight at Wirecard.

On the occasion, Schnabel did not disappoint and carried the day. In fact, she sounded more like the president of the Bundesbank than Jens Weidmann and more like the ECB president than Christine Lagarde. Odds on her replacing either or both of them should be narrowed considerably.

(Source: ECB, caption by the Author)

Rising to the occasion, Schnabel created the sense of a courtroom drama, in order to drive home her conclusion, by way of a summation of the case for the ECB defendants. She then picked up, where “Rehnfeld” had left off, in what with hindsight now seems to have been his curtain-raiser on her performance.

Schnabel conclusively answered the legality of the ECB’s actions, by explaining that they were and still are “necessary, suitable and proportionate”. On her way, to this conclusion, she made it clear that, had it not been for the ECB’s action, the Eurozone would have fragmented.

On proportionality, Schnabel also suggested that, had it not been for its unconventional actions, the current benchmark interest rate would have to be at -1.7% by now. The German savers’ hated negative interest rates had, thus, been mitigated by the ECB. The German Judges could, therefore, choose their poison between an expanded balance sheet or the most negative interest rates in the world.

The deviation from Capital Key discipline is thus acceptable to avoid the egregious negative rate of interest. On said Capital Key deviation, Schnabel opined that there is scope to reintroduce it, with the reinvestment of pandemic purchase proceeds process, when the time comes. She, thereby, indicated that the current monetary policy stance is temporary although its extended duration remains warranted under current circumstances.

In a follow-up speech Schnabel even speculated that, although the pace of economic recovery will be slow, the ECB may not actually need to do all the bond-buying that has been envisaged. Thus, not only is the pandemic response temporary it is also potentially smaller in size. What’s not to like?

(Source: ECB, caption by the Author)

Schnabel then continued her extended soliloquy, with a reprised and “slightly amended version*” of her magnum opus, specifically targeted at an all-German audience.

Schnabel was impressive on all occasions, and it will be hard for the German judges not to be similarly impressed and most importantly satisfied with her summation.

Schnabel’s strategic win was then potentially squandered by Governing Council member Francois Villeroy de Galhau’s ensuing premature victory lap. In a presumptuous interview with the Handelsblatt, Villeroy speculated openly on what credit quality of bonds the ECB will buy next. At least, he sensibly ruled out Junk Bonds for now. But injudiciously, he did not rule them out totally, making the excuse that a credit crisis and/or recession could suddenly turn the strongest quality bond into junk.

Villeroy then moved on recklessly to opine that, currently, bloated debt levels should not be addressed for some time by policymakers. This bloated debt structure must also be enabled, with loose monetary policy, until such time that inflation is back above target according to him. This combination, of debt and loose monetary policy, conjures up an image of deficit monetization that was the horror of the German Judges. It is an image of MMT, but more on this subject later, when it will be seen that this is something that France strategically needs.

(Source: ECB, caption by the Author)

Executive Board member Yves Mersch was far less perfunctory and, hence, less inflammatory than Villeroy. On the contrary, Mersch was every inch a logician as he painstakingly laid out all the instances and legal reasons why the ECB had fully explained itself to the letter of European law. He concluded that, since Germany has already signed up to subsume its own justice system to the European Courts of Justice, his esteemed “German colleagues” will find the ECB’s actions and explanations satisfactory.

The German Judges, having been becalmed by Schnabel’s gravitas, were put back on the offensive by Villeroy’s both peremptory and avuncular tone. Villeroy, evidently, has a privileged inside view of what is going on behind the scenes. This insider viewpoint gives him the confidence to be inflammatory. After his potentially inflammatory remarks, the German Constitutional Court judges ducked and passed the buck on making the ultimate decision, about participation in the QE program, to the Bundesbank.

Clearly, also, Isabel Schnabel’s courtroom-drama summation was part of a bigger soap-opera for the German public consumption. The fire-starters in the Constitutional Courts lacked the intestinal fortitude to follow through. Apparently, the Bundesbank has the legal authority to make the decision. Weidmann had already covered his back by opining that the ECB’s actions are temporary and reversible. Schnabel had confirmed that this is the case. Thus, the Bundesbank can now say that the ECB is acting “necessarily, suitably and proportionately” and most importantly“legally”.

The political grandstanding in Germany continued to help the Bundesbank make up its mind. A broad cross-section of parties within the Bundestag tabled a motion that the ECB had successfully answered the question of the proportionality and hence the legality of its actions. The motion was passed.

Evidently, the word temporary means proportionate, in German, even if temporary lasts for a decade or even longer. The grandstanding was given further brio by Chancellor Merkel throwing what remains of her political capital in with the EU’s massive joint fiscal stimulus proposal. Had there been a referendum in Germany, about the ECB, things could have looked so much worse. The German parliament has thus kept the pretense of European solidarity and unity alive, dangerously threatening to widen the gap with its own voters.

A crisis appeared to have been averted. In practice, the conditions for a new crisis had been created.

(Source: the Author)

The reader may remember that, in the last report, Spanish policymakers were trying to prevent Spanish banks from being consolidated into foreign rivals. Luis de Guindos advocated domestic consolidation. Clearly, the Spanish government is now intervening to support its own banks and intends for this support to be funded by foreign taxpayers. This premise just doesn’t seem plausible, even in the swamp of conflicting self-interest that is the Eurozone.

In an attempt to level the playing field, in order to enable deeper banking consolidation, the ECB has just moved the goalposts. The top banking regulator Andrea Enria recently renewed his calls for consolidation by opining that the pandemic is a timely catalyst. In addition, the ECB dropped its limitations on banks doing share buybacks and paying dividends. Since short-selling is now allowed again, the market mechanism can start to re-price the respective attractiveness of all the banks. Undoubtedly, this discounting mechanism is hoped by the ECB to enable consolidation. Evidently, this force for consolidation must now contend with the national forces of protectionism.

Enria then gave the discounting mechanism a little further nudge, by commenting that “the worsening of bad loans problems is inevitable…. but difficult to say to what extent at this stage.” The ECB now intends to find out just how bad with banking stress tests. Presumably, further recommendations on consolidation will be made after the stress test results are in. The last report noted that the health crisis in the Eurozone was now moving towards a credit crisis. Enria has just confirmed this chronology of events.

Elsewhere, in “Club Med”, Governing Council member Pablo Hernandez de Cos exchanged his ECB hat, for his Matador’s tricorn, in order to encourage Spanish policymakers to spend the expected EU joint fiscal stimulus before it has been agreed. As with his fellow countryman De Guindos, de Cos would like the government to extend and expand its loan guarantees for the banks. Evidently, the Spanish seek to kill two birds with one stone at the EU’s expense. Not only will the Spanish fiscal deficit be expanded, but its banking sector will also be protected.

Despite this rush to protect their domestic banks, with loan protection schemes, Eurozone policymakers and central bankers are finding that their support is not working for the benefit of the real Eurozone economy. Of the estimated $2 Trillion in support on the table, only circa 15% of it has been taken up. This poor uptake may be due to the complicated application and approval systems involved, that have been exacerbated by the pandemic situation. It may also be that, simply put, intended recipients of support have just given up and closed down. What is clear is that the national champions, like auto-manufacturers and airlines, have been saved whilst the smaller operators have been abandoned to fight for themselves.

A statist model, of national champions and their immediate dependents and beneficiaries, is emerging in the business landscape of the Eurozone, during and post-pandemic. The much talked about innovation and small-scale focused recovery is nowhere to be seen. What is appearing is a throwback to the bad old days of Eurosclerosis. Unfortunately, neither the taxpayer nor the consumer can support this artificially fattened sclerotic calf.

Evidently, President Macron has observed the risk of drifting back to the bad old days of Eurosclerosis. He has, therefore, bravely tried to mix-in some structural economic reforms with his pandemic fiscal response. Macron hopes to engage the unions in his strategy, through their acceptance of furloughs that will last two years with the government picking up 85% of the wages. The unions must also accept a cut in working hours and mandatory retraining for those who are surplus to requirements. It looks like a good deal for France. Let’s see if the unions think so. Thus far, they have rejected anything and everything that Macron has offered them. Unfortunately, if they see this as a referendum on his presidency or him as an individual, they are most likely to reject it.

Macron’s proposal also draws attention to fundamental problems within the French economy. If hours worked are proposed to be cut then, clearly, there is not enough work to go round. If retraining is offered then, clearly, there is also a skills problem. France has a productivity problem, that has been highlighted and also exacerbated by the pandemic. If the trade unions return to the status quo pre-pandemic, the Eurosclerosis will be even worse.

The omens are not good for Macron and, hence, his reform-drive by default. His party was recently routed in the country’s mayoral elections, which is a blow for his attempts to centralize executive power in the government. It is not all bad news, however. The winning protest vote is for the Green Party. Economic reform that can be camouflaged Green, thus, stands a chance of making it through the legislative process. Somewhat chastened, Macron did his best impression of Alexandre Ledru-Rollin and “followed” those whom he hopes to lead by pledging a 15 billion Euro Green stimulus. He also applied the traditional French crisis tool of Le Guillotine, rhetorically speaking.

Macron’s sheer desperation was evinced by his political sacrifice of Prime Minister Edouard Philippe, to be replaced by what is described as a “Social Gaullist” oxymoron. Macron is drifting to the right in order to push through his reforms. It didn’t work for Sarkozy, who was always a right-leaning president, nor did it work for Macron’s first execution victim President Francois Hollande.

Macron is either U-Turning or showing his true right-leaning colors, neither of which will endear him to French voters. A period of a weak French presidency, thus, beckons. Ideally, this is the time for Germany to advance into the Eurozone political void. No surprise, therefore, to see Angela Merkel trying to force through the EU joint fiscal stimulus plan as her final legacy and platform for Germany to ascend from. What a great pity that nobody told the German Constitutional Judges to get with the program!

If his re-invention fails, it seems that Macron is also willing to buy his way out of the political hole, thereby expanding the French fiscal deficit that he is supposed to be structurally reforming. Clearly, survival at any cost is now his priority. His finance minister Bruno Le Maire is already being creative with ways that this debt can be reclassified to make the French fiscal picture look better than it is.

(Source and caption by the Author)

Le Maire recently suggested stripping out COVID-19 related fiscal spending from the regular French deficit calculations. He may have ulterior motives. Stripping out COVID-19 related debt will have the effect of suppressing French yields. Financing costs for the French economy can be mitigated. In addition, stripping out pandemic related debt may allow the French to bend Stability Pact fiscal limits on borrowing. Stripping out the COVID-19 related debt may also be a way around the Capital Key rules that would preclude the ECB from buying extra French debt. France is clearly under financial pressure, which will cause it to rely on the ECB for support. Since the ECB president is French, Macron is also hopeful.

Spain has similar productivity problems as France. Bank of Spain Governor Pablo Hernandez de Cos has also warned Spanish policymakers about the productivity threat facing them. Spain will not be able to sustain the low interest rate cost of its growing debt pile without structural economic reforms that promote productivity in his view.

(Source: ECB, caption by Henry V according to William Shakespeare)

As if to underline the productivity problems facing France and the wider Eurozone, ECB staffers have recently published some worrying empirical evidence. They find that monetary policy shocks create stickier prices and a wider dispersion of pricing power. Those with pricing power come out of the monetary policy shock with enhanced pricing power. The ECB, on the one hand, should be rejoicing that its actions should help it to achieve its inflation target. The downside of this, however, is that this blessing is not uniformly distributed across all pricing agents in the Eurozone economy. There will be a small number of winners and a larger number of losers. If these winners do not account for the lion’s share of the CPI, then, the ECB is gifting pricing power to the few without reaping the reward of achieving its inflation target on aggregate.

Oh, to be one of the Eurozone few, or at least to have shares in them!

No doubt, the ECB will be buying shares of the few when it finally gets round to taking equity risk!

Just as tensions with Germany began to subside a new political threat emerged. Out of the burning embers of Italy’s Five Star Party, a new “Italexit” Phoenix rose. Nobody can tell if the new Populist orator Gianluigi Paragone is a sock-puppet for the Kremlin or the White House active measures to undermine the Eurozone. Perhaps he is a sock-puppet for and gets paid by both. In fact, nobody can tell the difference between Kremlin and White House active measures these days, as all the puppets appear to be manipulated with brio by President For Life Putin.

Italy is also facing similar deficit problems to France and coming up with creative ways, to wiggle its way out of them, to pass risks to investors. The latest Italian fiscal dodge is to issue bonds with coupons and a fidelity bonus at maturity linked to Italian GDP. One can see the perverse incentive for a heavily indebted post-pandemic Italian government to reform its official GDP calculation lower whilst borrowing even more. The big problem for Italy, going down this route, is that its Capital Key share and hence room on the ECB’s balance sheet would be lowered.

(Source: milanodesignfilmfestival, caption by T.S. Eliot and editing by the Author)

The ECB appears to have a standard modus operandi for dealing with unfolding crises. This author has noted a pattern of ECB guidance, whereby, whenever Christine Lagarde speaks she is swiftly followed by vice president Luis de Guindos and Chief Economist Philip Lane. This pattern is a kind of guidance tryptic. And so, it was again.

The “Atlas of Creation”, a sex cult creationist book authored by a wanted Turkish pedophile, brazenly disported on Christine Lagarde’s bookshelf as she remotely guided, just raised more questions over her economic credentials in addition to her fit and properness. If one, however, remembers her IMF predecessor the Marquis de Sade Kahn, then the book is probably essential reading for all French policymakers.

The ECB guidance tryptic is, presumably, a redundancy that was built-in after Lagarde fluffed her original lines on the ultimate responsibility for managing yield spreads. Lagarde is, evidently, still feeling new to the role of ECB president and in need of crutches to lean on; especially in times of crisis such as these.

With the German Judges, seemingly, in the bag, Christine Lagarde did not do a victory lap. Instead, she beseeched global policymakers to show meaningful commitments to Solidarity and the mitigation of Climate Change. Translated into Eurozone languages this means a commitment to the EU’s joint fiscal stimulus and its Green New Deal.

(Source: ECB, caption by the Author)

ECB vice president Luis de Guindos, like Lagarde, was in no mood to celebrate. After acquitting himself well, in the hostile interview with German the journalist, he followed up with a lower fruit interview with La Stampa. Naturally, the interviewer had an Italian economic agenda and set of questions.

De Guindos projected a vigilance in relation to the uncertainty associated with the economic re-opening, and a readiness to act alongside national fiscal policymakers if required to do so. There was a light touch on the salient points about Italian debts and the need for the country to implement structural reforms to sustain them. De Guindos also made his pitch, for deeper integration and joint fiscal policy, by remarking that the impact of the pandemic would have been smaller had greater integration already occurred.

De Guindos seemed most concerned to make clear that the Eurozone banking sector needs to achieve scale, through consolidation, in order to play a leading role in the economic recovery. Coincidentally, or most likely not, whilst he was speaking the ECB released new guidelines for bank mergers. The new guidelines lower the barriers to consolidation, by giving the banks greater latitude to account and provision capital for them.

(Source: ECB, caption by the Author)

Lane’s part of the guidance tryptic was a tough technical interview. This interview referred closely to the yield spread issue, thereby, underlining the credibility gap that Lagarde still suffers from.

The questioning dealt primarily with the current bounce in economic activity versus the continued fall of inflation expectations. Lane would not be tempted to admit that monetary policy has still not solved the inflation conundrum. Instead, he noted that the ECB remains vigilant and reacts proportionately to the incoming data and signals from the capital markets.

Nor would Lane be tempted to speculate, about an exit from QE, other than to say that the ECB has consistently guided on what the exit conditions will be. Reverting, to his vigilant posture, he noted that persistent uncertainty lingers will influence future policy decisions.

Noting Lane’s reluctance to de drawn, the interviewers left him in rhetorical no-man's land. This positioning was achieved by the interviewers making an observation rather than asking a question. The observation was that when the ECB last exited QE it caused a spike in yields that then triggered an economic slowdown and the need for more QE. It was, thus, implied that the ECB will never be able to exit QE following this pandemic. If had Lane inferred it, from the observation, he was not taking the bait.

(Source: ECB, caption by the Author)

Lane also needs his props and empirical crutches when he speaks. On this occasion, they came with a release from his team that debunked the myths surrounding the Phillips Curve. His team finds that “quiescent inflation” is due to the inability of price shocks to be sustained, over a period of time long enough to move the inflation needle. The crutch came with the assertion that the ECB’s loose monetary policy has mitigated this tendency towards “quiescent inflation”. This implies that things would be even worse without the ECB’s actions.

(Source: banquetworkshop, caption and editing by the Author)

Lane needs to be careful where he goes with this “quiescent inflation” thesis since it implies that inflation is no longer a monetary policy phenomenon. This goes right to the heart of monetary policymaking at the ECB itself. If this is so, then why bother with an inflation mandate and target… unless the sneaky Lane is trying to get the ECB’s mandate changed once it has pacified and subdued the German Judges!

Most likely, Lane and his staffers are making the case for a massive fiscal stimulus that can be enabled, at low or even negative interest cost, with the ECB’s balance sheet. Such a policy is MMT. This author has long-suspected that MMT is where the ECB is headed and why it will also end up in the German Constitutional Court again.

As the tensions, created by the German Judges, began to subside another crisis lurched onto the radar screen. It swiftly became evident that there was still no consensus in agreement with the EU’s proposed joint fiscal stimulus. Northern European nations, led by the Netherlands, were still unhappy with some of the more lenient terms afforded to net recipients from the plan. The EU had tried to buy-off the Northern Europeans by offering them continued generous rebates. These rebates still, however, left the net donors substantially worse off. The pushback has prompted European Council president Charles Michel to draft a compromise proposal. This jury is still out.

Fiscally-responsible-at-home Dutch Prime Minister Mark Rutte is quite the fiscally-feckless hypocrite when it comes to a joint EU fiscal budget. Defending Holland’s pecuniary turf, he demanded discounts on his nation’s contributions to the joint pot, as a sweetener for accepting the joint EU budget proposal, under cover of pretending to require tighter conditions on how it will be doled out. He, thus, opened the floodgates for all the allegedly responsible to become fiscally-feckless hypocrites. The outcome will be that the joint EU budget has an inbuilt unsustainable hole in it from its inception.

In Holland, it now appears that hypocrisy amongst policymakers has become more contagious than COVID-19 itself. Evidently, the country’s admirable performance during the pandemic in terms of social distancing and healthcare provision has reinforced a national cognitive bias. Consequently, the Dutch have become self-righteous to the point of hypocrisy.

Nederlandschebank president Klaas Knot is the latest victim of his nation’s cognitive virus contagion. He argues eloquently that the EU should engage in a massive fiscal stimulus so that the ECB does not have to do a massive monetary policy response. He also believes that the Capital Key should be enforced on all future ECB purchases.

Enforcing the Capital Key would make yields spike in the nations going for the massive fiscal stimulus. Knot, therefore, advocates that the Eurozone should go for a fiscal solution that will see it fragment. To be fair to Knot, he is only defending Holland’s corner. He may also be trying to make sure that France does not bend the rules by stripping out its COVID-19 related debt from its national budget accounting. French hypocrisy thus begets Dutch hypocrisy and this all leads to increased Eurozone hypocrisy.

The Eurozone’s innate fiscal hole cannot be filled by German taxpayers since (A) they remain suspicious of the EU and (B) their economy is not growing fast enough for their tax receipts to accrue at a sufficient rate to cover it. The Germans may be persuaded, to pick up the tab, if they are given more political control of the EU. If they are given more control this may compensate them, in some way, for the impending loss of American protection against Russia.

(Source: the Author)

The obvious solution is that the ECB monetizes the EU’s joint new debts at low or even negative rates of interest. Philip Lane even has the temerity to call this securitized new joint debt Safe Bonds. No doubt, the ECB’s temporary conditionality on pandemic bond purchases, which currently pacifies the Germans, will become permanent in duration-terms to accommodate the hole in the Eurozone’s finances. This would, in theory, and practice, be MMT.

(Source and caption by the Author)

If the Eurozone gets lucky, by the time that MMT occurs, Lagarde will be French President, Schnabel will be ECB President, and the current German Constitutional Court judges will have shuffled-off this mortal coil. Unfortunately, MMT may need to come much faster than this best-case scenario if Benoit Coeure’s predictions come true. In which case, the Eurozone and ECB will stagger into the next crisis in no fit shape to deal with it.

Sources close to the ECB have recently leaked that the next crisis is already here. Assuming that the Germans accept the ECB’s explanation of its actions there will, allegedly, now be a new squabble over the application of the Capital Key in relation to purchases. The result of the current German legal challenge and the future Capital Key squabble will be that the pace of ECB bond-buying gets slowed down. This is a headwind. This headwind may soon be reinforced with trade war headwinds. It will, most likely, be reinforced with COVID-19 related headwinds as the Eurozone re-opens and social distancing is eroded.

In a unified Eurozone, all these headwinds would blow strongly for MMT.

Unfortunately, for the exponents of MMT, the Eurozone is a democratic patchwork of communities that can frustrate the process. These communities are also capable of fragmenting the Eurozone so that MMT can never occur. Ironically, it is existential threats like COVID-19 that act as catalysts to accelerate the MMT process if they can be managed politically by maintaining European consensus. Ugly demagogues like President Trump and President Putin also enable the consensus-forming. China is also a potent catalyst for consensus-forming. The process is slow because of the democratic foundations upon which it is built. Challenges can accelerate the process, though.

(Source: investorvillage, editing by the Author)

The Eurozone, its bonds, and its currency are anything but safe. But then, in the current pandemic and trade war-ravaged global environment what is safe these days? The global joint race to MMT and simultaneous dive to the bottom of the currency pool is very crowded.

Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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