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Tuesday, 21 April 2020
Same 2008 QE playbook, but the Eurozone will kick off Western chaos not the US
US bankers caused the Great Recession, and thus the US was the first to suffer economic turmoil. The coronavirus is a novel malady: we now know that it only severely attacks infirm and unstable bodies – it’s not overly facile to graft this idea onto the global economy.
Therefore, among Western nations and their client states it is the Eurozone (the weakest link in the global macro-economy, despite being also the biggest link) which will see the worst economic effects of the “Great Lockdown” stupidity.
(It is “stupid” because the West is employing quarantining and control methods used by Asian nations, but without having similar cultures of governmental economic intervention nor widespread trust in their governments.)
Because reality is multilayered we must not become immune – even though many want to focus only on the medical/tabloid/political sniping/fear aspects of corona – to the enormity of the Great Lockdown’s economic consequences. So it’s wake-up call time:
Hey! It is now really bad, economically!
Double hey!! Europe was already bad, economically!!
Triple hey!!! Europe was already intellectually paralysed when it came to fixing their bad political-economics!!!
We all get the first point, but regarding the second: Sadly, I am a rare Europe-based journalist who has publicly discussed how the Eurozone has already had a Lost Decade worse than either of Japan’s two – here is the data, which was quite easy to crunch but nobody in the Mainstream Media wanted to crunch it (or publish it).
So I tear you away from your corona-fear porn to point out: the Eurozone already had severe underlying morbidity. (Japan’s ailments – such as an obese debt-to-GDP ratio – are of an entirely different order for so many obvious political-structural reasons.)
I keep asking myself: “Maybe it’s not so bad, economically?” After all, the Eurozone has one competitive advantage over their US partners: their governments often chose to protect employment by assuming wage payments. This will prove vital psychologically (which influences consumer activity) and logistically (keeping supply chains normal) upon reopening.
But it is not the “Socialist Republic of the Eurozone” but rather the “Neoliberal Empire of the Eurozone”: some nations have suspended rents and debt repayments, but these are temporary suspensions and not total forgiveness of 1%er rentier parasitical activities. The state orders you to cease economic activity but will not fully cover the costs of doing so – cui bono? The Eurozone, after all, does not want socialist equality but capitalist inequality and wealth/market concentration – it’s the “birthplace of human rights (for aristocrats)”.
But the Eurozone’s wage assumptions and its larger social safety net – funded by the stolen wages of over two centuries of imperialism – cannot mask its fundamental weakness relative to other currencies.
Not much EU QE yet, but what else could they do – go socialist? Or perhaps fix the pan-European project?
Round after round until today’s “well past the point of ‘QE Infinity’” has proven that modern neoliberalism has only one play in its playbook. So we should not be surprised that 2008 is repeating itself.
The US has once again been the first to announce the biggest bailout. Currency swaps to debt-entrap client states were immediately opened in a series of hugely successful moves to buttress the dollar, yet again. In order to diffuse and stagger the effects of money-printing from threatening the dollar’s global dominance – just like a decade ago – we should expect the European Central Bank to hold off their major bailout once again.
Accordingly, the ECB has only announced a €750 billion rescue package, which is dwarfed by the $6 trillion of the US and even – in a rather significant development – the €1.1 trillion of Germany. France’s bailout is just 10% that of Germany’s, despite being 70% its economic size, because Emmanuel Macron is – of course – 100% supportive of the international 1%’s long-running goal of crushing the French model.
(“Fiscally responsible”, “debt fearing”, “Weimar-scarred” Germany has also additionally announced a “limitless” aid program for small- and medium-sized businesses: this was made possible due to the collateral appropriated from a decade of heartless strangulation of small- and medium-sized businesses in weaker areas of the Eurozone. Disgusting, how the rich get richer and how hypocritically Germany turns socialist just when the heat is turned on. As I point out over and over, because it is a fact: for over a century the obstacle to European stability remains Germany.)
So the ECB is obviously laying back, waiting for US QE to wend its way through the Western economy, but it’ll be the same playbook: G20 central banker + corporate banker collusion to keep QE going across the West.
But how long can infinity last?
Which is to say: how long can European nations keep borrowing from middlemen banks instead of using the ECB as it ought to be used – directly and with sovereignty, and not with national debt-increasing loans, as in this rescue package but outright purchases? The ECB directly funding national governments is against EU law.
The ECB wants to end these rules for this rescue package, but they could be challenged legally. However, they seem to have already thrown out this rulebook and are buying Italian bonds disproportionately – we are in the middle of a crisis, after all, and the wheels of justice move slow. But we don’t know that for sure because – in the lack of transparency which repeatedly plagues pan-European institutions – the ECB does not have to publish details of what it is buying under its emergency bond purchases
How long can this nonsense go on, both legally and politically, as well as historically and culturally?
I assume we’ll only find out for sure when the bond crisis fully hits the Eurozone.
“(Nomi) Prins (author of Collusion) quotes Bank of England leader Mark Carney in 2015 to illustrate this point: ‘As I wrote to G20 Leaders, the structure of (the) financial system has changed significantly since the crisis. Virtually all of the net credit since the crisis has been from the bond markets and the size of assets under management has increased by 60% to $74 trillion.’
Those numbers are staggering. The 2017 estimate for worldwide total GDP was around $75 trillion. Global QE had reached $12 trillion in 2016.”
Both the US and Eurozone now have huge corporate debt problems due to QE-funded stock buybacks, but while the biggest problem in the US in 2008 was mortgage debt in the Eurozone it was government debt. If a government – the largest economic player in any nation – cannot pay its bills (and in the Eurozone individual nations have no power to print money to pay their bills) said nation necessarily collapses. This is why government debt problems in the US and Japan are not at all comparable to the government debt problems of Greece, Belgium, France, etc.
Government debt is thus a fundamentally more troubling issue than subprime mortgage or corporate debt, and this is why their Sovereign Debt Crisis lasts four years and was not contained until 2012, years after the US “solved” their issue.
So the key question revolves around lending to sustain the Eurozone’s governments (at what interest rates), and the difference (spreads) between bond rates of different members of the Eurozone (because the failure of one major member could imperil the 19-member euro currency).
Wars increase interest rates, as there is demand caused by the activity of reconstruction, but epidemics historically produce lower interest rates, because nothing needs to be rebuilt and everyone is still peering through a crack in their front door and finding even that risky. This is significant given that European banks were greatly weakened by the 2008 and 2012 crises, to the point where only one European investment bank is now among the world’s 10 biggest (long-wobbly Deutsche Bank); and also that banks play a more vital role than in the US – European companies eschew selling bonds and shares to procure two-thirds of their credit from banks, a rate double that of the US.
We also know that the ECB has already been in negative-interest rate territory since 2014, so they cannot go lower than stealing your savings (and thus gutting their banks profits and making them weaker, and also forcing them to search for risker investments); we also know that nations such as Spain and Italy have had panic-inducing borrowing problems relatively recently; and we also know that their collective currency essentially refuses to be a political collective other than agreeing to all use the same bits of coloured paper.
Europe was supposed to be “forged in crisis”, and what has 12 years of fire revealed? The “pan-European project” essentially comes down to sharing the same bits of coloured paper and free (border, capital) movement. The lack of true international solidarity (which only exists in socialism, and never in competition-based capitalism) makes this a national project with no nation. That sounds paradoxical and nonsensical, but hey – I didn’t pen the Eurozone’s corrupt and unaccountable structure: the teachers of the Chicago Boys did.
A project of international solidarity based on the furthest-right capitalist and most rabidly anti-socialist principles has proven to be as stupid a concept as that sounds. In this crisis Eurozone nations are outbidding each other for personal protective pandemic gear (nor sharing it among themselves, in a public relations campaign the average Eurozoner is galled by), but also the favors of international high finance.
It is the latter which which will kill far more than corona via poverty.
But how has the ECB responded thus far? Typical: steal from others and claim they invented it
What we can certainly count on from the stagnant Eurozone is to expect zero creativity – since 1980 that is only found in Japan and the US, and all the Europeans can do is trail in their wake and try to look smugly stylish.
The European Central Bank’s key April 7 announcement reads like a bunch of concessions to common sense born of desperation, because that’s exactly what they are.
Here is the very start and bullet points of their press announcement – the key here is to note how very much they are willingly degrading the quality of their collateral/financial instruments:
ECB adopts an unprecedented set of collateral measures to mitigate the tightening of financial conditions across the euro area
Temporary increase in the Eurosystem’s risk tolerance in order to support credit to the economy
ECB eases the conditions for the use of credit claims as collateral
ECB adopts a general reduction of collateral valuation haircuts
Waiver to accept Greek sovereign debt instruments as collateral in Eurosystem credit operations
ECB will assess further measures to temporarily mitigate the effect on counterparties’ collateral availability from rating downgrade.
“Mitigate”, “increase in… risk tolerance”, “eases”, “reduction of collateral valuation” – everything is about making banking/fiscal standards lower, and thus riskier. In a monetary bloc which stared into the abyss in 2012, and which has had only growth rate stagnation and internally-weakening austerity ever since… does allowing more risk sound like a good solution?
Perhaps the easiest way to understand the Eurozone’s intrinsic dysfunction is that Greek national bonds, which were formerly considered to be too risky to be part of the ECB’s bond-buying program, will now be bought. This measure should have been implemented immediately in 2012 to help collectively mitigate bad Greek collateral, but richer Eurozone members wanted to force their products into Greece and buy up Greek assets. But what they are saying now is that collateral which was bad in 2012 is acceptable in 2020 even though said collateral is fundamentally even weaker, due to the failed solutions of austerity and upcoming post-corona economic prospects.
In a neoliberal bankocracy with a normal, united currency the ECB would socialise this bad collateral directly, but they cannot; they cannot bypass the banking middlemen (because they have never created “more Europe”), who can indeed refuse to buy Eurozone national bonds and send borrowing costs to unsustainable 7% levels.
The last one is the kicker, “rating downgrade”: for reasons only “capitalist conspiracy” can probably explain, word on the street is that ratings agencies feel that their credibility is on the line this time and so they will not be lenient like in 2008. Thus, the corona lockdown will produce a ton of corporate and banking downgrades, which will increase their borrowing costs, thus provoke bank bankruptcies in a currency bloc heavily dependent on their banks. The ECB is thus acknowledging to these groups that it knows this is coming and that it will do “whatever it takes”, a la ECB chief Mario Draghi in 2012… but this time for weak corporations that deserve to go bust (in capitalism). This is an immediate echo of the unprecedented, historic, unexpected Fed decision last week to start buying corporate junk debt.
This is the bond pin on which the Eurozone will turn
The Eurozone’s atrocious neoliberal underpinnings fundamentally leaves themselves more wide-open to the machinations of high finance than any other currency. The Eurozone and the pan-European project can be conceived of as a US/German federal system, where the states have a lot of power to gain or fail based on their own policies, but with only a tiny amount of federal support available in case of emergency.
Here is the crux of the biscuit for the Eurozone in a post-corona world: QE is not going to finally create economic growth unless strings are FINALLY attached. Not down-loaning this round(s) of QE means total, prolonged economic chaos combined with rapid governmental insolvency in the awful neoliberal-empire structure which is the Eurozone.
But it’s the same rub, yet on a wound which is even more raw than in 2012: any such formal strings will cause bankers to shy away from loaning to these ever-riskier national Eurozone economies; at the same time, successfully attaching said strings would enrage the populace because why are these banker-middlemen needed at all?
High finance pre-corona has been pacified with no-strings QE in order to keep them from attacking the Eurozone’s national bond markets – but if strings get attached then high finance can’t hoard the QE, get it? This is the ultimate height of neoliberal capitalism’s parasitical rapaciousness, and which is never reported.
So either Europe cuts out the middlemen and lends directly – and investors pounce upon the national bond markets in retaliation, as they did in 2009 or after Mitterrand’s anti-austerity victory in 1981 – or the Eurozone formally admits the middlemen are indeed the government in Western bankocracy, and national populaces revolt. A good place to read about this historical trend and economic inevitability is part 2 from my 7-part series from 2017, back when I foolishly assumed QE Infinity was an impossibility: Why no Petroeuro? or France’s historic effort for an anti-austerity Eurozone.
Insolvency in a Eurozone nation is thus the biggest, most likely threat to the Western-dominated global order. The Eurozone remains a disunited currency, which is an unsustainable paradox.
The long-running historical reality is that Germany preferred to join a neo-imperial project led by the US rather than the one led by Paris and Brussels, and this is why collective aid to nations has never been done in the Eurozone. Macron warns of EU unravelling unless it embraces financial solidarity – France has said this for so many decades that it no longer has any effect. Germany and their true partners – the US – simply don’t believe in European solidarity, only dominance of Europe.
The US can get away with making BlackRock the new private bureaucracy of the Fed & the financial strong-arm of the executive branch – Europe isn’t as dumb. The Yellow Vest and national strike marches hung effigies to BlackRock. Europeans are different, special, more intelligent, the global catalyst for modernity, the intellectual leaders of the West, etc.
Or so they keep telling us.
Time to show off that European finesse they’re so self-satisfied with… or throw it out altogether and join the Yellow Vests.
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Corona contrarianism? How about some corona common sense? Here is my list of articles published regarding the corona crisis, and I hope you will find them useful in your leftist struggle!
Ramin Mazaheri is the chief correspondent in Paris for Press TV and has lived in France since 2009. He has been a daily newspaper reporter in the US, and has reported from Iran, Cuba, Egypt, Tunisia, South Korea and elsewhere. He is the author of the books ‘I’ll Ruin Everything You Are: Ending Western Propaganda on Red China’ and the upcoming ‘Socialism’s Ignored Success: Iranian Islamic Socialism’.
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