Only this time, the ECB is already doing “whatever it takes.”
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
With hotly contested general elections coming up in France, Germany, and Holland – where yet another upset could be on the cards – 2017 was always going to be a nail-biter for the Eurozone. That was before former Italian PM Matteo Renzi raised the prospects of fresh elections in the home of electoral chaos, Italy.
And investors’ nerves are fraying. The spread between the 10-year yields of French government debt and German government debt has already widened from 0.28% in October to 0.81% today in anticipation of French elections, to be held in April. According to Frankfurt-based Sentix research group, the probability that France could fracture the euro is also rising, reaching 8.4% in its latest survey of investor sentiment as concerns about Marine Le Pen’s threat to the French and European establishment continue to rise. It’s the highest level registered to date.
The poll, which was launched in June 2012, at the height of Europe’s sovereign debt crisis, surveys more than 5,000 retail and institutional investors from 20 countries about their expectations of Europe’s financial markets. The result of the latest survey is clear as day: the euro crisis is once again back front and center in investors’ minds.
A quarter of respondents believe that at least one State will abandon the single currency in the next 12 months. It’s the highest level since Brexit, when Sentix’s fear index reached 27.5%. The highest level ever recorded was during the euro zone’s peripheral debt crisis when it reached 73%. Ironically, no country left, thanks largely to Mario Draghi’s pledge to do whatever it takes to keep the euro intact.
But now, five years later, most of the Eurozone’s existential problems remain unresolved, despite the ECB having frittered €3.7 trillion (or roughly 36% of Eurozone GDP) on keeping the leaking ship — and the region’s biggest banks — afloat.
Hard as it is to believe, Greece is arguably in even worse shape today than it was when the term Grexit was first coined, six years ago. It cannot leave the Eurozone, but as long as it stays, its economy will continue to plumb new depths of depression. With no end in sight to the latest round of bailout negotiations, bank deposit flight is at its worst since 2015 as Greeks once again yank their funds out of the banks in anticipation of another face-off with the ECB.
Greece is just one of many seemingly intractable problems the Eurozone faces. There’s also Italy, the world’s third most indebted government which somehow hopes to rescue, with public funds, a banking sector that is home to an unspecified number of insolvent institutions as well as roughly a third of the EU’s entire stock of non-performing loans. This is a problem that will cost, at the very least, scores of billions of euros to address.
But even if that happens, the Eurozone’s biggest problem — the economic and financial heterogeneity of its 19 member nations and the complete absence (according to some, by design) of a fiscal transfer mechanism — will continue to fester. Even on the off-chance that Germany were to suddenly sanction a fiscal transfer scheme, it’s probably already too late in proceedings for it to change the course of events.
Mark Blyth, a professor of political economy in the U.S. who was one of very few academics who correctly guessed three of the biggest political shocks of 2017, Brexit, Trumpism and the no-vote in Italy’s constitutional referendum, has warned that 2017 could even be the year that the euro ceases to exist:
For all of the sturm und drang (German for “storm and stress”) about Brexit and whether Britain should have left, it might actually be the case that the EU ceases to exist before Article 50 is invoked. Think about it this way: you have an election coming up in France. It’s entirely plausible the National Front will win the first round. At that point everyone in France is meant to organize a giant blocking campaign to stop them being elected. That would mean everyone on the French left has to vote for someone who basically wants to bring Thatcher’s menu to France, and that’s after eight years of stagnation. That’s going to be a very hard sell.”
Whether it’s France, Italy or Spain, Grexit, Brexit or Nexit, a ressurgent Doom Loop, banking collapse or the Eurozone’s Target2 imbalances, something will eventually give.
The time-honored game of extend and pretend is losing its magical effect, even in the short term. Ever since the global financial crisis exposed the chronic shortcomings of the European Monetary Union and Europe’s banking system, the EU, with the ECB doing most of the arm work, has been frantically juggling so many intractable, existential problems for so long that it’s often assumed, particularly in the Brussels bubble, that it will be able to continue to juggle them ad inifinitum, regardless of how many new problems are thrown at it to juggle.
But investors – among many others – are once again beginning to have serious doubts. Only this time, the ECB is already doing “whatever it takes,” and it’s not working that well anymore. By Don Quijones.
Turns out, Italy’s banking crisis is not fixed. Read… Is that Desperation Hanging Over Europe’s Banking System?