Published on 28 February 2020

The Euro is a currency without a Eurozone sovereign legal person backing it. Swathes of Eurozone financial assets are rated and accounted for as if there was such a legal person, whereas the backing for these assets is far less impressive.

The consequence is that the Eurozone financial system is far less well-capitalised than it appears, and that market actors in it are taking far greater risk that they appear to realise. By extension, then, the Eurozone financial system contains meaningful systemic risk, and this systemic risk is being transmitted to investors in the global financial markets.

This is the message from the book ‘Managing Euro Risk: Saving Investors from Systemic Risk’, by Barnabas Reynolds, David Blake and Bob Lyddon and just published through Politeia, the UK forum for discussing economic, constitutional and social policy.

You can download the book here.

Normally a currency is backed by all the taxpaying entities in the geography that uses it and on a joint-and-several-liability basis.

The Eurozone is no more than a defined term referring to a subset of the European Union; by contrast the European Union is a single legal person, whose debts are guaranteed by its members on a joint-and-several-liability basis, albeit that its borrowing capacity is limited to 40 bn per annum and even this capacity has not been fully utilised so far.

The Eurozone contains a “European Central Bank”, and “Eurozone National Central Banks” (such as the Bundesbank and the Banque de France) but these are misnomers in two ways.

Firstly the European Central Bank only holds sway over the Eurozone and not over EU member states that do not use the Euro nor over countries in Europe that are not in the EU.

Secondly neither the European Central Bank nor the Eurozone National Central Banks have assets and liabilities that are genuine “central bank money”: this is the risk-free money that has a sovereign legal person backing it.

The Eurozone member states – which continue to term themselves as “sovereigns” – have given up the sovereign powers over their currencies to the European authorities by joining the Euro. They still issue their own debts, and these are wrongly termed “Eurozone government bonds” because there is no Eurozone government: the term should be “Eurozone member state bonds”, which have an intrinsically lower credit quality that genuine sovereign government bonds.

From these anomalies trickle out a range of fault lines in the Eurozone financial system, and these are explored in this book. It adds up to an export, on the grand scale, of unmitigated systemic risk into global financial markets, which are housed in London and New York.