Published on 14 August 2022 and earlier published on on 13 July 2022 under the above headline and photograph, a Photo of Anak Krakatau by arief adhari/EyeEm from Adobe Stock]

BREXIT HAS BEEN largely botched so far, as has so much else by the present government. Remainers, several now emanating from their mausolea, claim that prices would be lower and supply chains less blocked if Brexit had not occurred, and it is always difficult to disprove such a theory when there is no control experiment. There was no control experiment for the UK’s situation in 2016 had it never joined the EU, and there cannot be one in 2022 now that the UK has left.

Sensationalists need not look far, however, for indicators of dire problems within the EU:

·      A drop-off in Germany’s balance of trade.[1] Exports were down by 0.5% and imports up by 2.7% in May compared to April 2022, with exports up by 11.7% but imports up even more – by 27.8% – compared to May 2021. At least exports to the Russian Federation recovered in May by 29.4% compared to April;

·      Italy has declared a state of emergency in five northern regions on account of a drought;[2]

·      President Macron has threatened to re-nationalize EDF (Electricite de France) in order to avoid power blackouts;[3]

·      There have been widespread protests by farmers in the Netherlands against EU/Dutch government proposals to limit the usage of nitrogen-based fertilisers.[4] The province of Gelderland, around Arnhem, has even declared that it wants a ‘Gelderland solution’ to the problem (will one require a ‘Passport to Hoenderloo’?).

Non-sensationalists thank the stars twinkling over the UK that we do not use the Single Currency. All the statistics are going in the wrong direction, and now Ukraine is to blame, as the Pandemic was before, and Anglo-Saxon trading methods before that, but one excuse cannot even be whispered: the euro doesn’t work.

The latest attack on the Eurozone by a ‘diabolus ex machina’ is a disaster in the bond market: yields on bonds of certain governments of Eurozone member states have increased sharply, threatening to wreck public budgets. In the case of Italy and its 10-year bonds, the yields increased from 1% at the turn of the year to over 4% in mid-June.[5] The European Central Bank cannot of course remain on the sidelines and allow free market forces to operate: it has to intervene in favour of member states and against private investors. The ECB is preparing its ‘fragmentation instrument’, not a holy hand grenade but possibly the bazooka that the then-governor of the ECB, Mario Draghi, said he would bring to bear to solve the problems of the debt levels of governments of Eurozone member states.

Mere rumours of a major ECB intervention have now brought Italian 10-year yields down to 3.3%.

The instrument may even be announced at the next ECB policy meeting on 21 July, although there will be many disagreements and technical issues, such as how such an instrument might function as and when the ECB does decide to increase its official interest rates: they are currently 9-10% below the rate of inflation.

The ECB appears intent on destroying the value of money, in fact on destroying the value of savings and investments in the currency it was founded to establish. Now, after 10 years of buying up member state government bonds and pressing down yields for investors, the member states still have a wide array of Debt-to-GDP ratios, the target of a unified 60% ratio has been suspended, and some of the biggest member states have the worst ratios: France 112%, Spain 118% and Italy 150%. The same countries had 2021 fiscal deficits of 6.5%, 6.9% and 7.2% of GDP respectively, against a target of 3%.

Now Italy has found itself unable to raise new money on what it would view as acceptable terms, and the difference between what it has to pay – 3.3% – and what Germany has to pay – 1.3% – proves that the euro is not a Single Currency, if two forms of its so-called ‘central bank money’ attract such different returns. Actually, they do not represent ‘central bank money’ because they carry quite different credit risks: Germany’s bonds are an AAA risk (on Standard and Poor’s scale) and Italy’s a BBB one.

What does the ECB intend to do? Buy up Italy’s new bonds and press down the yields to far nearer to Germany’s, and in large size. The ‘fragmentation instrument’ will attempt to counteract the recent ‘fragmentation’ of yields by doing more of what the ECB has done since 2012: its Asset Purchase Programme that now owns €3.2 trillion of bonds and its Pandemic Emergency Purchase Programme which owns €1.7 trillion. The new programme may go under a name like Outright Monetary Transactions, and it must be dressed up as a monetary policy operation because it cannot be seen as a bailout: Italy, or any other user, must not be forced as Greece and Cyprus were to rein in its spending, and anyway the available bailout mechanisms do not have the firepower to support a large member state.[6]

The ECB’s intervention will necessitate its departing from its mandate to control inflation, and its indulging in further and very expansive ‘direct monetary financing’ of member states, a line already crossed by the Pandemic Emergency Purchase Programme.

The ECB must now go much further and dispose of any pretence of even-handedness. Previous programmes involved buying bonds of all member states in line with their size.[7] The fragmentation instrument cannot buy a portfolio structured like this if its aim is to bring down yields on the bonds of some member states and to cause the yields on others to rise. The portfolio must perforce go very long of Italian bonds and short of German ones. It is hard to see how Italian yields can be forced down relative to German ones, without German ones rising, and it is even harder to see how the ECB can act like this and still claim its intervention is a monetary policy operation. There would surely be fundamental disagreement within the ECB Governing Council: the ECB would not be a neutral party acting in the interests of all Eurozone member states, but as a partial market actor forcing Germany to pay more so as to enable Italy to pay less.

Perhaps the instrument will cause the very socialization of member states’ debts that Northern Europe fears is the ECB’s objective, or maybe the oxymoronically named ‘fragmentation instrument’ will do exactly what it says, and precipitate the Eurozone’s fragmentation. Either way we can be very happy in the UK to have distanced ourselves from an intractable mess and we must steadfastly reject the entreaties of our own ‘diaboli’, rising from well-merited obscurity in their mausolea, to rejoin the Single Market, the Customs Union or even the EU itself, they all being forms of ‘Passport to Euroloo’.

[1] accessed on 6 July 2022

[2] accessed on 6 July 2022

[3] accessed on 6 July 2022

[4] accessed on 6 July 2022

[5] accessed on 6 July 2022

[6] accessed on 7 July 2022

[7] This is achieved by applying the Capital Keys that reflect the shares which member states’ central banks  own in the ECB, and that are determined by shares of population and GDP