Published on 28 June 2019

We have had a paper published today through the Global Britan think tank about the fate of the Eurozone.

It has been endorsed by Steve Baker MP, the former Brexit minister who sits on the Treasury Select Committee of the House of Commons:

“This alarming report exposes the huge contingent liabilities with which the UK will be saddled if we accept the negotiated Withdrawal Agreement. Once again we see the astronomical financial problems created across Europe by poor-quality rules imposed from the top down on a continent. The Eurozone will end in tears and we must not be shackled to it at the time. I congratulate the author.”

You can download the paper here

The UK’s maximum possible liability now of €207 billion could be escalated to €441 billion, or even more if our exit is drawn out into the period of the next EU Multiannual Financial Framework.

A renewed Eurozone crisis could come at any time and would require a “re-set”, via the large and solvent EU Member States borrowing in their names and paying off the debts of others.

The UK needs to both leave the EU and sever its contractual connections with the EU in order not to be caught up in this “re-set”.

The UK’s likely share of such a “re-set” would exceed €200 billion, a horrendous outcome that would set the country back many years in its efforts to escape from austerity.

This would be all the more unacceptable when we voted to leave the EU three years ago, and the best our negotiators have managed is a half-baked agreement that leaves us exposed to risk for at least twenty years.

The Eurozone financial system is drinking in the last chance saloon, a saloon that is a hall of mirrors in which each participant appears solvent only because it accounts for its claims on the other participants at face value.

Behind this pacific façade lies a black hole of €1 trillion – the financial hangover built up over 20 years from banks and investors acquiring assets in the “Club Med” countries and Ireland for far more than they are worth now.

The apparent recovery of the Eurozone since 2012/13 is an illusion, kept intact by the ECB and the other Eurozone National Central Banks buying up government bonds in €trillions, reducing yields and enabling Eurozone governments to issue new debt at subsidised rates of interest, as well as flooding financial markets with cheap money.

In turn this enables bankrupt borrowers – “zombies” – to remain alive, and for lenders into these “zombies” to rank their loans as “Performing” when the borrower cannot repay the capital or sustain a rise in interest rates.

The lenders are zombies themselves, kept animate by ECB money and creative accounting.

Lending banks continue to be allowed to under-assess the risks in their businesses via “Internal Risk-Based” methodologies, and in turn to claim that they are well-capitalised when they are not.

are either massaged back into “Performing” status without borrowers paying any debt service, or are sold off in bogus securitisations where the bank continues to carry a high risk of loss.

Financial markets recognise the size of the problems in the Eurozone’s banks by valuing bank shares at a considerable discount to their book value, and the ECB bank supervision department has quantified bad loans as being 3.6% of all loans that banks still hold on their balance sheet: both these indicators point towards a Eurozone-wide “black hole” of €1 trillion.

A meltdown could be triggered in any number of ways, but the “longstop” is a realisation in 2020/2021 that it is economically and politically impossible to achieve compliance with the EU Fiscal Stability Treaty by 2030: not only Greece, Italy and Portugal, but Cyprus, Spain, Portugal, France and Belgium have Debt-to-GDP ratios over 90% and only Greece’s ratio is falling.

Failure to hit the Treaty targets will underline that the Euro is not really a single currency and that the countries using it are diverging economically and not converging.

Only a transfer of debt from the shoulders of these countries onto those of the stronger ones – to achieve a consistent 87% Debt-to-GDP ratio across the Eurozone and EU – can preclude that.

The amount of debt to be transferred is again of the order of €1 trillion.

The UK needs urgently to distance itself from involvement and the way to do that is to leave the EU as soon as possible and without a “deal”, and certainly nothing based on the Withdrawal Agreement and Political Declaration.