This is the third of our predictions for the Payments industry in 2018, and it is about the Euro and its path to full completion.
Brexit is both a threat and an opportunity for the “centralisers” at the European Commission. Their arguments will be firstly that the Single Market and the Customs Union (“Economic” union) cannot work properly and be considered fully complete until all Member States have joined the Euro (“Monetary” union), to complete which there must also be a fiscal and budgetary union, and joint-and-several liability for all government debt. Secondly the UK will be construed as having acted as a brake on progress towards the objective, denying the citizens of the other Member States the benefits of full completion of the European project.
These elastic excuses for the failure of all of the Single Market, the Customs Union and the Euro to deliver on their promises of a uniform economic and monetary zone will be the more palatable headings under which to press for full completion than an admission of failure and an admission that the results of failure – the Euro sovereign debt and banking crisis – still exist and have been temporarily brushed under the carpet.
Remember the promises of the euro? Homogenous and deep capital markets, price stability (including of periphery real estate assets – which shot up and then tanked), price transparency, price harmonisation. None of these has materialised.
Now, 19 years in, the structural problems of the euro refuse to stay under the carpet. Capital flight from the periphery is ongoing and several Eurozone economies are on life support from the European authorities:
- TARGET imbalances rising such that the Bundesbank lends about €1 bn extra into TARGET2 every day and in turn to the periphery;
- Italian banks’ Non-performing loans starting to rise again: Unicredit’s NPLs rose by €6.4 bn in the first nine months of 2017;
- ECB Asset Purchase Programmes increasing, with €30 bn per month of new purchases and more than that in reinvestment of maturities.
Now we also have rising inflation of Germany and the temptation to raise interest rates – which would be disastrous for the ECB Asset Purchase Programmes as the ECB is itself thinly-capitalised and an upward movement of interest rates of only 10 basis points would cause a mark-to-market loss on the APP portfolio sufficient to bankrupt the ECB.
When in a corner, the European Commission will always go for more integration, and the stark fact is that the debt burdens of several Member States (at national level, in their banks, and in other public-sector enterprises) are too high and cannot be paid if the liability for them remains on a several-but-not-joint basis.
The several-but-not-joint basis of liability sits behind the European Central Bank, TARGET2, the European Investment Bank, the European Financial Stability Facility and the European Stability Mechanism – but not behind the EU Budget itself and the funds/commitments that are offshoots of it (the European Financial Stabilisation Mechanism, the Balance of Payments Facility, the first-loss guarantees to the European Investment Bank).
The euro is not a homogenous currency, because its different forms of central bank money do not all represent the same credit risk. Curiously the notes do, and the coins nearly do, but a credit balance in one of the Eurozone central banks and a holding of government bonds of a Eurozone country do not.
The TARGET2 imbalances encapsulate the problem: the Eurozone central banks lend to one another against government bonds of the borrower’s owner, who is anyway responsible for the debts of that borrower – these are unsecured, sovereign risk loans in disguise.
In the Council of Finance Ministers meeting before Christmas it was discussed whether and how the TARGET2 imbalances could be refinanced out of the European Stability Mechanism, thereby on the face of it reducing the exposure of Germany, Luxembourg, the Netherlands and Finland to be closer to their capital keys in the ECB, like rearranging the deckchairs on the Titanic.
What will be offered instead in 2018 is a package of:
- A shotgun to the head of the non-Eurozone Member States that they shall now join the Euro, whether this is the realisation of an undated treaty obligation of Accession Countries (Czech Republic, Poland, Croatia, Bulgaria etc) or a cessation of the sitting-on-the-fence stances of a Denmark (in the ERM for the last 20+ years, a signatory of the Fiscal Stability Treaty) or a Sweden (a signatory of the Fiscal Stability Treaty, has held its interest rates the same as the Euro and has managed a constant FX rate against the Euro for 19 years);
- They join a euro that is a homogenous euro: a holding of a note, or of a coin, or of a bank balance in any EU central bank, or of a government bond of an EU Member State, will be an undivided claim on all taxpaying entities in the EU;
- Or you do your own Brexit and leave the EU.
After an implementation period of perhaps 36 months there won’t be any “Member State currencies” any longer: the euro will be the sole currency of the EU. SEPA schemes will replace the local payment schemes in the countries moving to the Euro.
National tax rates and budgets will have to conform to guidelines set in Brussels and Frankfurt.
Joint-and-several-liability will sit behind all Euro central bank money, and the citizenry will have been bounced into complete EU integration through the introduction of the Euro in 1999 (based on empty promises) , the Lisbon Treaty that created the European Nation State in 2007 (based on the deception that it was just a little bit of administrative tidying-up), and in 2018 the further treaty to complete Economic and Monetary Union – without the UK, which neither adopted the Euro, nor is a TARGET2 participant, nor is a signatory of the Fiscal Stability Treaty, nor is a participant in the European Financial Stability Facility and the European Stability Mechanism, nor is under a treaty obligation to join the Euro, nor is in the ERM.
This is really why Brexit was an inevitability at the point where the European authorities had either to admit failure or engage in what in German would be a termed “eine Flucht nach vorne”: a panic advance. That the UK in effect foresaw what was going to happen and decided to leave before being given an ultimatum is all to our credit: coincidentally Brexit provides the European authorities with a cloaking device to conceal the underlying failure of the European project and bounce Europe’s citizenry into its full completion.