Keeping the flag flying for the euro

Published on 2th September 2023

This piece appeared as a Comment in the Daily Express. It is about the implications of the European Stability Mechanism being so weak, given that it is the main backing for the euro:

Digital currencies – bitcoin, stablecoin, Britcoin et al – makes your head spin. The spinning has helped the euro grab on to proper currencies like the pound and the dollar and make out it is like them. Its shop window is certainly decked out like a proper currency: just don’t go in the storeroom and see what’s behind it.

Behind bitcoin there is pseudo-religious belief and not much more: the UK’s Treasury Select Committee recently compared it to online gambling. Behind stablecoin – bitcoin’s self-professed perfect cousin – there is meant to be tangible backing in gold or some such. What is behind the euro, though?

The euro has no tangible backing, and, unlike the pound, dollar, yen or Swiss franc, it does not have a country behind it. All UK citizens back the pound and, God help us, 100% of the UK’s debts. We hold all the levers of economic management over the pound – even if we regularly crunch our gears – and in the worst case our government can instruct the Bank of England to issue more pounds to service the UK’s debts.

The euro’s equivalent backing is pathetic: the €9 billion capital of the European Central Bank. That is nowhere close to even 1% of the €9 trillion acknowledged debts of the Eurozone member states, and the further €6 trillion of shadow debts for which they are responsible. The total Eurozone member state debt is €15 trillion – 120% of the Eurozone economy.

Eurozone governments cannot ask the European Central Bank to issue more currency to help them service their debts. Instead they can apply to borrow from the European Stability Mechanism, or ESM, but the ESM only has €417 billion available, less than 3% of all the debts of the states that use it.

Even that is hanging by a thread: €417 billion dwindles to €183 billion if France’s public credit rating falls just one level from AA to AA-. France only escaped that in June this year because the rating agency Standard and Poor’s said that France’s debts had the ‘implicit support’ of Germany.

For ‘implicit’ read ‘doubtful’ – there is no legal obligation on Germany to pay France’s debts of €4 trillion as well as its own, also €4 trillion. Political considerations would supposedly cause it to. Really? Even if it wanted to, does Germany have the necessary resources? Is it good for €8 trillion, or indeed the entire €15 trillion if Germany ‘implicitly supports’ all the Eurozone member states? That would be over 300% of the size of its whole economy. Even Greece’s debt is only 193% of the size of its economy and that merits it having a Standard and Poor’s credit rating of BB+ (denoting a speculative investment with a substantial risk of loss).

If Germany was responsible for such a massive amount of debt, its credit rating should be nearer to the CCC level – junk with a very high risk of loss.

That’s the problem. Germany enjoys a AAA rating because the rating agencies in one breath consider it in isolation, and in the next breath they wheel in Germany’s implicit support to justify maintaining inflated ratings for other Eurozone member states, without adding that member state’s debts onto Germany’s and adjusting Germany’s rating downwards.

This is both a hall of mirrors and a house of cards, based on hope that ‘it all tracks back onto Germany’ and faith that Germany is good for it all. That sounds like pseudo-religious belief. The euro  no better than bitcoin? Maybe we’d better start believing it.