The crucial constructional fault of EMU is seen in the fact that member states can impose their budget deficits on other members behind the scenes, covertly and inconspicuously. This happens in the following way. – Members that spend more than they collect in taxes issue government bonds to cover the shortfall. – Banks buy a good portion of these bonds because they can deposit them with the ECB as collateral for new loans. – If the banks have deposited the government bonds and received a central bank loan in return, the money supply in the EMU increases overall. – But if the money supply increases, CETERIS PARIBUS sooner or later prices will increase as well, and this across the euro area as a whole. – In this way, a member can easily pass on its debts to all other members via the common currency without being forced to address the causes of the budget deficit directly with economic policy measures. Politicians, too, can distribute campaign goodies uninhibited to the disadvantage of all citizens of the EMU, as indeed it was and is until now the case. – This fatal concatenation could only be stopped if – banks, as in the case of the Greek crisis, suffer losses through forced haircuts and refrain from buying government bonds of shaky members; but this hardly happens as long as these losses could be depreciated tax saving and thus ultimately passed on to others, – rating agencies downgrade these government bonds to junk status – which until now immediately earned them the scolding of many politicians, the EU Commission along with violent threats, culminating in warning to be banned: the rage is figuratively directed at the thermometer instead of the fever – and the ECB is thus forced to apply a high haircut, – the ECB would no longer accept such ultimately worthless government bonds at all and would thus cut off the flow of money to the highly indebted member, which it cannot do for political reasons and because of peer pressure in the ECB Governing Council. – It is therefore a mistake to claim that the ECB only financed crisis states by buying the government bonds of shaky members: this happened long before in the way described. Without the ECB, Greece would not have been able to pile up such a high mountain of debt, and the same applies to Cyprus or Spain and Portugal. – See fear, perverse, purchases, central banking, bail-out, democracy deficit, downrating, expropriation, cold, EMU blow-up, ECB sin-fall, fragmentation, gold sacrifice, peer pressure, Japanization, moral hazard, low interest rate policy, perpetual motion machine, bill, renationalization, junk paper, debt drug, debt union, debt repayment pact, sovereign liability, stability and growth pact, southern front, transfer union, redistribution, central bank induced, constitutional article one, treaty fidelity, growth-debt fact, historical, path inflation, forced expropriation.
Attention: The financial encyclopedia is protected by copyright and may only be used for private purposes without express consent!
University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
https://de.wikipedia.org/wiki/Gerhard_Ernst_Merk
https://www.jung-stilling-gesellschaft.de/merk/
https://www.gerhardmerk.de/