Deepening EU Banking Crisis Meets Euro-TARP and Taxpayers

Yves here. When the crisis was getting serious in the US, the Treasury tried twice to create a “remove bad exposures from bank balance sheets” approach. The first was when Hank Paulson tried to broker a private sector solution to the so-called SIV (structured investment vehicle) problem in the fall of 2007. This came about when the asset backed commercial paper market seized up starting in August 2007. SIVs were supposedly off-balance sheet vehicles that had a fair bit of subprime mortgage exposure. The structures varied, but they were somewhat to pretty dependent on commercial paper funding. While in theory the investors in these SIVs would just eat the losses, in practice many were ginormous customers of the banks and would insist on being made whole. And on top of that, it was revealed much later that the bank with the biggest SIV exposure, Citi, was so dopey as to have given a “liquidity put,” so it was explicitly on the hook if the SIVs could not roll their commercial paper (mind you, this is simplified but accurate enough for the purposes of today’s discussion).

We said from the get-go that Paulson’s solution of somehow selling the bad assets out of the SIVs would never work because if you sold them at market prices, you’d recognize the losses, so this was hardly a remedy. Paulson kept acting as if there was a way to get the assets out without having a subsidy somewhere, somehow. The government was not going to do this, and there was no way you’d find a private sector stooge to do that either.

Similarly, the TARP was originally supposed to transfer bad assets out of banks. Again, Paulson & Co spend time (not much time, mind you) acting as if the assets could be purchased at prices that didn’t amount to subsidies to banks. We debunked this idea and weren’t at all surprised to see this TARP scheme die an early death. As we wrote in 2008:

Long-standing readers and finance junkies may remember the Treasury’s structured investment vehicle fiasco of last fall. By way of background, banks had created off balance sheet entities called structured investment vehicles (SIVs) which contained subprime (and sometimes other) assets, funded by commercial paper and short-term debt. Like a regular bank, the economics worked because the assets were of longer maturity (3-5 years) than the funding sources, and short term money is generally cheaper than long-term funding.

Then the subprime crisis hit, lenders became very leery of funding subprime related assets, and the SIVs looked pretty certain, as it indeed played out, to produce losses. The banks had assumed they could simply let the SIVs fail, but were told in no uncertain terms by the debt investors that There Would Be Consequences if the SIVs went bust. Suddenly an off balance sheet exposure was not off balance sheet at all.

Hank Paulson attempted to ride to the rescue with an idea, the so called Master Liquidity Enhancement Conduit, that we said virtually from the get-go would not work. He wanted to set up a vehicle, to be managed by a third party that would buy the junky SIV holdings, which included risky real estate assets and murky stuff like collateralized debt obligations, and be funded by private investors. The problem was that there was no price which would solve the basic conundrum: investors were not willing to pay above market prices, and the banks were unwilling to sell at market. Paulson & Co. wasted nearly two months trying to breathe life into this stillborn idea, then abandoned the effort.

Ah, but the MLEC lives! It’s been retooled into the Paulson plan We still have a fund that will be managed by third parties. We still have the buying of drecky, hard to value assets, with emphasis on mortgage-related paper. And the taxpayer is being told that it is an investor, that it might actually make a profit on this venture.

And as with the MLEC, the big issue will be how to price the paper or at least some commentators treat that as an open question. But by foisting this on to chumps taxpayers, the problem goes away. It is clear now that the intent is to pay over whatever the book value of the paper is, both to recapitalize the banks and to generate high valuations that let other financial firms use these phony favorable prices for preparing their financial statements.

But the MLEC was designed to address the pressing problems of a year ago. The crisis has advanced considerably since then.

Remaining fixated on a solution that is badly out of date is tantamount to fortifying the Maginot Line when the blitzkrieg has rolled into the fields of France and the British are beating a retreat to Dunkirk. And I expect it will prove every bit as effective.

The big reason the revived Paulson idea died is he also tried pretending as before that there would be no subsidies. How will the Europeans finesse this wee problem?

By Don Quijones, Spain & Mexico, editor at Wolf Street. Originally published at Wolf Street

Events are moving so fast in Europe these days, it’s almost impossible to keep up. While much of the attention is being hogged by political developments, including the election in the Netherlands, Reuters published a report warning that the European banking sector may face even higher bad loan risks if the ECB begins to scale back its monetary stimulus programs, something it has already begun, albeit extremely tentatively.

The total stock of non-performing loans (NPL) in the EU is estimated at over €1 trillion, or 5.4% of total loans, a ratio three times higher than in other major regions of the world.

On a country-by-country basis, things take look even scarier. Currently 10 (out of 28) EU countries have an NPL ratio above 10% (orders of magnitude higher than what is generally considered safe). And among Eurozone countries, where the ECB’s monetary policies have direct impact, there are these NPL stalwarts:

  • Ireland: 15.8%
  • Italy: 16.6%
  • Portugal: 19.2%
  • Slovenia: 19.7%
  • Greece: 46.6%
  • Cyprus: 49%

That bears repeating: in Greece and Cyprus, two of the Eurozone’s most bailed out economies, virtually half of all the bank loans are toxic.

Then there’s Italy, whose €350 billion of NPLs account for roughly a third of Europe’s entire bad debt stock. Italy’s government and financial sector have spent the last year and a half failing spectacularly to come up with a solution to the problem. The two “bad bank” funds they created to help clean up the banks’ toxic balance sheets, Atlante I and Atlante II, are the financial equivalent of bringing a butter knife to a machete fight. So underfunded are they, they even strugggled to hold aloft smaller, regional Italian banks like Veneto Banca and Popolare di Vicenza, which are now pleading for a bailout from Rome, which in turn is pleading for clemency from Brussels.

What little funds Atlante I and Atlante II have left are hemorrhaging value as the “assets” they’ve been used to buy up, invariably at prices that were way too high (often at over 40 cents on the euro), continue to deteriorate. The recent decision of Italy’s two biggest banks, Unicredit and Intesa Sao Paolo, to significantly write down their investment in Atlante is almost certain to discourage the private sector from pumping fresh funds into bailing out weaker banks.

Which means someone else must step in, and soon. And that someone is almost certain to be the European taxpayer.

In February ECB Vice President Vitor Constancio called for the creation of a whole new class of government-backed “bad banks” to help buy some of the €1 trillion of bad loans putrefying on bank balance sheets. Constancio’s idea bore a striking resemblance to a formal proposal put forward by the European Banking Authority (EBA) for the creation of a massive EU-wide bad bank that, in the words of EBA president Andrea Enria, would “make it much easier to achieve critical mass and to create a well functioning market for (impaired) assets.”

Here’s how it would work, according to Enria’s words (emphasis added):

The banks would sell their non-performing loans to the asset management company at a price reflecting the real economic value of the loans, which is likely to be below the book value, but above the market price currently prevailing in illiquid markets. So the banks will likely have to take additional losses.

The asset manager would then have three years to sell those assets to private investors. There would be a guarantee from the member state of each bank transferring assets to the asset management company, underpinned by warrants on each bank’s equity. This would protect the asset management company from future losses if the final sale price is below the initial transfer price.

One of the biggest advantages of launching an EU-wide bad bank is that it would avoid the sort of public “resistance” that would occur if it was done at a national level, says Enria. Italian lenders would presumably be able to continuing pricing bad loans at or around 40 cents on the euro on average, even though their real value — i.e. the current value priced by the market — is often much lower. The difference between the market price, if any, and the price the banks end up receiving for their bad debt will be covered by Europe’s taxpayers.

If given the green light, the scheme would pave the way to the biggest one-off bail out of European banks in history. It would be Euro-TARP on angel dust, with even fewer checks and balances and much less likelihood of ever recovering taxpayer funds. According to a banker source cited by Reuters, while Germany has not yet endorsed the EBA plan, the EU documents describe the development of a secondary market for NPLs as a priority. According to Enria, the EBA hopes to finalize matters “at the European level” in the Spring.

The documents also include proposals for a wider “restructuring of banking sectors” as states address the NPLs problem. This “could lead to mergers among EU banks after they offload their bad loans,” a banking industry official said.

In other words, EU taxpayers would have to spend potentially hundreds of billions of euros saving yet more banks from the consequences of their own acts and bail out their bondholders and potentially their stockholders too, with funds desperately needed in other areas. Those banks, once saved and their balance sheets cleansed, would then be handed on a platter to much bigger banks. In return, taxpayers would end up with an even more concentrated, consolidated, interconnected financial system that is even more prone to abuse, corruption, and excess. By Don Quijones.

The ECB’s policy isn’t about creating inflation but about keeping a financial system and a currency union from collapsing upon each other. Read…  ECB Trapped in its Own “Doom Loop” as Inflation Surges

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  1. ian shepherd

    “could simply let the SIVs fail, but were told in no uncertain terms by the debt investors that There Would Be Consequences if the SIVs went bust.”

    What were the consequences?

    1. Katharine

      Good question! The suggestion that there would be consequences reminds me of thugs demanding protection money from merchants. Under what circumstances might the investors be charged with racketeering, or whatever Europeans would call it? (Sorry, I suppose it’s just a pipe dream, but it had sudden strong attraction.)

  2. PlutoniumKun

    Of course, the obvious way to reduce toxic debts is to boost the European economy – a very high proportion of those bad debts (especially in Italy) are not the result of bad lending practices, but of a long term decay in economies meaning otherwise reasonable loans going bad. The Irish case is actually a positive oneNPL’s are stabilising and reducing sightly, because the economy is doing well. Rising property values in Ireland are pulling many non-performing mortgages and loans into viable ones.

    But of course, ideology rules – as this blog points out, one of the consistent worse offenders in Ireland – AIB bank, which has had to be bailed out more than once by Irish taxpayers – is to be sold off, having had its bad loans stripped out. But there is not a squeak from the establishment to allow a discussion of keeping the bank in national ownership, for the benefit of citizens.

    1. Eustache de Saint Pierre

      I was over in Dublin for a short business trip in December, for the first time in a few years. I was frankly shocked by the amount of the homeless & people begging. I actually found the time to visit Apollo house to give a donation to an effort I found very laudable & a good illustration of what can be done at a grassroots level.

      I am not sure if blowing another housing bubble is a good idea & judging by the change I found in Dublin – Neoliberalism is obviously thriving in that tax haven of a country. As for it doing well, as is obviously the case unless you are sleeping in a car or stuck on a hospital trolley, the actual amount does appear to vary on the figure one happens to use, as is explained in this article, which is in my opinion a pretty good source for monetary goings on in the UK & to a lesser extent Europe.

      1. PlutoniumKun

        Yes, the situation on the streets is appalling, it is primarily due to austerity cut backs in discretionary social services (i.e. the services aimed at the most vulnerable and peripheral along with very sudden and dramatic increases in rents due to a shortage of housing supply. It is improving very rapidly as it has become a political embarrassment and the housing market is normalising (the crash resulted in a lot of distortions which kept empty or underused properties unavailable). It also destroyed building industry capacity (i.e. all the tradesmen and engineers went to Oz or Canada) which has meant a very slow pick up in construction.

        Nobody pays any attention to Irish GDP data, its been distorted since the 1970’s due to the openness of the economy and widespread transfer pricing for tax reasons. GNP data is probably more accurate, but most look at the employment rate as the best proxy for the economy, and at the moment thats very healthy, although it hasn’t yet become healthy enough for significant pay rises outside the high tech sector.

    2. WorldBLee

      I’m not sure a property bubble, as in Ireland, is a long term solution to alleviate bad debts…

      1. PlutoniumKun

        There isn’t a bubble yet – the banks don’t have the liquidity to pump money into the housing market yet – obviously they would if they could. But it is certainly on its way to being one.

  3. Larry

    As is always the case, the sanctity of creditors is protected to the limits of sanity while debtors are thrown under the bus. Banks must be restored to health, instead of eating their poor performing loans and having their senior management fired. Small businesses and homeowners must be thrown out of their homes so that large investors can swoop in and purchase assets at bargain prices and gain from implicit support from governments and central banks. It is amazing to me looking at percentage of NPL on some bank balance sheets and the situation on the ground for citizens in countries like Greece that the EU is able to lumber on. Brexit will certainly accelerate a potential fracturing of the EU and Trump’s policies may damage it further, though who knows with his paranoid style of “leadership”.

  4. Disturbed Voter

    Summarizing: Nationalizing and sterilizing bad loans … is temporary and prejudicial Jubilee by the central bank … but eventually the bad loans have to be paid to creditors, who are being protected against loss. Thus everyone gains, except the taxpayer and trading partners. Greece etc cannot do this, because they have no central bank of their own, they have to have the EU central bank consider them … worthy.

    Then as the bad loans, now in the national “bad bank”, mature, they are paid off in fiat. The fiat however can be provided by fiat expansion and by taxation. The question remains, to what extent fiat expansion will be sterilized. This depends on how many Euros other central banks or sovereign funds want to carry at their currency desk. That depends on the prosperity and good will of foreign powers. Similarly the taxation to pay for a portion of the maturing bad loans, depends on the good will of the taxpayer.

    Basically an involuntary and crony expansion of liquidity that dilutes the impact of the bad loan portfolio over time. But things won’t get better if the bad loans are merely rolled over, instead of being paid. In the case of the US, dropping interest rates to zero, merely assists the government or “bad bank” to roll over higher interest loans to lower interest loans … but this has diminishing returns unless you can institute general negative interest rates … which is a hidden tax increase. If no lesson is learned, this liquidity dirty trick will be repeated, and the situation gets worse. The assumption that the banks will “behave themselves now” is naive of course.

    There is no free lunch, unless you are the recipient of a Jubilee, but in this case cronyism is for the creditors, not the debtors. With the resulting austerity, the debtors slowly go bankrupt, with immediate debtor Jubilee, the creditors quickly go bankrupt. Debtor austerity is supposed to be covered by the usual main economic growth. The alternative being a partial Jubilee for debtors, where the central bank or “bad bank” only pays off 90% of principle and no interest, so that the creditor is forced to take a partial loss (aka negative interest rate on the bad loans only). Of course as a debtor I would prefer the latter … to apply austerity to the creditors, not the debtors. But my cronyism magic wand is broken

    1. Synoia

      In this case, where the bank has NPLs, the Bank is the Creditor (I believe).

      If banks create money when they originate loans, why can Banks not destroy money by writing off NPLs?

      As we read in the Barclays UK 5.7 Billion recapitalization, the money went loan->deposit->Capital, by sleight of accounting, then what would be the similar process to extinguish the loan?

      1. Gman

        Major national banks are in fact quasi-autonomous agents of the state. Discuss.

        Barclays allegedly avoided a taxpayer bailout courtesy of private middle eastern investors selflessly riding to their rescue, which presumably helped it fill its self-inflicted black hole by fair means or foul….. I know where my money would be…. thus supposedly letting the hapless UK taxpayer off one less banking hook and leaving Barclays to carry on regardless.

        NPLs have always been priced in as the cost of doing businesses and banks have always had ways of writing them down (and in some cases getting tax relief) or simply flogging them on to third parties, debt collection agencies or ideally the next mug born of every minute.

        The thing to bear I mind of course is that writing off debt on a large scale, particularly under duress, sends out dangerous signals, both nationally and internationally, that all is possibly not well with the bank itself in terms of capitalisation, and the quality of its assets, or more importantly the economy at large.

        All circumstances which can possibly lead to a tightening credit environment and further strangling of growth.

  5. John Wright

    In my simple algebraic view of finance, I saw the USA MBS meltdown as a previously unrecognized massive speculative loss finally being observed by the financial authorities.

    But the political authorities did not want to damage the balance sheets of their true constituency, the wealthy elite.

    About the only way the loss recognition could be avoided would be to get the underlying assets (residential houses) back to the bubble price levels.

    But this would be difficult to do, so the last 10 years have had the US authorities trying to spread some of this loss across the USA’S population (some who lost all home equity) while continuing to financially encourage home ownership (and increasing home prices).

    To some extent, they have succeeded in getting the residential housing market well off the bubble bottom in my area of Northern California.

    Here is some information on government involvement in the USA housing market, from March of 2016

    “The payments on one of every four new residential mortgage loans are insured by the government.”

    “The government buys 1 of every six residential mortgage loans issued for its own account.”

    “Though the Government Sponsored Enterprises the government either owns or insures 3 of every 5 mortgage loans currently outstanding in the country.”

    “Fannie Mae and Freddie Mac are at the top of the mortgage sector. They own or insure $4.6 trillion in residential mortgages or 45.9% of the market up from 41.9% in 2009.”

    “The private sector is second largest. It controls $3.9 trillion in mortgages or 38.8% of the total loans outstanding. Its share is down from 52.3% in 2009”

    “At the bottom, and fastest growing, is Ginnie Mae. This wholly owned agency of the United States government owns $1.5 trillion in loans or 15.2% of the market up from 5.7% in 2009. It is growing so fast that it is taking market share from both the GSEs and the private sector.”

    But one can be concerned that this will not follow the same earlier bubble path, as the US government has an even higher exposure to housing mortgages (61.2% (2016) versus 47.7% (2009)) .

  6. Sound of the Suburbs

    Isn’t this what Central Banks are for and why they have a printing press?

    All the toxic sub-prime NPLs now lie on the FEDs balance sheet.

    All bankers need someone to clear up the mess they create, this is why we have Central Banks.

    We need to treat bankers like puppies and wipe their noses in the mess they leave behind.

    1. Chauncey Gardiner

      Re: …“Isn’t this what Central Banks are for and why they have a printing press?”

      Good question. This is a political and ideological issue, as well as a banking problem. The questions now revolve around selecting the least damaging of some poor choices, as the debts cannot and will not be repaid, and it’s now merely a matter of recognizing that.

      Suggested policy map:

      1.) Write down the banks’ Non-Performing Loans (NPLs) to the point where they can be serviced by the borrowers and collateral values exceed the reduced carrying values of the loans on the banks’ books.

      2.) Write off banks’ shareholders’ equity in the amount of the difference between the total amounts at which the loans were reported on the banks’ books and the reduced carrying value of the loans following recognition of the total amount by which the banks’ loans have been impaired.

      3.) Write off banks’ bonds in the amount by which No. 1 exceeds the total amounts of No. 2, beginning with the most junior subordinated bond indebtedness, followed by write-offs in the banks’ most senior bond indebtedness in terms of priority.

      4.) Write off uninsured deposits in the amount by which No. 1 exceeds the total of Nos. 2 and 3 combined, if any.

      5.) Sell the residual amounts of any remaining non-performing loans to the ECB, which has demonstrated over the past 8 years that it can create money at will. The ECB would purchase the loans at their original carrying value on the banks’ books less the total amounts in Nos. 2-4.

      6.) Allow national central banks and successor privately owned banks to repurchase loans from the ECB.

      7.) Implement a new EU “Marshall Plan” funded by the ECB and the World Bank to provide fiscal support and recapitalize the European banking system as necessary.

      Neoliberal policy proponents desire both fiscal austerity and repayment of all debts and accrued interest in full, thereby preserving their illusionary cake while eating it too. They also seek expansion of centralized monetary and economic control.

      National politicians and their bank and corporate cronies want to protect the status quo from which they have personally benefited and derived their perceived wealth.

      The system will not be changed until the wealthy suffer material economic losses from their poor policy, underwriting and business decisions rather than transferring their losses to the public.

  7. Synoia

    There would be a guarantee from the member state of each bank transferring assets to the asset management company, underpinned by warrants on each bank’s equity.

    Then a Miracle occurs, but:

    The liabilities should still be on the bank’s balance sheet, and the non-sovereign state governments are guaranteeing the banks.

    The Eurozone state governments should point to the ECB and state “It’s your problem.” We, the states, cannot guarantee banks, because that’s an illegal subsidy to business.

    In the US the citizenry would file a lawsuit to get adjudication on the matter.

  8. Sound of the Suburbs

    No one can admit things aren’t working.

    The problems run very deep and aren’t going to be fixed with monetary policy.

    Knowledge of economics and monetary theory has been regressing for one hundred years as the wealthy tinker with it to their advantage.

    1920s inequality suited them just fine, so they have bought back 1920s neoclassical economics.

    Why everything looks so familiar:

    1920s/2000s – high inequality, high banker pay, low regulation, low taxes for the wealthy, robber barons (CEOs), reckless bankers, globalisation phase

    1929/2008 – Wall Street crash

    1930s/2010s – Global recession, currency wars, rising nationalism and extremism

    1940s – Global war.

    The same absolute faith in markets ensured no one recognized the bubble that had been blowing up which will wreck the economy

    “Stocks have reached what looks like a permanently high plateau.” Irving Fisher 1929.
    In 2007, Ben Bernanke could see no problems ahead.

    The Euro is based on an assumption from today’s economics that it will naturally head to a stable equilibrium. It is an assumption I wouldn’t have much faith in.

    The bankers create money out of nothing, we better hide that, though it is just a mechanism to allow you to borrow your own money from the future. When you know how it works you know why prudent lending is essential and why you don’t want bankers creating money to feed into speculation and asset bubbles. It also help you to realise the debt load is money borrowed from the future, the more debt there is, the more impoverished the future is.

    “…banks make their profits by taking in deposits and lending the funds out at a higher rate of interest” Paul Krugman, 2015.

    This is today’s theory (financial intermediation theory), but it is nothing like the reality.

    If we knew how it really worked we could have seen 2008 coming.

    This is the build up to 2008 that can be seen in the money supply (money = debt):

    Everything is reflected in the money supply.

    The money supply is flat in the recession of the early 1990s.

    Then it really starts to take off as the boom gets going which rapidly morphs into the US housing boom, courtesy of Alan Greenspan’s loose monetary policy.

    When M3 gets closer to the vertical, the black swan is coming and you have an out of control credit bubble on your hands.

    Credit bubbles are reflected in the money supply (money = debt).

    1. Sound of the Suburbs

      Neoclassical economics corrupted Classical economics at the end of the 19th and beginning of the 20th Century.

      The distinction between “earned” and “unearned” income disappears at this point and the once separate areas of “capital” and “land” are conflated.

      The landowners, landlords and usurers are now just productive members of society and not parasites riding on the back of other people’s hard work, but they are.

      Free-trade needed a low cost of living as they knew in the 19th Century when they repealed the Corn Laws.

      This knowledge is lost today and the West has priced its labour out of international markets with excessive housing, healthcare (US) and education costs (student loan repayments).

      Free-trade needs subsidised housing, healthcare and education to keep the cost of living down, all known in the 19th Century.

      What if you don’t get the cost of living down?
      You need protectionism.

      Trump has the protectionist solution.
      Bernie had the re-distributive solution.

      Neo-liberal free trade with a high cost of living causes the populists to rise (aka those priced out of global labour markets by national rentiers).

  9. edr

    “What little funds Atlante I and Atlante II have left are hemorrhaging value as the “assets” they’ve been used to buy up, invariably at prices that were way too high (often at over 40 cents on the euro), continue to deteriorate”

    Can you imagine how quickly the whole thing might have been cleared up in the US if homeowners had been offered to keep their homes at 50cents on the dollar, or 60cents on the dollar?

    But we don’t want to give bad incentives to the public, we only want to give bad incentives to Corporations and Banks, to encourage them to continue buying politicians and creating new housing bubbles with new creative scams[securitization] to bring down the whole economy. They’re the creative sector after all.

    So instead Bush and Obama bailed out the banks that had destroyed the economy, took their bad housing loans off their hand paying them almost full price for something that wasnt even worth 50cents on the dollar, while impoverishing previous homeowners across the country AND added the cost of the bank bailouts to the National Debt, along with the useless Wars…. ad naseum… and left the criminal banks standing ready to do the same thing again to our children.

  10. Sound of the Suburbs

    Many of the Euro’s problems stretch right back to the beginning; they just didn’t become apparent until the Euro-zone crisis.

    The financial sector made an assumption that Germany would backstop all debt within the Euro-zone and set interest rates as if lending to any nation was like lending to Germany.

    Later this turned out not to be the case, and caused sustainable debt to become unsustainable debt in many of the nations at the periphery of the Euro-zone.

    Everyone could see what was happening, but no one stood up and said there was not going to be any debt pooling.

    Many of the Euro-zones periphery nations had been high risk as far as lending was concerned and had previously had very high interest rates.

    Central Bankers lower interest rates to encourage spending now and raise interest rates to defer spending into the future.

    Spending had been encouraged throughout the Euro-zone periphery and they were only too willing to follow the incentives being given them.

    The nations that were most incentivised to borrow and spend by massive falls in interest rates were those that would have the most trouble when interest rates corrected to their normal very high levels.

    The mispriced lending within the Euro-zone carried on for many years and the money creation from new debt allowed the countries to really boom, e.g. the Celtic Tiger, Ireland. Housing booms blew up in Greece, Spain, Ireland and Holland. The new money fed back into wages and prices at the Euro-zone periphery increasing the under-lying imbalances already present.

    “historically the German D-Mark had been strengthening since its introduction in 1948 against the currencies of its neighbours, and this reflected – and compensated for – increased German competitiveness. Their weakening currencies allowed German trade partners to keep their export industries in business and their workers employed. By introducing a single currency, future revaluations of the German currency were disallowed. This amounted to a de facto future devaluation of German purchasing power, revaluation of the currencies of the other European countries, and hence would render non-German economies less and less able to compete against German exports over time.” Professor Werner

    The under-lying problems of the Euro-zone were magnified by early mismanagement.

    The ECB wasn’t designed as a full Central Bank and didn’t have the power to intervene when interest rates returned to their correct levels without debt pooling. This allowed the suddenly unsustainable debt problems at the periphery to grow with no mechanisms available to deal with them. Bailing out their banking sectors added to their woes and added to their debt problems.

    Can we put Humpty Dumpty back together again?
    Wait and see.

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