We have been analysing, for the thinktank the Bruges Group, the extreme difficulties in which the Eurozone finds itself, after years of economic stimulus totalling over 3% of GDP per annum and the build-up of both the ECB's Asset Purchase Programmes and
the loans within the TARGET2 system.
These imbalances are insoluble, and there is a big bullet to dodge: the Fiscal Stability Treaty obligation on each Member State to reduce its national debt-to-GDP ratio to 60% by 2030.
The announcements from the new Italian coalition government could not have come at a worse time. Commentators have focused on the intention to run a budget deficit above 3% and that this is in contravention of the Stability and Growth Pact.
Ignoring the Fiscal Stability Treaty is far more serious, since it is the earnest to the international financial markets from the European authorities and the EU Member States (except the UK and the Czech Republic) that EMU is irreversible.
Instead the Italian coalition intends to borrow more (who from? The ECB and other Euro central banks are stuffed to the gunnels with Italian bonds), and already the resulting disquiet has pushed up the yields on Italian debt, and pushed down the bonds' value.
In turn this has two more very nasty impacts.
Firstly it causes a major drop in value of all the Italian bonds that the ECB and other Euro central banks are stuffed to the gunnels with. They have been the biggest buyers of this debt since the Euro Sovereign Debt Crisis.
Secondly the other Euro central banks are lending the Italian central bank over EUR430 billion in the TARGET2 payment system, secured on Italian government bonds. When the collateral drops in value like that, the loan becomes partially unsecured.
Italy's situation brings into clearer focus that the Fiscal Stability is largely a dead letter, and even if there were to be a year or two's "fiscal flexibility" on the target date.
Several Member States which are overindebted compared to the 60% measure are not yet even in fiscal surplus, let alone on a compliance trajectory - and this includes Belgium and France - and they cannot turn their situation around without shrinking GDP and
making compliance even harder to reach.
There is only one pathway available, which is the completion of Monetary Union, via a series of ultimata given to the EU Member States by the European authorities:
- forcing all non-Eurozone Member States into the Euro;
- converting the “Eurosystem” of the European Central Bank and the National Central Banks into a single legal person, with the ECB at its head and the National Central Banks becoming its branches;
- installing an EU-wide Bank Deposit Insurance System;
- transference of Member State government debts onto the legal person of the European Union, meaning they become the joint-and-several liability of all Member States.
It is that or risk a total economic collapse. No pressure, then.
The likelihood of a total collapse has been increased by the Italian coalition government.
The European authorities must act and very soon, or see a repeat of the Greek crisis but on a scale a dozen times as large.
This is really why Brexit was an inevitability at the point where the European authorities had either to admit failure or engage in a “Flucht nach vorne”, a German phrase for which we have no direct equivalent - it is 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.
Arguably the UK stepped off the Euro bus on Black Wednesday in 1992, but has been riven with controversy ever since as to whether to get off and stay off, or to maintain one foot on it to keep trade going and one foot off as regards mitigating the detriments
of integrationist policies we had no stake in.
That mitigation has itself been a failure; we have had to accept high payments, a steady stream of onerous regulation, an influx of over 3 million EU economic migrants, and a plundering of our corporate tax base by the same multinationals – out of their
profit-shifting bases in Ireland, Luxembourg and the Netherlands – that seem to so much have the ear of the UK’s Brexit negotiating team through their pressure group the Confederation of British Industry and its supporter in the Cabinet the Chancellor of the
The major worry is whether the Brexit deal that is being worked out between the UK government and the European Commission and Member States is a prolongation of the one foot on/one foot off arrangement we have had since 1992, or is the clear break that the
UK population voted for, once they had been given the chance.
Those in favour of close alignment and trade links will be happy to have kept the UK’s foot on the bus. It is another matter how they will explain away to the UK population firstly the acceptance of a continuation of the detriments that is the price of access,
and secondly the direct fall-out on the UK deriving from our remaining closely aligned with an organisation that is in the Red Zone for the reasons explained in the paper.
There had better be no fall-out on the UK, either from the measures needed for the Euro to survive, or from the Euro’s collapse if that is what occurs.