On 2nd June 2011, European Central Bank President Jean- Claude Trichet “Would it be too bold, in the economic field, with a single market, a single currency and a single central bank, to envisage a ministry of finance of the union?”
We, at Decimal Point, have a long held belief that the only hope for the Euro to survive a single currency is for the member nations to give up their fiscal and military sovereignty to a single European Parliament, controlled de facto by Germany. In fact, a few days ago the Financial Times in London referred to European control of Greek Taxation and Privatization Ministries as some of the conditions for new Hellenic Rescue package.
What Mr. Trichet is asking is not a theoretical question, but a desperate SOS call from a sinking ship. In our opinion, ECB and ESCB (European System of Central Banks), are the de facto rescuers of the PIGS sovereigns and banks. For example, Central Bank of Ireland has borrowed around Euro 150 billion from other banks in ESCB in order to support Irish Banks. This is much higher than the official rescue of Ireland. Much of this ”unofficial rescue” has been funded by Bundesbank, as explained by the Chart 1 below.
Bundesbank explains - in its own words- the sharp rise since 2007 as “essentially due to the tension on the money market and problems in the banking sector within the euro area.” Without going into technicalities, essentially Bundesbank is acting as guarantor for German banks claims on PIGS banks – via ECB. This funded guarantee has increased by Euro 350 billion since the start of credit crisis in 2007, and this soft funding has been made available to PIGS Central Banks by Bundesbank (via ECB) at around 1.25% pa, and without any conditionality. Again, this amount is significantly higher than „official” rescue via ESFS of the PIG nations.
In our view, the once mighty Bundesbank has got itself into a concern now, with exposure to low quality credit, technically via ECB. Since ECB draws its strength from Germany, Bundesbank cannot take comfort from the technicality of its exposure to ECB.
We expect significant political pressure from Germany, Luxembourg, Netherlands and Finland for political integration. These four nations‟ respective National Central Banks (NCBs) have provided significant funding to all other NCBs in Eurozone. It is interesting to note that France is a not a provider of this funding, as shown in the Chart 2 above.
If the efforts of Germany succeed in getting a political integration, then survival of Euro is assured, otherwise doors are wide open for all possibilities.