Invite me to the funeral of the euro

/Pogled.info/ The thick smoke from a special military operation in Ukraine hides an urgent and acute problem for Europe – the upcoming financial crisis. It is able to shatter the entire EU banking system, then shatter a united Europe and bury the splendor and prosperity of European life under its ruins. Today, several European countries that are members of the eurozone are de facto bankrupt.

The European sovereign debt crisis began in 2010. Its epicenter was in Greece, and the country was facing problems in servicing its debt due to budget deficits and rising bond yields. Back then, ten-year bonds yielded more than 25% a year. But even at a fabulous rate, no one wanted to buy Greek bonds, and the country had to raise tens of billions of dollars from the IMF.

As a result, Greece came under the external control of financial advisers from the IMF, the ECB and the European Commission. But financial support and advice from top economists has not improved the Greek economy. Extremely difficult conditions for restrictions were imposed on the country – a sharp reduction in the budget deficit, and hence pensions and benefits, the sale of national infrastructure and tax increases. All this has caused a severe economic crisis: unemployment in Greece in 2014 jumped to 28%, among young people exceeded 50%. Overdue loans to households broke all records, and the level of government debt to GDP jumped to 180%.

The ECB has resolved the financial crisis. The regulator has started buying Greek government bonds. Real interest rates on Greek debt have fallen to negative levels, and the government has managed to borrow on the open market and pay off the IMF. As a result, the country’s insolvency problem has been swept under the rug, leaving its solution until better times. A decade later, Greece’s debt reached 198.4% of GDP, or 394 billion euros.

The problem with Greece’s debt is quite telling. In the name of saving the eurozone and the country’s creditors, it was not allowed to leave the single economic space and the EU a decade ago. Reforms have reduced the Greek population to poverty, and the country’s debt and low economic efficiency problems have not been resolved. But the main thing for European bureaucrats was done: European banks did not suffer losses.

Today, Greece is not the only country in Europe that is so indebted. Seven of the nineteen countries that make up the eurozone have debt that exceeds annual GDP. For example, Spain’s debt-to-GDP ratio increased from 85% to 118% over the decade, which is € 1.427 trillion in absolute terms. Portugal’s debt reached 127% of GDP and 270 billion euros. However, all these economies are peripheral and each is unable to do much damage to the EU’s banking system. These debts are being bought, refinanced and written off with severe consequences for the countries, but they do not pose a threat to the entire Eurozone.

The toxic queen of Europe’s debt is Italy. Its public debt has been growing every year since 2008 and today it is a real time bomb under the euro. The debt-to-GDP ratio here has exceeded 150%, and the debt itself has reached an astronomical 2.75 trillion euros. Unlike the United States or Japan, which are also overburdened with debt, Italy (such as Portugal, Spain, Greece) cannot print its national currency to pay off. In terms of debt service, these countries have been held hostage by the ECB.

Italian debt is rapidly depreciating today. Already in the summer of last year, creditors were in line to lend to the Italian government at 0.5% per annum. But now it is difficult for Rome to raise money even at 3%. But even this ten-year yield does not cover the level of inflation in Italy, which reached 6% in April. This means that inflation-adjusted bondholders receive a guaranteed loss. Investors have only one natural desire – to sell such paper. Italian bonds depreciate even faster than Spanish and Portuguese debt.

Without ECB support, Italian bonds will fall very quickly and the Italian government’s ability to borrow will soon be limited. But it cannot do without new debt: the country’s budget remains in deficit. Plus, due to the rise in the price of energy resources since the beginning of this year, there is a deficit in the trade balance. All these holes need to be plugged with something.

For its part, the ECB’s unlimited credit card is expiring. Eurozone inflation has reached unprecedented levels with the prospect of reaching double digits this summer. This inflation has had a strong impact on the real incomes of the population. The word “recession” is increasingly being heard by economists. Thus, the European index of consumer confidence in April this year has already fallen to 96.4 points, below the bottom of the crisis of 2008. This means that the real European economy is in severe crisis.

If the ECB continues to be inactive, inflation will continue to damage people’s real incomes, devalue savings, undermine investment and disrupt debt markets. The ECB will therefore be forced to tighten monetary policy in the euro area, which means that support for government bond markets will be reduced in one way or another. However, whatever the ECB chooses, the situation is already such that the debt market will in any case sink into chaos faster and faster, and bondholders – European national banks, pension and sovereign wealth funds – will be spinning in the vortex of losses. . That is, all the main guardians of European capital have been attacked.

A decade after the unresolved Greek debt crisis of 400 billion euros, Europe is on the verge of a debt crisis in at least four countries with a total debt of 4.85 trillion euros. The irony is that there is no longer an acceptable solution. European capital will be destroyed either by inflation, or by the wave of bankruptcies of the eurozone countries, or by a sharp devaluation of national currencies after the exit of the countries.

Translation: V. Sergeev

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