Jean-Claude Trichet points out that in terms of economic output, the euro area is second only to the United States. It accounted for about 20% of world output in 2010, twice the share of Japan (about 10% of world output), and somewhat less than the United States (about one-quarter of world output).
Central banks can't really become insolvent in a strict sense, since they can always print money. The anxiety then becomes the ability of the monetary authorities to tighten their purse strings in time to prevent spikes in inflation and interest rates. The longer the banking crisis and the sovereign crisis last, the more likely we will get a crisis of confidence in the central banks who act as lenders of last resort to banks and governments. http://venitism.blogspot.com
Trichet notes that for over 12 years now, the European Central Bank –together with all national central banks – has been delivering what it is expected to deliver: price stability in the euro area as a whole over the medium-term, with an average annual inflation of less than 2%, but close to 2%.
Banks in PIGS have unloaded risks amounting to one trillion euros with central banks. The central banks have distributed large sums to their countries' financial institutions to prevent them from collapsing. They have accepted securities as collateral, many of which are garbage. These risks are now on ECB's books, because the central banks of eurozone are not autonomous but, part of the ECB system. When banks in PIGS go bankrupt and their securities are garbage, the euro countries must collectively account for the loss. Bundesbank, provides one third of the ECB's capital, which means that it would have to pay one third of all losses. http://venitism.blogspot.com
Financial and fiscal stability concerns will make it difficult for central banks to aggressively fight inflation pressures once they emerge. The European Central Bank is just the latest victim, the sovereign and banking crises have forced it into actions that threaten to undermine its credibility over time. The gold price and exchange rates have already been signaling a loss of confidence in the value of fiat money for some time.
Trichet has thereby been safeguarding the euro's purchasing power. This has been achieved despite several headwinds to the European economy: oil prices went up; the internet bubble burst; violence and wars have raged in some parts of the world; and starting in mid-2007 we had to cope with the most severe global financial crisis in over 60 years. http://venitism.blogspot.com
Bundesbank has already decided to establish huge reserves to cover possible risks. The expected failure of Greece, which would lead to the bankruptcy of a few Greek banks, would increase the bill dramatically, because ECB is believed to have purchased Greek government bonds for €60 billion. Besides, ECB had spent about €100 billion on refinancing Greek banks. We criticized many times ECB's program of purchasing government bonds issued by ailing eurozone states. In the event of a bankruptcy or even a deferred payment, ECB would be directly affected.
Taken as a whole, the euro area performed soundly also when looking at other macroeconomic indicators, or comparing with other large developed economies. Adjusted for differences in population growth, per capita GDP growth in the euro area over the last decade has been almost the same as in the United States, at about 1% per year.
ECB accepted asset-backed securities (ABS) as collateral, amounting to one trillion euros. It was precisely such asset-backed securities that once triggered the real estate crisis in the United States. Now they are weighing on the mood and the balance sheet at ECB. ECB cannot jettison these securities without dealing a fatal blow to the eurozone. ECB is in a no-win situation now that it has become an enormous bad bank, a dumping ground for bad loans.
The dispersion of real GDP growth rates across euro area countries is comparable with the equivalent dispersion across U.S. states. For instance, the difference between the fastest and slowest-growing U.S. states is not of a markedly different order of magnitude as that between euro area countries.
Overall employment in the euro area increased by 14 million during the first twelve years, compared with a rise of about 8 million in the United States. And the overall yearly public finance deficit in the euro area is presently about half that in the United States or in Japan. The IMF projects indeed the euro area's fiscal deficit to reach 4.4% of GDP this year, against 10.8% of GDP in the U.S. and 10.0% in Japan.
Trichet states the euro's international status is the outcome of market forces. But one of the particular characteristics of the euro's international role is to be markedly regional and strongest in economies with close geographical and institutional links to the euro area.
The euro's international role also displays a high degree of stability. And the available factual evidence suggests that it has remained broadly unchanged since the outbreak of the global financial crisis, in particular.
For instance, the euro accounted in 2010 for about one-quarter of disclosed foreign exchange reserves globally (against around 60% for the US dollar and 4% for the yen). It also accounted for about one-quarter of the stock of international debt securities and for roughly 20% of foreign exchange turnover.
Central banks can go broke and have done so historically. Central bank insolvency may become an issue again, if central banks were to assume too many foreign-currency denominated liabilities in an attempt to support or bail out private banks and other financial institutions deemed to be too large or too interconnected to fail. Trichet points out the euro area has a balanced current account. As such, the euro area does not contribute to global imbalances, one of the main challenges facing the global economy and the world community.
Trichet stresses the euro area is the relevant dimension to consider for a vast single currency and economic area with a common exchange rate and monetary policy. And there, the numbers are clear: the euro area current account balance averaged less than 0.1% of GDP over 2005-2007 before the global crisis broke out, according to IMF figures. Moreover, the euro area current account is still projected by the Fund to be broadly balanced this year and the next up to 2015. The picture is very different in other parts of the world.
A concern is that after some partial reduction induced by the crisis, global imbalances are starting to widen again. This raises challenges for international monetary and financial cooperation. The euro area has a significant stake in effective global re-balancing, notably through sounder domestic policies worldwide which, in turn, would contribute to global external stability. The global economy has a lot of homework to do if it is to address these challenges.
As the health of much of the global economy weakens on a daily basis, political leadership increasingly ignores the source of the malady and instead focuses on short term band-aid remedies. These measures which may buy a few months, or years, of relative wellbeing, will convince the public that problems have been solved and will thereby take pressure off governments to make the needed structural changes. The $1 trillion EU bailout is a perfect example of this band-aid approach. Napoleon Sarko threatened to pull out of eurozone, unless Merkel agreed to back the European Union's bailout plan!
The euro has been rescued for the moment, but Eurokleptocrats have thrown the foundations of Fourth Reich's common currency overboard with their unprecedented bailout package. In the longer term, the dangers of the crisis can only increase, and the flood of billions of euros will lead to inflation. Eurokleptocrats have thrown overboard all the noble principles and promises of the formal, tough treaty-based foundations for the introduction of the euro and the independence of the European Central Bank. http://venitism.blogspot.com
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