So much for QE as the answer to the EU’s problems.
In 2012, during the depth of the EU banking crisis which nearly took the entire EU financial system down, Mario Draghi stated that he would do “whatever it takes” to hold the EU together.
Anyone paying attention knew that this was a bluff. True, the ECB and EU leaders had already defied if not broken every condition of the Maastricht Treaty and the Schengen Treaty (the legislation that formed the EU proper). However, even to the most cynical analyst, Mario Draghi’s claim was pushing the envelope a little too hard.
Implementing capital controls and border controls limit freedom, but from the perspective of monetary policy, they’re secondary items. The REAL power is that of the printing press.
This is how Draghi’s promise to save the EU was different from every other action: it addressed the structure of the EU in its most critical component, namely the control of the currency.
It took the EU two years to cobble together its reasoning for how something that went completely against the Maastricht Treaty would be permitted. As usual it was the Germans (the ultimate holders of the purse strings) who gave the “OK.”
Since being given the green light on QE, Draghi has spent over €600 billion. The ECB’s balance sheet is now approaching its former record high from 2012 after the massive LTRO and LTRO 2 programs.
And Draghi has accomplished?
Not much of note. The EU’s inflation rate is clearly trending lower. This is AFTER the first ever QE program was both launched and increased in pace form €60 billion to €80 billion per month.
For all intensive purposes, four cuts into NIRP and the first ever QE program represented nothing more than a tiny dead cat bounce in inflation. If you didn’t know the dates of those programs, looking at the above chart you’d be hard pressed to guess anything significant had happened in terms of monetary policy.
Why is this?
Because the structural problems for the EU absolutely DWARF the ECB’s current programs. The EU banking system is €46 trillion in size and leveraged at 26 to 1.
At these leverage levels, even a 4% decline in asset values renders the entire financial system insolvent. A 4% decline of €46 trillion represents €1.84 trillion. The ECB’s QE program is roughly a little more than half of this.
The real issue is that the ECB is completely cornered. The best it can do is buy EU bonds to drive yields lower in the hope that somehow someone will actually use this to deleverage.
Unfortunately that is not human nature. The lower yields go, the more debt EU nations issue. Consider that Spain, Italy and other EU program nations have actually seen their Debt to GDP ratios increase since the 2012 crisis allegedly “ended.”
In short, the ECB’s extraordinary programs have done ZERO to address the structural issues facing Europe and its financial system. Bankrupt nations continue to issue bonds that bankrupt EU banks buy and use as collateral to backstop their derivatives books, which are in the ballpark of hundreds of trillions of Euros.
All the ECB has done is vacuum up this collateral and allow EU banks to continue to value this debt at 100 cents on the Euro. These “solutions” are imaginary at best.
At the end of the day, the EU banking system is one gigantic €46 trillion Lehman Brothers. Given the interconnected nature of the global banking system, this is not Europe’s problem… it is the WORLD’s problem.
Eventually this will trigger another 2008 type event. When, no one can say, but given that the ECB has failed to generate significant inflation, and that most EU nations have seen their Debt to GDP ratios increase since 2012, it’s not far off.
The next Crisis is just around the corner. And it will make 2012 look like a joke.
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