This week’s story: How ECB failed the Eurozone

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Central Banks and their monetary policy were among the main fundamental reasons for Bitcoin creation.

A small group of high officials with almost unlimited money creation power following political mood swings is a good recipe for disaster. Satoshi Nakamoto has well spotted the issue, but little did they know that the problem of “Chancellor on Brink of Second Bailout for Banks” – the title from The Times embedded in the very first Bitcoin block – would be dwarfed by the enormous mess the Central Banks have gotten themselves into in since 2020.

And among all them, European Central Bank stands out quite remarkably, not only causing a soaring inflation, but also driving half of the Eurozone into a debt crisis and potentially endangering the euro.

The big ECB shopping spree

Central Banks’s two most popular tools are interest rates and open market operations, i.e. buying or selling securities on the open market. The “buying” part is theoretically infinite: when the CB doesn’t have any available cash, it just creates it out of thin air, inflating its balance sheet.

The ECB has thus created almost 4 trillion euro since 2019, doubling its balance sheet in just two years.

An average economy student would worry about incontrollable inflation resulting from this shopping spree, and an average concerned citizens would like to know how credit institutions got to make their ECB financing tripled.

ECB’s President Christine Lagarde is, however, well above such considerations, and at every mention of inflation she insisted it would be negligeable and/or transitory, sticking to the script and deflecting when necessary, as a good attorney she is (an attorney leading a Central Bank, what?..)

Of course, when the official Eurozone inflation exceeds 8% and push comes to shove, the denial must end and a plan to salvage people’s livelihoods must be formulated.

The American Fed, also guilty of over-spending and triggering an 8.5% inflation, informed about its tapering intentions (reducing securities buying) back in December’21, and hinted at a soon interest rates hike as early as March, effectively raising them in May. This still impacted the markets badly, with people switching from risk-on to risk-off assets and crushing stocks and crypto markets ?, but at least the market-moving information was given gradually.

What did the ECB do? While announcing a timid tapering in December, it has been denying any intention of hiking interest rates for a long time. It denied, it denied when specifically asked, it denied when compared to the Fed… and then suddenly on June 9th ECB announced interest rates to be increased in July, and then once more – in September. European markets panicked.

The abrupt nature of this communication, and the worst possible timing raise many questions: is it unprofessionalism, some sort of strategy or a sign of ECB’s growing panic in front of the situation that got out of control?

However, these questions would have to wait, as the ECB has another problem now, and a pretty big one.

Dangers of Eurozone rate fragmentation

The Eurozone may have one currency, but it is still composed of 19 countries, each with its own economy, more or less capable of withstanding interest rates hike.

While some less-indebted countries like Germany will be able to pay a bigger interest on their bonds, other countries with a higher debt/GDP rate like Italy will not: the cost of maintaining the debt will be too high.

This makes countries like Italy a bigger risk, which in turn increases the yield that potential lenders would expect in return for borrowing them money. The higher the interest rates go, the worse the situation would become for these countries, which in turn would make them an even bigger risk, which would increase the rates… This is the vicious circle of indebtedness, and half of Eurozone could face a debt crisis.

The difference between interest rates in different EU countries is known as the spread, and it is widening: last week Italian 10-year bond rates climbed above 4% for the first time since 2013, Spanish bonds hit 3%, and French – 2.2%, all rising from around 0% just 6 months earlier. German bonds now trade at 1.65% and Dutch – 1.97% yield.

The ECB has had several emergency meetings to discuss this problem: on June 9th it announced that it would design a new “anti-fragmentation tool”, and on June 15th it announced its will be… buying vulnerable debt. Well, the exact words were “reinvesting redemptions from the emergency bond purchasing program in a flexible way”, but behind this neutral wording (kudos to Madame Lagarde, her attorney writing skills are still great) an obviousness is hiding: the ECB does not have any magic anti-fragmentation tool and it will continue doing what it always does: buying securities.

Oh wait, isn’t it the ECB buying that got us all here in the first place?

Well, yes, only this time it could be worse: imagine if for every German bond that has come to maturity an Italian bond is bought. This will certainly not please Germany and, most importantly, fragilize the ECB itself, which will be pumped with risky bonds. This will then hurt the euro and all the people and companies who own it, and this could all… you know, snowball.

The Eurozone is now facing a big problem, and the reason for it is not the pandemic, as the ECB is mentioning in every piece of communication these days. The reason is a reckless and short-sighted money printing carried out by an organization which main objectives have always been managing the inflation and not meddling with politics. Both of them failed spectacularly.

Where’s Bitcoin in all this?

Bitcoin represents a totally different view of the role of money in the economy. It is independent and provably scarce, which means that noone can mess with its supply for whatever reason, which in turn means avoiding disastrous consequences that ego-driven (and maybe not very competent) people could inflict on whole countries.

Of course, Bitcoin is still too volatile to claim the title of a universal money… but as the adoption progresses, its price swings are bound to decrease and one day switch it from the “risk-on” to the “risk-off” assets category. This is not for tomorrow, but totally possible in the mid- to long-term.

We at D.Center have a liberal view on the economy, and the more interventionist failures we note, the bigger grows the dream of an independent money that will be just money.

In the meantime, here are photos of Christine Lagarde being awarded an honorary degree by the London School of Economics and Political Science last week ?