F. William Engdahl
New Eastern Outlook
4 April 2018
In a transfer union, the healthier countries of the Euro will support the weaker. This is behind Macron’s call for a common Eurozone Finance Minister who would develop a common tax budget for the ECB member countries. Under the Macron Plan, which Merkel and the SPD have endorsed, each euro transferred from a Northern to a Southern European country would reduce the Target claims and liabilities by one euro.
The deeper underlying problem in all these schemes is the fact that the countries of the ECB and Euro have done nothing fundamental to clean up their banking insolvency mess. Instead the ECB under Draghi has been used to create what is today a de facto insoluble problem for the German and other strong central banks of the Euro using Target 2 balances as a stealth bailout. Now the Merkel-Macron axis in the EU is ready to spring the next step—Eurobonds, a common Eurozone Finance Minister and fiscal policy and a transfer union.
This is the real reason Italy’s “Euroskeptic” parties suddenly dropped election demands for a referendum on leaving the Euro or the EU. They realized Italy could be a huge benefactor by staying in and backing an EU Transfer Union. Bond market speculators like Soros will have a field day. German and Dutch and other more prudent countries will de facto pay the bill. For Germany where the demographic reduction in working age population is already apparent and will accelerate in coming years, a growing pension obligation makes German debt obligation in the long run unsustainable. To now add a fiscal transfer from Germany to the indebted Southern EU countries spells political and economic Tsunami.
New Eastern Outlook
4 April 2018
It’s remarkable that the Euro and
the Eurozone currency grouping hasn’t fallen apart until now. Greece
could have done it in 2010 but it was avoided by extraordinary acts of
the Euro governments and European Central Bank. Now those actions are
coming back to haunt especially Germany who stands poised to become the
“sugar daddy” of the debt-bloated southern Euro states such as Italy or
Spain. This is one major reason that the anti-Brussels parties that
triumphed in recent Italian elections—5-Star and Lega, suddenly dropped
talk about leaving the Euro. They are betting that Macron and Markel and
their proposed new EU architecture will pull their debt chestnuts out
of the fire at expense of German taxpayers. It’s a timebomb ticking ever
louder.
Ten years into the greatest
financial meltdown in the history of finance, triggered by the USA
sub-prime real estate bubble collapse in 2007, the Euro and its 19
member central banks are at a dangerous crossroad. It’s clear from her
recent address to the German Parliament that Chancellor Merkel intends
to lure Germany into what she and Macron intend to become a “transfer
union.” In plain English that would mean the strong surplus economies of
Germany and northern Europe including Holland, would have to “transfer”
hundreds of billions of Euros to subsidize the deficit countries of
Italy, Spain and southern Europe. The ultimate winner would be the shaky
French and Southern Eurozone banks. It’s not surprising that Merkel, a
close ally of former banker Marcon of France, is not being open with her
people on what is at stake.
Target 2 Trap
In 2011, in the wake of the
manipulated Greek bond crisis that triggered a Eurozone contagion panic
in markets, the European Central Bank initiated a highly controversial
and poorly understood disguised bailout known as Target 2.Without
getting into the complex details of how Target 2 central bank balances
function, they in effect allow the central banks of the Eurozone crisis
countries, led by Italy and Spain, to issue state bonds which are in
effect taken by the strong central banks of the Euro, notably Germany’s
Bundesbank. Since 2011 and the Greek crisis, Target 2 balances have been
growing phenomenally to where today the total is estimated for the
Bundesbank alone at € 914 billion. This is about one third of German
GDP.
In 2011 the highly-respected German economist and then-head of Munich’s IFO Institute, Hans-Werner Sinn, called the ECB use of Target 2 “The ECB’s stealth bail out.” He was the first to warn that the ECB Target 2 system for “Target balances constitute public credit relations in the same way as credit that is given via official rescue packages.”
In 2011 the sums involved were still a fraction of the present total. Today the sheer size of these little-publicized Target 2 central bank balances in the Eurozone, especially the Bundesbank, put enormous pressure on the more prudent northern EU countries, especially Germany, to finally drop resistance to adoption of George Soros’ plan to have the Euro countries issue common Eurobonds. With such Eurobonds, the public debt of euro-zone countries would be pooled and converted into Eurozone “Eurobonds” with collective responsibility. De facto that would mean German or other north EU taxpayers would support the debt of stressed countries like Italy or Portugal or Greece. For strong reasons former Finance Minister Wolfgang Schäuble fiercely resisted any supranational issuing of bonds as a disguised forced German bailout of the countries such as Italy or Spain.
As Sinn points out about the covert bailout Draghi’s ECB has created via the little-understood Target 2 central bank credits, “And yet the Bundesbank’s Target claims (on Italy, Spain, etc) are essentially worthless, because they can never be called due, and are issued at an interest rate determined by the debtors, which hold the majority on the ECB Governing Council. For the time being, they have set the interest rate to zero.” This is €914 today, alone for the German Bundesbank.
In 2011 the highly-respected German economist and then-head of Munich’s IFO Institute, Hans-Werner Sinn, called the ECB use of Target 2 “The ECB’s stealth bail out.” He was the first to warn that the ECB Target 2 system for “Target balances constitute public credit relations in the same way as credit that is given via official rescue packages.”
In 2011 the sums involved were still a fraction of the present total. Today the sheer size of these little-publicized Target 2 central bank balances in the Eurozone, especially the Bundesbank, put enormous pressure on the more prudent northern EU countries, especially Germany, to finally drop resistance to adoption of George Soros’ plan to have the Euro countries issue common Eurobonds. With such Eurobonds, the public debt of euro-zone countries would be pooled and converted into Eurozone “Eurobonds” with collective responsibility. De facto that would mean German or other north EU taxpayers would support the debt of stressed countries like Italy or Portugal or Greece. For strong reasons former Finance Minister Wolfgang Schäuble fiercely resisted any supranational issuing of bonds as a disguised forced German bailout of the countries such as Italy or Spain.
As Sinn points out about the covert bailout Draghi’s ECB has created via the little-understood Target 2 central bank credits, “And yet the Bundesbank’s Target claims (on Italy, Spain, etc) are essentially worthless, because they can never be called due, and are issued at an interest rate determined by the debtors, which hold the majority on the ECB Governing Council. For the time being, they have set the interest rate to zero.” This is €914 today, alone for the German Bundesbank.
Merkel, SPD and Eurobonds
Now it becomes clear why Merkel
elegantly pushed Schäuble aside by naming him CDU Parliamentary leader.
His replacement, Social Democrat Olaf Scholz, is rumored to be privately
favorable to French President Macron’s proposal for a European banking
union and a transfer union. In her first speech in March as Chancellor
in the new Grand Coalition, Merkel suggested favoring plans to turn the
€500 billion European Stability Mechanism, the eurozone’s crisis rescue
fund since the crisis in 2013, into a permanent European Monetary Fund,
an EU version of Washington’s International Monetary Fund.
In a transfer union, the healthier countries of the Euro will support the weaker. This is behind Macron’s call for a common Eurozone Finance Minister who would develop a common tax budget for the ECB member countries. Under the Macron Plan, which Merkel and the SPD have endorsed, each euro transferred from a Northern to a Southern European country would reduce the Target claims and liabilities by one euro.
The deeper underlying problem in all these schemes is the fact that the countries of the ECB and Euro have done nothing fundamental to clean up their banking insolvency mess. Instead the ECB under Draghi has been used to create what is today a de facto insoluble problem for the German and other strong central banks of the Euro using Target 2 balances as a stealth bailout. Now the Merkel-Macron axis in the EU is ready to spring the next step—Eurobonds, a common Eurozone Finance Minister and fiscal policy and a transfer union.
This is the real reason Italy’s “Euroskeptic” parties suddenly dropped election demands for a referendum on leaving the Euro or the EU. They realized Italy could be a huge benefactor by staying in and backing an EU Transfer Union. Bond market speculators like Soros will have a field day. German and Dutch and other more prudent countries will de facto pay the bill. For Germany where the demographic reduction in working age population is already apparent and will accelerate in coming years, a growing pension obligation makes German debt obligation in the long run unsustainable. To now add a fiscal transfer from Germany to the indebted Southern EU countries spells political and economic Tsunami.
F. William Engdahl is
strategic risk consultant and lecturer, he holds a degree in politics
from Princeton University and is a best-selling author on oil and
geopolitics, exclusively for the online magazine “New Eastern Outlook.”
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