Over 6 weeks ago we distributed the attached Eurosystem Solutions paper.

It described the unique non-standard measures being used for by the Eurosystem and ECB to address bank solvency and national solvency issues and the movement towards a real solution involving the ECB.

Now the ECB has announced what is very close to the real solution: unlimited bond purchases.

Regardless of conditionality, or even in spite of conditionality, this is the crossing of the line into the notion that there is an entity that can credit accounts in Euro in unlimited amounts.

While conditionality is the apparent necessary circumstance, and it’s likely national authorities will play along, these ECB purchases will have to take place regardless of conditionality. If Spain says they can’t comply, is the ECB going to let them default? The ECB has done all this to avoid Spanish default.

The best case is for the markets to recognize the ECB backstop and so regular purchases aren’t very necessary. There will be lots of movement towards coordination of budgets and banking supervision.

But the ECB line has been crossed.

Sixteen years after our AVM/III July 1996 Bretton Woods conference that identified the severe credit problems with the looming Maastrict rules (1/1/99), and eleven years after Warren’s famous paper on the potential European credit crisis “The Rites of Passage” we are finally seeing the necessary repair to the EMU.

There still remain political obstacles, court challenges and the like, but the imperatives to avoid a complete collapse of the Euro financial system have driven virtually all the important constituents to this necessary path of solution.

35 Responses

      1. @ESM, How do you look at negative interest rates?
        A premium on expected return to DM that will rise or merely a sign of desperate panic, in search of assumed safety?

      2. @walter,

        I think it’s a little of both, but probably more a premium (i.e. upside on the non-zero probability of Germany exiting the Euro, which exceeds downside on the non-zero probability of Germany defaulting under the Euro system).

        I think it makes sense to view government bonds under the Euro system as being like separate currencies issued by the respective governments, with a formal agreement to keep the currencies pegged to the same value (and the ECB now empowered to enforce that peg). If the agreement is torn up, some of those “currencies” will trade up, and some will trade down, relative to the dollar or a basket of goods or whatever.

  1. Does this mean the European Central Bank will give member countries as much money as they need as long as they promise to pay it back? Someday?

  2. “If Spain says they can’t comply, is the ECB going to let them default?”

    Clearly, the author has a deficient grasp of European politics.

    First, there is a practically zero chance of Spain not complying. The Spanish elites have completely sold out on the European project, a long long time ago. They are eager to implement austerity measures that will bring the middle class back to size and very grateful about having a conditional aid program as a pretext.

    The proof? They could use the TARGET2 mechanism to regain monetary sovereignty if they wanted but they refuse instead to even consider this very real possibility. In fact, it’s worse than that: the hypothesis has been ignored and – via omission – simply excluded from the realm of acceptable debate.

    Second, if by chance a Spanish leader decided to suspend implementation of austerity all that the ECB would have to be would be to stop purchasing bonds – or just announce its intention to stop – for a couple of days. The consequent rise in yields would soon discipline Spain back into compliance.

    The euro trap is being perfected and the periphery brought into line with no chance of escaping from austerity. This is what the OMT is about – and I think it’s puzzling to read articles on MMT sites rejoicing over the putative success of this strategy.

    1. @Jose Guilherme, Agreed. I see little to no chance these governments will not implement anything the troika demand of them, and it will effectively undermine the purpose of bond purchases by the ECB. This is the latest kick-the-can tactic to emerge, not a strategy that will lead to emergence of a real fiscal authority.

    2. @Jose Guilherme,

      By staying in the euro, is the path to political union being reduced to TINA, there is no alternative?

      If that’s the target, and austerity-induced volatility the floating cost … what are the odds they can keep the designed social cost within bounds long enough to cement political union?

      Even then, can the euro-zone get the non-euro EEU nations to commit to both monetary & political union?

      Still lots of questions, and most of them are political, ethnic & policy-oriented.

      ps: Is all of Greece on the dole an acceptable price?

      1. Well, speaking as a European, I’d take a war “fought with fiat money” over a war fought with mortal humans *any day of the week*.

        I’m sure you would, but it still results in people dying needlessly.

        More people die of famine and disease in war than die in combat. You can’t really see the impact of WWI on male deaths in the population statistics, but you can certainly see the impact of the Flu on a weakened population.

        The Greeks had a recent election. They voted for parties that want to stay in the Euro. And opinion polls show that Greeks want to stay in the Euro.

        Absolutely. And that will continue to be the case – until it isn’t. And at that point leaders start swinging from lampposts.

  3. @MamMoTh,
    Warren,
    1. I assume Cliff is Cliff Viner, your partner in iii, correct?
    2. Could you provide the 6 week old Eurosystem Solutions paper?
    3. What does this mean?
    a. the 800 lbs gorilla finally out of the room, no more psi, the way is free to buy Portuguese bonds and even Greek bonds? or
    b. small members may have proportionately bigger defaults than big members?
    4. I assume the necessary enforcement mechanism to prevent a race to maximize deficits is in the coordination of budgets and banking supervision. Correct?

  4. Conditionality is a Must for me..

    Mosler in another post said Fed have to cover Liquidity of States/Municipalities inside USA but have to put Deficit Limit to avoid Moral Hazard..

    in Europe is the same with Piigs .. and inside Italy is the same with South (Transfer from North 2000 bn in 40 years = Total National Debt)

  5. Hey Warren,

    I understand that the ECB bond buying will be “sterilised”. It seems to me that there is little difference between the ECB buying bonds with Euros or with, say, T-bills. If so, what’s the point of sterilising? Is it just for cosmetic reasons?

      1. @WARREN MOSLER,

        I don’t understand if BCE sell German Bund in his portfolio and with cash buy Piigs Treasury so there is an AUTO-STERILIZATION..

        or BCE print money (simultaneous credit and debit on his balancesheet)and then buy Piigs.. in this case it’s necessaty a FINAL Sterilization with Selling of “EuroT bills” to withdraw monetary base..

      2. on a gold standard or with fixed fx ‘sterilization’ removes convertible currency to remove that risk of conversion and reserve loss.

        with today’s floating fx that’s all inapplicable.

      3. @WARREN MOSLER, sorry, “buying bonds with t-bills” was perhaps a poor choice of words on my part. I meant that the ECB may issue t-bills, then use the proceeds to buy govt bonds. Seems like an unnecessary step to me.

  6. It’s time to have debt clocks in European Capitals.

    Writing above increasing numbers could be: ECB term deposits= unsustainable burden to our children.

  7. Warren
    why do you think this will solve the crisis when the SMP didn’t?
    isn’t it just the same scheme? if anything even worse because it will come only with even more deficits reductions

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