The Entire Euro System Faces Failure

June 09, 2023

by Alasdair MacLeod Gold Money

In these dogdays of summer, there is a new complacency over the financial and economic status of the Eurozone. Inflation is down, bank shares have rallied, and the end of further rises in interest rates is in sight.

The lull in bad news conceals a deteriorating situation. In common with other markets, Eurozone bond yields are rising, and banks are now visibly trying to reduce their excessive balance sheet leverage. This is bound to lead to credit shortages in the coming months, maintaining or even driving interest rates higher. Contracting credit could lead to funding dislocations for highly indebted Eurozone governments, all mired in debt traps.

Presiding over all this is a clueless ECB, long on rhetoric and short on economic nous. Furthermore, even though it has reduced its balance sheet by a trillion euros, the hidden losses in the euro system wipes out its equity many times over. How can it recapitalise itself, and how can it underwrite depositors in a deteriorating commercial banking system?

It is a recipe for an entire systemic failure.