The ECB is in a precarious position without having raised interest rates even once: it seems that the end of the EURO has begun! Excessive inflation is spreading more and more in the stock and bond markets and in the real economy. Jamie Dimon, CEO and President of the largest US bank JP Morgan, sees a financial hurricane rush to the West.
Central banks, primarily the ECB, not only caused this hurricane significantly, but also actively ignored it at first and then passively belittled it. Now its slopes have reached the ECB Tower. On June 15, the board of the ECB unexpectedly met for a crisis meeting to take countermeasures to keep the uncontrolled rise in interest rates on Italian government bonds under control. To this end, the ECB would like to use funds from the PEPP Pandemic Emergency Program in a “flexible” way to help heavily indebted southern European countries.
The ECB fears the collapse of the debt towers due to inflation and interest rates
ECB management has officially plans to use the released Corona aid to buy Italian government bonds. Because Italy is groaning like no other country under the growing interest burden on its government bonds. The debt towers in the euro area, which only rose after the global financial crisis, are beginning to falter more and more. The measure is necessary because the ECB is terminating the bond purchase program or has to stop it sooner than expected. Because continuing to buy bonds from over-indebted countries is actually printing more and more money. This in turn fuels the high inflation of the EURO. In addition, the ECB plans to raise the benchmark interest rate from zero to 0.25 percent on 1 July.
The ECB statement does not mention inflation and interest rate profanity
Incidentally, the word Italy is not mentioned in the official ECB statement. Also absent from inflation and interest rates. The ECB, on the other hand, speaks – as usual murky – of a new “anti-fragmentation tool”. The term is revealing. It implies that the measures that the ECB is currently taking due to high inflation and the high rise in interest rates are indispensable to avoid the collapse of the euro. Italy’s irregular support will certainly be examined by the Federal Constitutional Court. Similar to that of the ECB, its credibility has been severely affected by its wait-and-see attitude in the past. The Federal Constitutional Court has approved precedents in its previous judgments. The difficulty now is to put an end to the normal case derived from the previous one. Whatever the verdict, you can already expect the court’s argumentative pull-ups.
The ECB commits an outright violation of the law for the first time
With the use of the Corona aid for Italy, the European central bank would for the first time support the euro states that were openly over-indebted. With its project, the ECB takes the last step on its long journey towards debt union. This step is not covered by the Maastricht Treaties. Unlike other cases of sin, the ECB cannot claim to have granted aid only indirectly. Rather, it refers to a crisis for which he is not only partially responsible, but which he did not see coming.
Interest rate spreads for deadly ECB and euro
Interest is of new interest. This in itself comforting news for savers and bond markets is the ultimate nightmare scenario for the ECB and the EURO. The gap between Greek and German government bonds has long been around 1 percent. Greek government bonds are now yielding 4.4%, Italy 3.9% and France 2.9%. The federal bond, on the other hand, still has low interest rates around 1.4 percent. The difference in interest rates between Greek and German government bonds is therefore around three per cent. The spread is once again becoming the decisive crisis indicator for the EURO.
The ECB knows: inflation and rising interest rates are an existential threat to the EURO
It is therefore revealing that the ECB itself does not believe that its support measures will be sufficient for Italy. That is why it commissioned a group of experts to develop further support measures. By the way, even the markets don’t believe the ECB. However, the ECB is lagging behind current inflation, the rise in interest rates and the beginning of the recession with its measures anyway.
Make no mistake: the wage-price spiral, which characterizes all inflation and makes it toxic in the first place, hasn’t even started in this country. The highest incomes are happily asking workers to tighten their belts now. The unions, meanwhile, will force a sharp rise in wages to partially compensate workers as the single currency’s purchasing power dissolves in the sun. If necessary with strike! To think that unions would castrate themselves with warnings from politicians and the ECB is completely out of this world.
Rising rates inevitable for the ECB, imbalances in the euro
In the US, the Fed has already initiated a turnaround in interest rates and raised them by 0.75% on Wednesday. As the last major central bank alongside the Bank of Japan, the ECB is limping behind development. This discouragement, which is an expression of intellectual helplessness, is the real problem. Because the innovative leaders in economic research at the DIW and the ECB don’t quite understand why the Phillips curve is long dead and why current inflation follows the quantitative equation that was believed out of date, almost textbook. Each rate hike, each additional point in the interest rate, is the ECB’s admission that they have no idea why this inflation is currently taking place! This is why overdue interest rate hikes are so extremely difficult for you.
The ECB wants to keep the euro stable and inflation down
The ECB welcomes visitors to its website with the slogan: “We keep prices stable and your money safe”. The ECB has already failed miserably against the standard by which it wants to be measured. On the indefinite credibility scale, it has long been in the deep red. Trust is the strongest currency in the world, especially for a central bank. The ECB has completely lost its credit rating. The impression is spreading among markets that the ECB is moderating a repeat of the 2009/2010 debt crisis. This time not with Greece as a problem daughter, but with Italy.
When the euro was introduced, one of its harshest critics (was it probably Wilhelm Hankel?) Prophesied that the euro final would take place in Rome. Poor Hankel, who worked under the legendary SPD finance minister Karl Schiller in the early 1970s, later had to be insulted as a nationalist D-Mark. Do his media critics still remember him 20 years later?
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