The Economist published an article on 28 November 2020 entitled ‘Christine Lagarde is taking the ECB out of its comfort zone’. It congratulated her on her first year as head of the European Central Bank: ‘The bank has acted decisively, avoiding the mistakes of the financial crisis of 2007-09 and the sovereign-debt woes of 2010-12. Since the start of the year, it has injected stimulus of €2.2trn into the economy’. Later in the article, it explains how it did this: ‘The ECB’s ammunition was sorely depleted even before covid-19 struck. Its benchmark deposit rate was -0.5%, and it had been buying government and corporate bonds through its quantitative-easing (QE) scheme since 2015. But the bank warded off a credit crunch earlier this year by ripping up self-imposed rules. Instead of buying a country’s assets in rough proportion to the size of its GDP, it has bought more of those of Italy and Spain’.
What the article does not do, however, is explain the wider implications of this. To understand these, we need to look at what is happening in TARGET2, the Eurozone’s cross-border payment system. Its use is mandatory for the settlement of any euro transaction involving the ECB and the national central banks of the EZ member states.
You can see from the TARGET2 balances below that these purchases of Italian and Spanish bonds are actually being paid for by Germany. TARGET2 is supposed to be used only for financing short-term trade imbalances between EZ members. This is what broadly happened until the financial crisis. But since then, Germany has been funding the ECB’s Italian and Spanish bond purchases – as well as the capital flight of Italian and Spanish citizens concerned about the solvency of their banking systems. This is clearly visible during the EZ sovereign-debt crisis of 2010-12, the effects of which lasted until 2019. Then covid-19 struck at the beginning of 2020 and the ECB’s buying of Italian and Spanish bonds went into overdrive – again paid for by Germany.
This is all part of the plan by President Emmanuel Macron and Lagarde, a former French Finance Minister, to get Germany to pay for the political unification of Europe – under French leadership. A necessary prerequisite for political union is fiscal union and this, in turn, requires the mutualisation of the national debts of the member states – with each member state’s debt being guaranteed by every other member state. But in practice, this means all member states’ national debts being guaranteed by Germany. Germany has resisted this until now. But it is apparent that Macron and Lagarde are using the cloak of covid-19 to force the mutualisation of member state national debts by the back door – with German tax payers paying for this.
I have previously argued* that TARGET2 is being used to save the Eurozone from imploding. It is now clear that Macron and Lagarde are using TARGET2 for a completely different purpose. It is equally clear that German tax payers are not aware of this, otherwise they would surely object.
*David Blake, Target2: The Silent Bailout System that Keeps the Euro Afloat (May 22, 2018). https://briefingsforbritain.co.uk/target2-the-silent-bailout-system-of-the-eurozone-by-david-blake/ Available at SSRN: https://ssrn.com/abstract=3182995 or http://dx.doi.org/10.2139/ssrn.3182995
Professor David Blake is at Cass Business School.