Lending is deteriorating most rapidly in Italy and Spain.
Banks are doing what they always do at the rumble of thunder: they are imposing tougher terms on households and small firms; they are rejecting loan applications. This is a self-fulfilling process that can spin out of control at turning points in the business cycle.
The founding contract of the euro was that the ECB should be as rigorous as the Bundesbank, and the euro should be as hard as the D-Mark. That contract looks like a quaint relic today.
But it would be tempting fate to assume that Germany will tolerate double-digit inflation for long, or that it will allow the ECB to keep tilting policy towards the needs of Club Med debtors in the cause of euro solidarity.
The German economic establishment thinks the country is on the cusp of a wage-price spiral.
There is an even deeper problem of social cohesion. Inflation is toxic in Germany because of deep-rooted cultural traditions. Half of Germans rent rather than own property. They typically keep their savings in bank accounts, and have no financial assets.
They have entirely missed out on the compensating wealth gains of the last decade. Gefühlte Inflation – the inflation that shoppers feel – is running at twice the official CPI rate.
Positive real rates are precisely what Italy cannot endure. It is why premier Giorgia Meloni lashed out at the ECB on her first day in office, denouncing rate rises on the cusp of recession as precipitous.
She said ill-timed monetary tightening would choke credit to families and firms, and she complained that halting bond purchases creates “extra difficulties for member states with high public debt” – as indeed it has.
Mrs Meloni is now in implicit alliance with France’s Emmanuel Macron, who has also castigated unnamed monetary hawks at the ECB. His demarche is logical: France has an even bigger debt burden than Italy.
Data from the Bank for International Settlements shows that total public and private debt (non-financial) is 351pc of GDP in France, 276pc in Italy, and 271pc in the UK, and 199pc in Germany.
This conflict is what happens if you impose a single coin and a single interest rate on a disparate region that fails every key test of Robert Mundell’s optimal currency area (OCA), (before Mundell drank the Kool Aid).
Zero rates, QE, and targeted longer-term refinancing options during the deflationary era masked the fundamental clash of interests over eurozone destiny.
Ambrose Evans-Pritchard 1 November 2022