The French president’s electoral gamble has sealed the euro’s fate as an orphan currency

This is not a repeat of the euro debt crisis of 2010-2012, which was the consequence of launching monetary union without a functioning lender-of-last resort. 

The ECB has since acquired powers to act as a backstop for the debt markets in an emergency. But that alone does not settle the matter.

The ECB’s untested Transmission Protection Instrument (TPI) allows the governing council to buy distressed bonds on its own authority, but only for countries that pursue 

(a) “sound fiscal and macroeconomic policies”; (b) are not “subject to an excessive deficit procedure”; (c) do not have “severe macroeconomic imbalances”; (d) where the “trajectory of public debt is sustainable”; and (e) where stress is “not warranted by country-specific fundamentals”.

The two Germans on the ECB council know that any decision to bail out a French government in open revolt against EU budget rules would be challenged in the German constitutional court.

It would further crystallise a view in the German ordoliberal establishment that the euro project has gone off the rails. “The bar for ECB intervention is high,” said Davide Oneglia from TS Lombard.

“France has always been able to get away with it because it is France,” said Bernard Connolly, doyen of Wicksellian economists and author of You Always Hurt The One You Love: Central Banks and the Murder of Capitalism.

Mr Macron first took power in 2017 touting a “grand bargain” with Berlin: he would reform France and make it fit for the euro; Germany would agree to fiscal union, the critical step needed to put the eurozone on stable foundations.

His gamble seemed to succeed when Angela Merkel accepted joint debt issuance for the EU’s €800bn Recovery Fund. But that was a one-off scheme, carefully ring-fenced in law

Berlin has since resisted all attempts to perpetuate the fund, or to issue joint debt for energy and defence.

Germany, Holland and the frugals will not share their credit card with the Latin bloc in any foreseeable future. 

They will not agree to an EU treasury with federal tax-raising powers. 

The euro will remain an orphan currency. 

Ambrose Evans-Pritchard Telegraph 25 June 2024

https://www.telegraph.co.uk/business/2024/06/25/emmanuel-macron-has-done-more-damage-than-liz-truss/

Macron är inte som de andra – han är för bra, skriver Barbro Hedvall - DN.se

TPI TLTRO

https://englundmacro.blogspot.com/2024/06/talk-of-frexit-is-overblown-tpi-tltro.html

OMT  (TSCG or ‘Fiscal Compact’) Europaparlamentet förklarar

In the aftermath of the European sovereign debt crisis, which unfolded in 2009-2012, EU leaders pledged to strengthen EMU, including by improving its governance framework. 

A Treaty amendment, affecting Article 136 TFEU, allowed for the creation of a permanent support mechanism for Member States in distress, provided the mechanism is based on an intergovernmental treaty, the stability of the euro area as a whole is threatened and the financial support is linked to strict conditionality. 

This led to the establishment of the intergovernmental European Stability Mechanism (ESM) in October 2012, which replaced several ad hoc mechanisms. 

In addition, ECB President Mario Draghi announced in 2012 that ‘within our mandate, the ECB is ready to do whatever it takes to preserve the euro’. To this end, the ECB created the Outright Monetary Transactions (OMT) instrument. 

The OMT allows the ECB to buy the sovereign bonds of a Member State in distress, provided the country signs a memorandum of understanding with the ESM, thus indirectly making ECB support subject to strict conditionality,which typically includes a substantial reduction in government spending as well as the obligation to carry out deep structural reforms. 

To avoid a reoccurrence of a sovereign debt crisis, EMU’s secondary legislation was upgraded. The European Semester was established, which strengthened the Stability and Growth Pact (SGP), introduced the Macroeconomic Imbalance Procedure (MIP), and endeavoured to further strengthen economic policy coordination. 

The improved economic governance framework was supplemented with intergovernmental treaties, such as the Treaty on Stability, Coordination and Governance (TSCG or ‘Fiscal Compact’) and the Euro Plus Pact.

Read more here

https://www.europarl.europa.eu/factsheets/en/sheet/79/history-of-the-economic-and-monetary-union

ECB should abolish its OMT program – which, according to Germany’s Constitutional Court, does not comply with EU treaty law anyway.

Furthermore, the ECB should reintroduce the requirement that TARGET2 debts be repaid with gold, as occurred in the US before 1975

https://englundmacro.blogspot.com/2014/10/tysklands-sinn-dammar-pa-ecb-bor.html

Italy’s debts to European Central Bank near €500bn

Germany’s Target 2 surplus is on track to reach €1tn.

https://www.nejtillemu.com/spricker.htm#0312Target

The euro is run in the interest of whichever country faces the biggest problems and poses the biggest threat to the survival of monetary union at any particular time.

Right now that is Italy,”

Bernard Connolly, a hedge fund advisor and former currency chief for the European Commission, Ambrose Telegraph 22 February 2018

Germany is the largest guarantor of the European Central Bank’s credit default insurance, known as the OMT,

and provides by far the largest stock of “target” overdraft credit to other European countries, currently €956bn.

Hans-Werner Sinn FT 27 June 2018

https://www.nejtillemu.com/draghi.htm