Covid-19, the failure of the Euro project,
and a coup d’état by the European Central Bank
The warning bells about the EU are ringing out louder and louder
© Facts4EU.Org 2021
Uncontrolled, massive risk on our borders – more dangers from EU’s democratic deficit disorder
In our Sunday edition Facts4EU.Org brings readers a new paper which has been written by Bob Lyddon and published by the Bruges Group, summarised below, and which contains a link to the full report.
Whilst this may contain some content which will be more of interest to City and finance professionals, our Facts4EU.Org summary highlights for general readers some of the inherent risks in the EU’s and European Central Bank’s (ECB’s) handling of their financial response to the Covid crisis.
Relevance to UK – risk on our borders and another example of EU lack of democratic control
This has direct relevance to the conversations currently taking place between the UK Government and the EU Commission, as the EU continues to refuse to grant the same equivalence in financial services to the United Kingdom which the EU confers on countries such as Brazil.
It also shows how the ECB, under its new President Madame Christine Lagarde, is paying scant regard to democratic control, according to Mr Lyddon.
It is also yet another warning bell being sounded – one which further endorses the increasingly-held view that the United Kingdom is better off going its own way, using tried and tested financial systems and controls which are accepted around the rest of the world.
Brexit Facts4EU.Org Summary
Some key highlights worth reading
- “The ECB’s actions have distorted the market to eliminate yield and diminish liquidity, and to compromise the standards for the safety of investment in Eurozone bonds.”
- “The ECB has put itself beyond democratic control from either Member States or EU organs: the ECB has, through the PEPP, carried out a coup d’état.”
- “The ECB is exposed to credit risk on corporate and retail customers right across the Eurozone, but without its having its own credit department to assess and manage the risk.”
- “The UK government is currently discussing a Brexit financial services deal with the EU based on equivalence – but there can be no equivalence between the UK’s free financial market and the Eurozone’s controlled one: they are incompatible.”
“The ECB’s Pandemic Emergency Purchase Programme – the undermining of the Eurozone as a free financial market, the epitome of the failure of the Euro project, and a coup d’état by the European Central Bank”
By Bob Lyddon
This new study, issued through The Bruges Group, dissects a main response of the European Central Bank to the pandemic: another programme of bond buying, taking up hundreds of billions of euros of Eurozone member state government bonds into the ECB’s Pandemic Emergency Purchase Programme, the “PEPP”.
The PEPP bought the majority of new debt issued in 2020 by the likes of Spain, Italy and Portugal.
This has concentrated 50% of Eurozone public sector debt into the hands of Eurozone financial mechanisms. The proportion could be much higher if the original balances held on accounts in the TARGET2 payment system were revealed.
ECB operations have driven bonds yields down to around 0%, saving Eurozone public sector borrowers billions of euros in interest payments. The ECB has driven both speculators and private investors out of the market: activity is concentrated between Eurozone financial mechanisms and investment banks.
Statistics on trading in bonds and related derivatives show a marked decline in liquidity. The ECB’s operations have eliminated yield and diminished liquidity: the investments should then at least be safe.
The investor will be disappointed in this area as well. 25,000+ bond issues appear on the ECB’s list of collateral eligible for payment and market operations, but by no means all class as “central bank money”– an asset that is free of credit risk. Considerable numbers of these bonds are rated by the public credit rating agencies at the lower end of Investment Grade. Indeed the PEPP is permitted to hold bonds that have fallen down into Speculative Grade, and to buy new bonds of issuers who are rated Speculative Grade as long as the issuer was rated Investment Grade in April 2020.
Through its interventions and distortions the ECB has compromised and undermined a fundamental equation of a free financial market: that any instrument admitted for trading in it should offer a transparent blend of Safety, Yield and Liquidity, benchmarked to independent standards.
The euro was supposed to usher in broad and liquid capital markets based on these principles. The PEPP is the epitome of the holing of this promise below the waterline.
A group of German academics and lawyers took a case to the German Constitutional Court in 2020 to attempt to rein in the ECB’s pre-existing programme which invested in public sector securities –the Public Sector Purchase Programme or PSPP. They obtained an equivocal judgement in which the court placed reliance on certain safeguards built into the PSPP which meant that the ECB could be seen as acting within its powers.
The ECB has written its mandate for the PEPP to bypass these safeguards and to make itself inviolate to challenge: the PEPP mandate permits the ECB to adapt the ways and means as it sees fit.
The ECB has made sure that the German Constitutional Court cannot challenge it again, and has put itself beyond democratic controls from either the Member State level or other organs of the EU. The ECB has, through the PEPP, carried out a coup d’état.
Whilst the ECB has undermined one of the promises of the euro (broad and liquid capital markets), it has morphed itself into a type of market actor that ironically fulfils another promise of the euro but not in the intended way: the ECB has become a pan-European commercial bank.
Through the PEPP and other programmes the ECB is buying – and accepting as collateral - all manner of asset classes that expose it to credit risk on corporate and retail customers right across the Eurozone, but without its having its own credit department to assess the credit risk. Instead it relies on public credit ratings and banks’ self-assessment of the risks the banks transfers to the ECB. The self-assessment mechanism is known as Internal Ratings-Based or “IRB”, and it is the common methodology used by banks in Greece, Italy, Cyprus, Spain, Portugal and Ireland to assess credit risk –the methodology that has resulted in such high levels of bad debts.
The ECB has not only undermined the Eurozone financial market through the PEPP: it has fundamentally undermined itself.
This begs the question as to what sort of Brexit deal should be agreed for financial services. There is intense lobbying for the kind of porous arrangements that pertained while the UK was an EU member.
The key term bandied about is “equivalence”, but there can be no equivalence between a free market, and a controlled and debased one. If the two are connected and porously, the state interference, self-interest and subsidy that underpin the controlled market will infect and undermine the free one.
© Lyddon Consulting Ltd 2021, published by Facts4EU.Org with permission
About the author: Bob Lyddon is an experienced management consultant both privately and with PwC, with a specialization in banking and payments. He has published numerous papers about the financial mechanisms of the EU, through the Bruges Group, Politeia and Global Britain, and now through Facts4EU.Org.
Yes, some of the above is quite technical. However it relates to the discussions currently going on between Lord Frost and his opposite number on the EU side, about the UK's access to EU financial markets and vice versa. Thus far, the UK has essentially given the EU full access to the UK's financial markets, but the EU has refused to reciprocate.
Increasingly the experts are warning that the UK would be best advised to steer well clear of any quasi-equivalence agreements with the EU. The debts being amassed on the continent are starting to look increasingly toxic, with the lack of democratic control and accountability and the sheer scale of some of the fast-growing debt mountains of the EU's Club Med member countries.
It must be remembered that the 'Trade and Cooperation Agreement' signed by Boris Johnson and ratified by the British Parliament contained no reference to the largest and most important part of the UK economy: services. Services represent 80% of the UK economy but the EU simply refused to incorporate services - financial or any other kind - into the agreement.
This is despite the fact that the appalling 'Withdrawal Agreement', signed by Boris Johnson in January 2020, was predicated on a full trade agreement.
At some point this will all come to a head.
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[ Sources: Bob Lyddon ] Politicians and journalists can contact us for details, as ever.
Brexit Facts4EU.Org, Sun 18 Apr 2021
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