“The Eurozone chess game has entered its third and final stage. Germany wins in three moves - Euro, deflation and purchase of public debt by the ECB (QE) – and in the last few years it has found a way to maximise its profits and reduce to zero its risks as Europe’s creditor.
Let’s try analysing the problems of the Eurozone as they really are: problems of conflicting interests of creditors and debtors regulated by demand and supply. If you agree to make a loan to your neighbour, you open yourself up to three risks:
• that he’ll pay you back in a different currency that has perhaps been devalued unless you had a prior agreement about the repayment currency (currency risk);
• that with the amount you get back, you can buy fewer goods or property (inflation risk);
• that you don’t even have either of the first two problems because your neighbour simply goes bust and thus you lose everything (capital risk).
How Germany gains
Germany is the Eurozone’s only big creditor with about 600 billion Euro loaned to various countries, most of which are on the periphery of the Eurozone, including Italy. The Euro has given it this enviable status. If you produce lots and you consume and invest very little and you keep domestic wages and prices low, then you’ll always have cheap unconsumed goods to sell to your neighbours. And you might also be able to make money by providing credit that they will probably ask you for so that they can buy your goods that are so cheap and so good. This is Germany’s situation. It has always had this approach to the market economy in European affairs ever since 1870 with its roots in Calvinism. Thus to sell and lend to the countries on the periphery of Europe was always Germany’s preferred economic activity when everything was going well, before the crisis in 2008. Since then its only objective has been to get that credit returned and to protect its purchasing power.
Basically, QE will give Germany the time needed to achieve the final objective needed to get checkmate: to get rid of the national jurisdiction over as much of the debt as possible and thus to reduce its own capital risk as much as possible. Only the debt issued under Italian jurisdiction can be redefined in a new currency and thus could impose losses on foreign creditors, mainly German, via devaluation of the new currency. Today that proportion stands at about 93%. So only 7%, not more than 150 billion of public debt, cannot be redefined and has to be paid by in Euro, in accordance with the contract. Assuming that there’ll be devaluation of 30%, implies that the cost of a Euroexit for Italy in relation to its public debt, would have been no greater than about 50 billion euro before QE. With the de facto QE, this number has gone up to about 80 billion given that if there’s a collapse, the cost of a “haircut” of let’s say 30% on 100 billion government bonds (BTP) that would be bought by the Bank of Italy, would be a cost borne by all of us. In the eyes of a German creditor, restructuring our debt or an exit with the devaluation of the new currency, in fact present the same capital risk.
So, from now on, the only thing that counts for us Italians in the game of ‘creditor v debtor’ is not to lose jurisdiction over our debt, so that we maintain the right to redefine it. This means we get the benefit if we do exit. Germany’s objective is exactly the opposite: remove our jurisdiction over our debt and thus increase the cost of an exit for us and give the advantage to them, thus continuing to protect the interests of the creditors, which is something it’s really good at.
If we wait too long before leaving the Euro, then Germany will get checkmate and after cashing in all the benefits of our entry into the Euro, it will also cash in on the benefits of our exit.