Redux - Is the EU imploding?

European Central Bank (ECB) President, Mario Draghi.

European Central Bank (ECB) President, Mario Draghi.

In May I wrote that despite Article 125 of the Lisbon Treaty prohibiting “bail-outs” of member States, there have been no less than 12 bail-outs, costing over €540 billion in total.

After concluding that Article 125 has been about as effective as invisible wallpaper, I went on to describe Mario Draghi’s calls for Fiscal gatekeepers to share the load.

“We need an additional fiscal instrument to maintain convergence during large shocks, without having to over-burden monetary policy..........Its aim would be to provide an extra layer of stabilization, thereby reinforcing confidence in national policies.” (May 2018)

Today he was again pushing the same message. I’m not saying it’s the wrong message, but I am suggesting that its return signals that all is not well in the EU. Yesterday (Wednesday in Berlin) he repeated that message.

“There ought to be an instrument that complements monetary policy in delivering macroeconomic stability both at the euro area level and crucially, in each of its member states.” (September 2018)

Spurred on, no doubt by Italy’s recent requests for further support and the Trump trade war, the ECB President is seeking support for a mechanism he considers to be vital - and one which effectively provides a big bail-out fund, but which circumvents or at least co-exists with Article 125.

Most likely as a result of the accelerating Trump trade war and the inevitable shrinking of the EU’s share of the global trade pie under that scenario (and Brexit) - Mario Draghi noted that removing internal trade barriers could double intra-EU trade over 10 years. Nice work, if you can make that happen.

As I previously speculated, whether this is some form of Government rated 'Austerity Bond' or perhaps a Union-credit wrapped guarantee, or something more exotic (i.e., more onerous to taxpayers) is yet to be seen.

But at least in answer to my question in May about what Germany thinks about it all, German Finance Minister Olaf Scholz did come out of the shadows, in Berlin.

He thinks there should be a banking union backed by euro zone members to make the EU bloc more resilient for the next crisis.

Scholz also called for the establishment of certain “instruments”, while there is still time.

In Europe, China, Hon Kong and other emerging markets it is risk-on, as a result of the trade war and its expected implications on current diplomatic trajectories.

Meanwhile, US equity markets break new highs and the fear index (CBOE’s volatility index) is again under 12.

Mike


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