The COVID-19 Crisis Is Driving the EU to the Brink
The comments below are an edited and abridged synopsis of an article by Philipp Bagus
The Eurozone is a machine of monetary redistribution. Governments can finance their expenditures through deficits that are monetized by one printing press. The ECB may buy EU government bonds directly from market participants or accept them as collateral in its lending operations, effectively increasing the monetary base.
Through monetization, a government can shift its deficit costs to citizens of other EU countries in the form of lower euro purchasing power. By running higher deficits than their peers, EU governments can try to live at the expense of foreigners.
Most EU governments have ignored a new treaty aimed at lowering debts and deficits. With interest rates at virtually zero, governments haven’t reduced their debts; they took advantage of higher tax revenues and reduced interest spending to boost government expenditures in other areas.
They believe that no one will end the monetization, because that would trigger a sovereign debt default, harming other EU governments. European banks and the ECB are loaded with EU government bonds. A government default would imply losses not only in the defaulting country, but in all EU banks, leading to bankruptcies and economic crisis. Confidence in the euro would be affected by the risk of (hyper)inflation.
Although southern governments haven’t reduced their deficits, some northern countries did, thereby increasing the possibility of southern governments relying on Germany and the north for bailouts.
During the Covid-19 panic, Italy, Spain and France have demanded solidarity from Germany. In spite of their failure to reduce government spending and deficits, they believe it’s their right to be bailed out. Several bailout schemes have already been instituted. The ECB announced that it would buy €750 billion in bonds, and the EU has agreed on a €540 billion bailout package.
The moral hazard of the euro not only influenced excessive government spending before Covid-19, but government responses to the epidemic as well. The costs of lockdowns and bailouts are enormous. What if a government can externalize some lockdown costs on others through new debts or bailouts? A government will declare a lockdown and continue with it for longer. By ruining their own economies, southern governments increase the pressure for new redistribution schemes, and a European super-state.