Europe and the ECB: The need for a decentralized currency

Journalist:
May 26, 2014

Europe, like the rest of the world, has struggled to emerge from the recent  financial morass. Tough decisions have been taken and the economic indicators emerging are somewhat promising. However, recent actions of the European Central Bank (the ECB) are causing concern amongst external observers.

The ECB is, essentially, the Central Bank for the Eurozone area. In order to ensure the ECB’s independence it is allocated its own budget and Governors are appointed for a minimum period of 5 years, members of the board are appointed for a non-renewable term of eight years. This security of tenure is added to by ensuring that board members and Governors can only be removed in the most serious circumstances. The role of the ECB is of vital importance to the stability of the Eurozone and to this end, Europe has given the ECB extensive powers. Whether the ECB uses those powers wisely or not is a point I wish to address.

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[dropcap size=small]F[/dropcap]rom late 2009, fears of a sovereign debt crisis developed among fiscally conservative investors concerning some European states, with the situation becoming particularly tense in early 2010. The Euro zone countries were Greece, Ireland and Portugal and there were some countries outside the EU area, including Iceland. The principal tool the ECB has chosen, to assist the countries with the sovereign debt problem, has been collateralised borrowing or loan agreements. To see how this works in practice, the ECB has underwritten loans to Ireland, Portugal and Greece, with stringent conditions attached. The countries benefiting have had to maintain high debt repayments to the ECB and in order to meet these repayments they have been forced to cut back on popular social programs and public sector expenditure. This has led directly to unhappiness in bailed out countries, with that unhappiness expressed as anti-EU sentiment, there have even been riots in Greece. Many German taxpayers, who live frugal lives, object to their taxes being used for bailing out countries that they believe were living outside of their means.  The sovereign debt crisis in Ireland was caused by a construction industry bubble that led directly to a collapse of banks with a significant property exposure.  Ireland was one of the first countries to be bailed out and is often cited as the great ECB success story. Ireland became the first country to successfully exit the ECB bailout program.

However, all is not as it seems. Ireland now has a huge level of national debt, 178 Billion Euros or 124% of the GDP, and this debt needs to be serviced.

By August 2011, total funding for the six banks by the ECB and the Irish Central Bank came to about €150 billion; the largest of the six, Bank of Ireland, then had a market capitalization of just €2.86 billion. However, many of the banks bailed out had been invested in, by unsecured bondholders. In April 2012, it was reported that the Irish government had paid one and a half billion euro to unsecured bank bondholders; an additional €1 billion payment was made in October of the same year.

Independent TD (Member of Parliment) Stephen Donnelly, criticized the move, arguing that the debts were incurred by “professional investors which have no sovereign guarantee and which occurred before the State took control of the bank”. On these grounds, he argued the Government had no “moral obligation” to repay them. So why exactly did Ireland choose to pay an investment return to unsecured bank bond investors? Simply because the ECB forced them to. Who were these unsecured investors? It appears they were mostly German Investment banks and pension funds.  Investors that had invested in a high-risk investment that tanked and then got their money back from Ireland, with a return. Ireland was forced to borrow this money from the ECB at 6%. Why, because if Ireland allowed the unsecured investors to go unpaid then the stability of the German banks would have been threatened. This could have affected Euro value and caused volatility. Was there another option? Well, yes, Iceland allowed the banks to default, but Iceland did not have the Euro as its currency. It seems there was a hidden cost to Ireland for adopting the Euro!

What would be a solution today? Well, adoption of a currency that is not centralized would help. Perhaps we do not discuss the politics behind the Euro openly, and the Yuan and Dollar are also openly manipulated by their governments. A truly decentralised currency would ensure that the financial accounts of independent nations would be true and accurate. That national considerations would take precedence over institutional ones. Remember the ECB replaced a government in Greece. A sovereign government in a sovereign state. Is it time for cryptocurrency? Is it time to cry stop?

Image by Shutterstock.

Last modified (UTC): October 19, 2016 15:47

PJ Delaney @P.J. Delaney@delboyir

Masters in Public Administration, Bachelors in Mgt., I live in Ireland, I have a bit of a background in Economics and lots of opinions on everything else.