David McWilliams: ECB Emperor Has No Clothes


From Celebrity/Veracity Economist David McWilliamsWe need to show ECB it’s not the only show in town:

Today, small countries like Ireland could take a leaf out of the book of the old city-states. Instead of committing ourselves totally to one sphere of orbit, we could play a trading game, seeing where the big powers’ interests have shifted and altering our own policy accordingly…

in crude terms the Germans have to “bank” their competitive advantage now in order to pay for the old Germany of the future. They won’t do this if they have to keep bailing out the likes of us, so they have doubled their bets on the east and clamped down on what they see as ongoing transfers to the EU’s periphery.

But frankly, that’s their problem and once you figure out the weakness of the people on the other side of the table, you begin the process of strengthening your hand.

I come back to the so-called bailout because we can’t pay for the banks’ debts and, interestingly, there are not so much “our” banks as “their” banks because the main creditor now is the ECB and as we all know from Leaving Cert economics, the creditor owns the company.

One other weakness the Germans also realise is that there are no real sanctions against a default in a monetary union. This is why they threatened our Government last week. The threat was that if we pursued “burden sharing”, the ECB would cut off funding to Ireland and flood the rest of the periphery with liquidity. This would show exactly what happens to a country that breaks ranks and imposes on German banks the losses that they should have taken anyway.

Well this proves that they don’t want to understand how a monetary union works. They could have cut off European liquidity to Ireland as much as the old Irish central bank could have cut off Irish liquidity to Mayo.

The money would simply find its way here as excess liquidity spilled over into all the nooks and crannies of the monetary union. Irish banks would have got liquidity as other banks lent on to the new Irish banks with the cleaned up — post default — balance sheets.

Their lack of comprehension about how a monetary union works on the way up when money cascaded into Ireland is only matched by their lack of understanding about how a monetary unions works on the way down. Yes, we would be downgraded, but there would still be ample euro financing around and, more importantly, as our balance sheet improved, together with a credible budget adjustment programme, money would flood into Ireland to recapitalise us.

We have to understand that this ECB Emperor has no clothes. There is no sanction against an Irish bank default within the euro bar threats and these threats are idle because the system is set up to make sure that liquidity seeps around the union. The threat is as hollow as Gerald Ford’s threat to New York City when in 1975 he said he wouldn’t bail out NYC and told the bankrupt city to “drop dead”. Of course he did a deal. The ECB and Europe’s politicians would do the same.

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This entry was posted in Bankers' Bailout, Debt Default/Restructuring, Debt for Equity, ECB/IMF, Economy, EU, Euro / Sovereign Money, Geopolitics, Housing Bubble, Independence/Nationalism, ireland, Solutions and tagged , , , , , , . Bookmark the permalink.

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