Some interesting figures have recently emerged, which give a good insight into what the ECB has been doing these past months. First are Money Supply figures, called “M” numbers. The M numbers are used to measure the amount of new money being printed and entering circulation.
Although Euro zone money supply has been declining in recent months, as Trichet has tightened the taps, the trend since inception is staggering, only matched by the inflation years of the 1990’s. Current annual growth in M3 in July is 9.4%, growth in M2 is more than double at 19.6%.When the credit crisis began, the ECB lead the way in pumping liquidity into the market. To do this, the bank will issue short-term debt called bonds that are lent with the repayment burden upon taxpayers. In return, borrowing banks post collateral and the bonds are used to lend again, at a higher interest rate to build schools, roads, hospitals; things a taxpayer expects their government to use their taxes for.
Initially, the liquidity injected by the ECB was 100 billion Euros, within a few months an additional 400 billion was issued. In recent weeks the ECB has indicated the borrowing banks have been abusing the system.
As of August 2008 the ECB had leant 976 billion Euros, but had the borrowing banks all been Eurozone banks the amount could have been justified. In reality, banks from as far away as Australia have dumped their toxic house loans and consumer debt on the ECB.
They have then headed back to Sydney with freshly printed Euros, to no doubt dabble in the oil, and foodstuff markets and to shore up their balance sheets.
While the ECB has certainly been fighting the good fight, (that is the fight against inflation) the opaque structure hides a multitude of flaws. Without the necessary structural and political reform, the ECB is a political and economic time bomb.
So in our view, the Eurozone has much pain and dislocation ahead, as economies continue to diverge along fiscal lines. Monetary union has meant giving a huge slice of each countries sovereign rights. Each member bank has handed over monetary policy, and national interest to an unelected body in Frankfurt.
