Could the triangular relationship between the US under Trump, China - given its financial circumstances - and Europe further destabilise the EU? Economist and former Greek minister of finance Yanis Varoufakis outlines the challenges
Europe performed better last year than expected, so it is very easy to start thinking it may be a source of good news for 2017/18 - but some caution is advised before you come to this conclusion.
Take Italy. It is too large to bail out, too large to ignore and too large to be bullied the way Greece was bullied. Italy is about to enter its perfect storm. So far, European Central Bank (ECB) president Mario Draghi has purchased €210bn (£176bn) worth of Italian government bonds. In the next period, Italy will have to roll over €1 trillion, at a time when Draghi is being forced to taper.
Note ‘forced' - he is not choosing to taper. Why? Because of a shortage of German bunds. Remember how European quantitative easing (QE) works: to buy any amount of Italian bonds, Draghi has to buy twice as many bunds. That is the only way the ECB could pull off QE ‘euro-style'.
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In other words, the only way of convincing German premier Angela Merkel and Bundesbank chairman Jens Weidmann to allow the ECB to do QE was that it purchased government debt in proportion to GDP or to ECB shareholding by member states. Same thing.
Now the problem is that bunds are running out because German finance minister Dr Wolfgang Schauble is not issuing them - he is running a surplus. German financial institutions have an obligation to retain the bunds they have. So you have excess demand for bunds.
This is creating problems for the smaller banks in Germany and the pension funds. And that is pushing Draghi into tapering already, and why the ECB's programme of QE is going to be withdrawn very soon.
It comes at a time when Italy has to refinance about €1 trillion. It comes at a time when the Italian banks are being forced by the Single Supervisory Mechanism (SSM), to ditch €150bn of Italian government bonds, because of their overdependence - or actually the overdependence of the Italian state on Italian banks. And it comes at a time of US monetary tightening that is only likely to become tighter over the next 12 months.
My great worry about Donald Trump is, as somebody said before, that he means what he says. And what does he say? That he is going to pump up infrastructure spending. This is going to do two things at the same time.
On the one hand, it is going to increase substantially the supply of treasuries - in the US markets and in the global markets - while the trade war or the squeeze on China by the new administration is very likely to initiate a sell-off of treasuries there and other kinds of pressures as the credit bubble in China begins to subside.
In this context, the problem Italy poses for the ECB and the eurozone, in combination with Trump's clear and present danger in relation to the Chinese credit bubble, creates the possibility of the further destabilisation of the European Union (EU) and European monetary union.
Check out any time you like?
Then there is the UK. You may have had every reason to dislike the EU and to want to get out but you were mistaken. I will allude to a favourite song of mine from the Eagles: "You can check out any time you like, but you can never leave." So you voted to check out of the EU so as to become global Britain, to be extrovert, to spend your energies looking outwards to China, to India, to Latin America and to Africa.
Instead, you are going to be stuck in Brussels for I do not know how many years with the Department for Brexit, involved in a negotiation about the right to negotiate. They are going to have you bogged down in discussions that will go on for the next two years, before you even have an opportunity to establish any interim agreement that makes sense for business and for finance in this country in the long term. This is why I was against Brexit.
And all of this at a time when Trump is embarking upon an irresponsible fiscal policy - and I say this as a left-winger - and a toxic policy towards China. Remember what the Reagan administration did to the Japanese in 1985 with the Plaza Accord, from which Japan never really recovered after having been forced to revalue the yen?
This administration under Trump is going to do something like that. So the irresponsible fiscal policy and the inimical stance towards China, while Europe is failing at the game of political coordination is not the right time for Britain to be forcing itself to cosy up to Trump in order to distance itself from the EU.
This article is an edited version of a section of a speech Yanis Varoufakis gave in March 2017 at Artemis's investment roadshow in Scotland. See also Why we should all be wary of the euro
Professional Adviser has secured two copies of Yanis Varoufakis's latest book - And the Weak Suffer What They Must? - to give away to the first two advisers' names drawn out of the editor's metaphorical hat at noon on Wednesday, 24 May 2017. Just email your name to [email protected] with 'Yanis Book Offer' in the subject line. Professional Adviser's normal terms and conditions apply.
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