“Ending the Euro isn’t anti-European”

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BrusselsReport.eu
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In a video posted on his Substack channel, Robin Brooks, a senior Fellow at the Brookings Institution, previously Chief Economist at the Institute of International Finance and Chief FX Strategist at Goldman Sachs, argues that “Germany needs to leave the euro”.

A transcript of his talk can be found hereunder:

Robin Brooks: “The euro has outlived its usefulness for Europe. This is kind of heretical to say in Europe. It gets you doxxed for sure. It is seen as an extreme right-wing view and commonly frowned upon and often you get attacked for saying something like this.

But the euro is really just a set of exchange rate pegs and the debate should be on whether those pegs make sense, whether the conditions that are needed to make those pegs are sustainable. I think the euro, in my opinion, is a big reason why that’s not the case.

(…)

Let me say two things up front. I’m a proud European. I was born and raised outside of Frankfurt, I think. The euro for me, like for all Europeans, is heavily mixed up with the emotional side of things, which is that many of us, including me, we kind of want a United States of Europe to a significant degree, right? We consider ourselves to have more things in common than things that divide us.

The problem with the euro is that it has become a vehicle that in my opinion and I’ll give examples in today’s presentation that make Europe weaker and Europe in my mind is kind of this I cover a lot of sanctions, stuff on Russia, the inefficacy and the brokenness of European institutions, the way that Europe is not rising to the occasion. And of course, you could have different opinions on the issue. It is heavily dependent on the fact that the euro basically means the fiscal capacity of the continent overall is extremely constrained. And so I’m really interested in making Europe.

I know it sounds heretical to talk about how we need to ditch the euro and go back to national currencies to do that, but I think it’s the only way. And I’ll lay out why I think that is in the presentation that I’ll pull up shortly. The other thing, when people like me and many of you in markets are making investment decisions, we are always in danger of getting hung up on what should happen versus what will happen. And of course, the European establishment, by which I mean politicians and mainstream centrist parties, by which I mean the financial sector, which holds a lot of debt in places that would have a debt crisis without the euro.

All these institutions have a strong vested interest to keep things going the way that they are. That’s understandable. But what’s not understandable is, or what you should try to fade out, is the view from these places that a Euro breakup will then be cataclysmic and anti-European and Europe will go back to war.

You just have to look at a country like Sweden or Denmark or Norway or Poland. These are countries that have their own currencies. They’re in the world. Thank you. There would be way more transparency and accountability if we went back to national currencies and ditched the euro. Just think about from the perspective of the ECB, all the things that are happening, I’ll talk about that today, and I have published lots of pieces on this. I think those things are not transparent, they’re not democratic, and ultimately they will cause a backlash. So “should” versus “will”.

The reason that I think we are moving towards “will” is because we are seeing a right-wing backlash in many countries. And the most important right-wing backlash is in the creditor countries, the countries that basically are underwriting the euro. And so that’s about the rise of the AFD. I am really worried that the AFD on topics like immigration and on the Euro basically is running circles around the political center in Germany.

The political center is not rising to the occasion. Do I think that the AfD will get more share of the vote? Absolutely. Do I think that they will be a real contender for a coalition government in 2029 when the next German elections happen? Absolutely.

And I think that’ll be a situation where then the euro will come under severe stress. The parallel that I see between the AfD and the bigger global picture is think about the United States. The United States basically after World War II was a benevolent altruistic global force that believed that by being generous to other countries.

The Rust Belt is basically the symptom of that. And it hasn’t worked really in the relationship with Europe where European countries have not raised defense spending the way that they needed to. And it was obvious for a very long time. So this MAGA movement in the United States… Trump is the symptom of that, but the underlying feeling is why are we giving all these other people all this generosity when it’s not returned or when at the very least they don’t listen to us? And I see the AFD as the German equivalent or the underlying sentiment in Germany itself. That is equivalent to MAGA. I see the euro here.

Ultimately, it’s a political vehicle. It depends on the buy-in of, most importantly, creditor countries, because they are who are underwriting this project. And I see, in general, a trend towards the political buy-in for the euro falling. That is I’m German. I see the rise of the AFD as extremely worrying.

I think there are parts of that party that are… Very unhealthy. But I think it’s also important to see that there are issues that are driving the rise in the AFD, and it’s those issues that the political center is not addressing. So should versus will, I think this thing is coming on the agenda.

I think the euro was always a political vehicle, and the political support for it is failing. Okay, let me pull up my slides, and we can go into the presentation. And then, as always, I’ll do Q&A So back in November, I wrote a series of pieces on why Germany needs to leave the Euro.

And that was not about bashing any particular country. It was not about saying that Germany is better than others. It was about how can we make Europe stronger? And The basic chart that drove all those pieces, I wrote three back in November, is this chart that you can see here, which is the aid that European countries are giving to Ukraine since the large-scale invasion happened in February 2022. And these are data that are compiled by The Kiel Institute in Germany, I think they’re authoritative. They’re good data. They add together all the financial aid that’s given, all the humanitarian aid, and all the military aid.

So you can consider them to be fairly comprehensive. Of course, adding up all these different things is complicated. There will be mistakes like in all data, but I think in general, they paint the right picture. And the way that I’ve made the chart is On the horizontal axis, you’ve got nominal GDP in 2021,hich I’m just using to give an idea for the size of the country. And you can see that Germany by far is the biggest European country, close to 4 trillion euros nominal. And then you have countries like the UK, which is GB in this chart, or France, which is FR, which are just below 3 trillion.

And then you’ve got lots of countries that are somewhat smaller, but there’s Italy and Spain. Spain is ES and Italy is IT, which are also fairly big. And the vertical axis shows you the aid. So again, this is a composite across all commitments on financial aid, military, and humanitarian that these countries have given to Ukraine since the large-scale invasion in February of 2022. And what jumps out is that countries like Italy and Spain in particular have falling significantly behind where they really should be based on their economic size. So taking a comparison, take Sweden, which is SE in this chart. Sweden gives about 10 billion euros in terms of total aid.

Its GDP is a fraction of Spain and Italy. And so… How does that make sense? That are way smaller, like Norway, which is NO in this chart, these give way more aid than Spain and Italy. And so the question is, why is it that Italy and Spain are not giving more aid?

And I don’t think it’s because they are nefarious. I don’t think that they are controlled by Russia. I think it’s because they can’t. They don’t have the fiscal capacity So that’s where the euro comes in. And you’ll see in the bullets that in my summary, the euro has become basically a vehicle for countries to pretend they don’t have Thank you. And so the combined effect of all these things that the ECB has done is basically to keep yields artificially low. That Has an advantage. It makes the status quo more sustainable. If you have a lot of debt, you can kind of lumber along and you can pretend like there’s no problem, but it doesn’t actually give you fiscal capacity. It doesn’t give you fiscal space, right? It doesn’t allow you to access debt markets at low interest rates because everyone knows underlying this is a big problem. And so think about what What Italy and Spain would have to do if they wanted to match, say,France or the UK or even Germany on aid, they would have to issue a lot more debt and that capacity just isn’t there.

One of my views is that the ECB actually is completely central to this European dysfunction, this illusion that we are laboring under that there isn’t too much debt, that there isn’t a debt problem in some countries means that the ECB basically has been co-opted. It’s largely run by countries with a lot of debt. And so… You basically have a situation where Germany goes along with measures to artificially cap yields because it’s worried about the alternative.

And so all the dysfunction that in my mind is happening at the ECB then has really negative consequences for Europe as a whole because it means that we’re kind of like a zombie continent, right? We’re lumbering along. We’re telling ourselves there is no problem. When in fact there is, and then a big real shock like Russia’s invasion of Ukraine comes along and there’s no money for Europe to step up and take the reins itself. That’s why we’re constantly going cap in hand to the United States for all kinds of things. It also means that In reality, when a shock like Ukraine happens, as you can see, Germany is by far the biggest provider of aid to Ukraine and so Germany ends up paying the bill and this is where I think I see the rise in the AFD in part.

As a symptom of this underlying dissatisfaction that Germany is constantly being asked to contribute, to foot the bill for others,but then gets very little in return and in fact kind of is constantly on the defensive in European negotiations. And I think that needs to change. Now, how do you change it? Obviously, there’s endless hand-ringing in Europe about how Europe can make itself stronger. I don’t think that discussion is remotely productive and will produce any meaningful change.

Why? Because the basic underlying situation is debt and the problems around debt. And as long as you don’t confront that, There’s going to be very little change that will make things better. So the real issue in Europe is about too much debt in certain places.

It is about the ECB that, in my opinion, has become an agent for high-debt countries. That is happening with the silent approval of Germany, but the political support for that silent approval in Germany is waning. (…)  

This chart shows you public debt in percent of GDP across different countries in Europe. And I’m going to highlight a few. There’s Italy, which is red, which obviously, as you know, has debt around 140% of GDP. There is Spain, which is somewhat lower. That is ES in this chart. And blue, it’s around 100% of GDP.

And then most worrying… The black line is Germany, that is DE, and you have France, which is orange, FR, and you can see that Germany and France until the mid-2000s, until the global financial crisis basically, France went on a debt binge. Every shock that we have, the global financial crisis,

And then COVID lead to a step change higher in public debt in France. And so you have this decoupling between the two perhaps arguably most important members of the EU and Yeah. Now, there’s a lot of focus on the debt break and what is happening in Germany.

And obviously, Germany is doing a big fiscal stimulus to finance rearmament. But the basic situation in Germany is a cultural one, which is that there are basically there is a political consensus that low debt is something to aspire to. And that is a northern European thing. In this chart, I show you the Netherlands, which is purple.

You can see Netherlands has public debt around 50% of GDP, so actually considerably lower than Germany. I show you also Norway, which is the darker purple. And I show you Sweden, which has an incredibly low debt to GDP of 30%. So there are countries in Europe that consider Debt to be a bad thing.

They use it for cyclical purposes. So when there’s a bad shock, they run up debt. But when the economy improves and the shock ends, they bring that debt back down. And that was always kind of the motivation behind counter-cyclical fiscal policy, right?

You were supposed to run debt up in a bad shock and then run it back down when things improve. And that lesson in Europe, in the Eurozone, has been lost because countries like Italy, like Spain, and especially France, debt only ever goes up.

And in a currency union that is not a fiscal union, that is a major issue. So what are the problems in the Eurozone? The bullets basically go through it. The Euro is a currency union, so it has common monetary policy. And of course, the ECB is the central bank that enacts that monetary policy,

but it is not a fiscal union. And the only way to make this kind of arrangement sustainable is if you allow sovereigns in the currency union to have a debt crisis if they run irresponsible fiscal policy, if their debt keeps going up. And of course, as you all know, the ECB increasingly is doing things to avoid. The appearance or the existence of debt worries in the Eurozone, it’s introduced all kinds of tools to artificially cap yields.

And that reflects the fact that the political center in high debt countries doesn’t want a sovereign debt crisis. I think that’s perfectly understandable, but it undercuts completely the way that the euro needs to work if it’s supposed to be sustainable. If you have a central bank that ties its own existence to avoidance of debt crisis, and I think that’s basically where we are now. The ECB kind of sees a sovereign debt crisis as a threat to the euro.

It talks about higher government bond yields as a threat to transmission of monetary policy. It’s basically saying we see high yields as interfering with our mandate, which is monetary policy. And of course, that mangles things because when you have a lot of debt Now, you’re The way that the euro currently works is that the ECB and high debt countries basically say, well, if you want the euro to continue, we can’t have sovereign debt crisis because we did that in 2011, 2012, and it basically was unsustainable and it almost caused a breakup of the euro. I consider this basically to be blackmail of low-debt countries and in particular Germany.

Basically, Germany gets threatened with, well, we don’t want a situation where we can have sovereign governments. And Germany is so far going along with this because of… I think there are other reasons too. They want the euro. They want this. But of course, exporters don’t vote. It’s voters that vote. And in my opinion, in Germany, there is a growing appreciation that this arrangement is not working. I don’t want to say this is a mainstream thought. It is not. But I think it will become one. And I think Germany has to find a way to deal with this kind of blackmail now.

The ECB, as I said, sits at the center of all this. The holdings of the ECB of sovereign debt are massive. And of course, this artificially keeps yields below where they would be otherwise. And I’ve frozen the nominal GDP at 2019 levels. COVID obviously switched. It sparked a lot of inflation.

So it makes things artificially look better than they really are. But of course, we all know that inflation is not a good fix to too much debt. And so that’s why I’m freezing nominal GDP levels in 2019. I don’t want debt deflation to skew the perspective here.

You can see that the ECB holds a ton of debt for Italy. It holds a ton of debt for Spain. And of course, it holds a ton of debt. And so holdings of Greek debt have also risen very significantly. Now, what does this mean to… As a geopolitical entity for Europe, it means basically that where Germany should be holding a lot of cards in negotiations on all things from sanctions to how to run fiscal policy, it means Germany basically is weakening its own hand by allowing the ECB to do These kinds of things to artificially cap yields, Germany weakens its own negotiation position in the euro.

And I think that is bad for Europe and it’s obviously bad for Germany. It’s mostly bad for German taxpayers. One recent example of where I think this is coming to a head is the unit credit takeover bid for Commerzbank. Which looks like it will happen. Now, think about the big picture, right?

You have sovereign bond yields for Italy, which are being kept artificially low. That obviously is a subsidy for Italy’s financial sector. If you had yields that instead of 5%, Yeah, absolutely. This Commerce Bank Unicredit takeover is an illustration of how, you know, in Stranger Things, the TV series, there’s the upside down where things are kind of the same but wrong. And in my opinion, the Unicredit takeover bid for Commerce Bank is a symptom of this upside down. Because financial markets in Europe are totally distorted. I’m completely sympathetic to the unhappiness over banking union. Of course, Europe needs banking consolidation.

But if you want banking consolidation and banking union, you need to start from a level playing field. And you can’t be artificially subsidizing banking systems in certain countries. And in particular, in high debt countries like Italy. So I see the unit credit takeover bid for Commerzbank as, in my opinion, completely perverse.

It is a symptom of how yields in the eurozone have become distorted, and it ultimately is the fault of the ECB and Germany going along with its acquiescence. Another example of how Germany loses leverage happened in December. You all know that funding for Ukraine is expensive.

It needs about 45 billion euros per year to keep going in its war against Russia. The European Union central banks hold a lot of Russian frozen reserves that could be used to fund Ukraine. And this came to a head during an EU leaders summit in December. And basically what happened is that France and Italy blocked the use of these frozen Russian reserves. Obviously, Belgium played a big role as well with its prime minister. But ultimately, France and Italy, in my opinion, they blocked the use of Russia’s reserves because they want more joint new debt issuance. This sets a precedent for euro bonds.

They want things to go that way because their own fiscal capacity is so compromised. As I showed before, neither country is giving the way it should in terms of support for Ukraine. And so, again, Germany lost out here. It couldn’t push through using Russian reserves for Ukraine funding because these countries have leverage that really they shouldn’t have.

Just think about, again, if sovereign bond yields for Italy and France were significantly higher, would they be pushing Germany around in these kind of fora? I really don’t think so. And so I think, again, Like Unicredit and Commerzbank, this is a symptom of how things in the Eurozone have become upside down.

Now, this is all happening because Germany goes along with it. But as I said, the political willingness and the political support for all this is waning in Germany. Now, I’ve spent a lot of time talking about shadow yields. The The idea of what yields would be if central banks weren’t artificially keeping those lower, this chart shows you on the horizontal axis where gross debt is as of 2024. On the vertical axis, it shows you the 30-year government bond yield as of last month. And you can see that for Japan, I have been going on about how the shadow yield is significantly higher. So that’s the hollow dot. I think

We are living in a kind of parallel universe. The thing that isn’t appreciated is that Germany That sounds counterintuitive because the ECB is buying German bunds as part of its QE. But think about a world where the ECB were, for example, prevented from buying sovereign bonds or from doing the kinds of verbal intervention that And that would push yields down. What is a safe haven? A safe haven basically is somewhere that you can hide and protect your principal from We saw during the sovereign debt crisis in 2010, 2011, 2012, that there were huge safe haven flows from the euro periphery to places like Germany, also to the Netherlands, also to Finland, anywhere with low debt. And so those flows at the moment, because the ECB is doing what it’s doing, are not happening. And they’re not happening because ECB yield caps mean this kind of safe haven feature. It’s not as valuable.

You don’t need it as much because bad shocks don’t push up periphery yields as much as they would otherwise. Now, the numbers that I’m giving here, Greek yields, 200 basis points, higher and so forth. They sound outlandish, but they’re really not. We have a natural experiment. …In other words, ECB President Lagarde said something that is…“The ECB is not there to close spreads”, but that was hopelessly naive on how the euro actually works and how important these spread controls are in practice. And of course, this statement had huge implications for spreads within hours. So you can see in this chart, I’m showing the 10-year sovereign bond spread for different periphery countries over bunds.

So Greece is black, Italy is blue. Spain is pink. And you can see that, for example, for Greece, you went from around 150 basis points in the spread, so 1.5 percentage points, to almost 450 basis points or 4.5 percentage points. So a 300 basis point widening in a very short time. This happened within hours. So markets basically…

Yeah. Yeah. Think about what happened within a few hours. The ECB then within days did emergency QE. This became known as the pandemic QE program to bring spreads back down. And it did all kinds of things that broke with history that allowed it to buy more periphery debt.

In the past, under Draghi, QE was constrained by the capital key. So this is basically you can only buy debt up to the country’s weight in Eurozone GDP. That’s what basically the capital key of the ECB is. And the ECB ditched that so that it could, in this moment of distress… So this is all just to say, what we’re seeing is artificial. The shadow yields in the Eurozone are significantly above observed yields. This basically is two things. It is a subsidy from low-deck countries to high-deck countries. That makes no sense whatsoever. And the political support for it is waning as a country like Germany is increasingly struggling. But more importantly, it gives the wrong incentives.

You want to incentivize high debt countries to bring debt down. This does the opposite. It incentivizes continued high debt levels and it reduces the urgency for bringing debt down. And that is what lands us basically with this equilibrium that I was highlighting in my first slide where you have this situation that looks okay.

There is no debt crisis on the face of things, but then a shock like Ukraine comes along. Spain and Italy have no money to help Ukraine. In my opinion, that makes Europe fundamentally weaker. The solution, in my opinion, is to admit defeat and to I want to say one more thing about Greece, which I think is the most egregious example of where the euro is underwriting abandonment. So as many of you may know, I spent a lot of time working on Russia sanctions. And one of the big things on Russia is the Shadow Fleet. It is this fleet of oil tankers that Putin has built on.

He doesn’t have to worry about EU price caps. He doesn’t have to worry about any kind of EU bans. He basically sells these shoes. Now, the chart shows you the growth in the Shadow Fleet over time. It went from around 100 ships before the invasion of Ukraine to now, on this database, almost 550.

This is incomplete, by the way. The Shadow Fleet is closer to 1,000 ships. It’s just very hard to track these ships. And what I’ve done here, together with my colleague Ben Harris at Brookings, we have collated Where these ships came from? Who were the previous owners?

And it turns out that Greece is the single biggest supplier of ships to the Shadow Fleet. Now, think about what is going on. Greece is basically a highly indebted, tiny country. The government is basically run by 10 families that live in Athens that own a huge number of ships. Those 10 families basically run the Greek government.

This is why the Greek government in the most recent sanctions package, for example, last month vetoed a prohibition of shipping of LNG, Russian LNG to third countries. That was vetoed on behalf of a large shipowner. Now, again, think about the euro. The euro is a vehicle that keeps Greek yields artificially low, in my opinion, without the ECB and all the stuff that it’s doing and has done. Greek yields would be in the double digits. Greece would be in a debt crisis. Would the Greek government feel empowered to veto in Brussels… I think Germany basically and other Northern European creditor countries give up massive leverage here.

It leads to bad governance. It perpetuates the status quo. And in Greece, it doesn’t even help ordinary people. It massively benefits these large ship owners who behave like stateless people. They do not… And so it is, again, an example where not only is financial support in the current equilibrium for Ukraine and It’s also true that countries behave badly. And I think although Greece is small in terms of global shipping, it is a major global power and it’s behaving very badly. And I don’t think that would happen if we had yields that were remotely reflecting reality.

Now, a breakup of the euro sounds nuts. Going back to national currencies sounds nuts. But staying with the status quo, and so what would a world where we go back to national legacy currencies look like? First of all, Europe can do everything that it needs to do from common defense, from common foreign policy with national currencies. You don’t need the euro for any of that.

The best example of this, as I said earlier in this call, is Sweden. Sweden is an EU member. It decided not to join the euro. There are other countries in the EU that decided not to join the euro, notably Poland. You can do all the cooperation that you want without a common currency. Why?

Because these things are political. They have nothing to do with monetary policy. They’re basically about a bunch of country leaders putting their heads together. If you went back to legacy currencies, the chart here shows target two balances. So when in emerging markets you have a currency crisis, basically you have a big devaluation. Why?

Because inflows from abroad to finance a current account deficit stop. And so the currency comes under big depreciation pressure and it falls. That’s not what happened in Europe. The currencies of high debt countries could not fall. Instead, the capital flows that in an emerging market would have ceased basically got taken over by flows between individual central banks.

And what happened was that Germany’s central bank, the Bundesbank, essentially took over intermediating capital flows to high debt countries like Italy, like Spain. And increasingly in recent years, France is becoming a net debtor in the Target 2 system. And of course, that reflects the growing deficit, the growing debt that France has now.

This target to credit that this asset that Germany has, it would have to be written down. As you know, from the earlier slide, German GDP in nominal terms is around 4 trillion euros. So this is 25% of GDP. It is significant. But I think not writing this down, which is what would be needed in a Euro breakup, it’s just throwing good money after bad. And I think we just have to face up to the fact that … … … … … That’s right. That actually, although it sounds scary, is the purpose of all this because going back to my first slide, countries like Italy and Spain don’t currently have the fiscal capacity to help when a big shock like Ukraine hits. And one way to create fiscal capacity is to do a debt write-down. That frees up fiscal space. And countries like Italy and Spain will then have the means to help on a big geopolitical shock like Russia’s invasion of Ukraine. All of this sounds scary, but I would say the following.

There’s obviously these big vested interests. There’s the political center in a lot of these countries. There are a lot of asset holders who don’t want this to happen because they don’t want their assets to be written down. But this equilibrium is a bad equilibrium. Europe is stumbling along. In a pretend world.

The first step that I’m advocating is for Germany to more forcefully represent its interests at the ECB. And part of that has to be, in my opinion, threatening a breakup of the euro. But obviously, this will start a discussion. I think the best place where we end up is that the euro remains, but that the ECB is banned from artificially capping bond yields. That would return us to… a situation that we need and want, which is that sovereign debt crises within the currency union can happen. That will cause governments to run better fiscal policy, and it will mean that fiscal specialization.

I think an end to the euro, I don’t want to see that either. But I think Germany here needs to start negotiating properly, and that has to start with its negotiation at the ECB.

 

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Okay, those are my slides. Okay, so my friend Thorsten Fröhlich from Germany has a question about the ECB ditching TPI.

So, Thorsten, this is a fascinating topic and I could talk about it forever. So, remember… Draghi in 2012 said, whatever it takes, we will do, the ECB will do whatever it takes to protect the euro. And that gave rise to a program called OMT, Outright Monetary Transactions. And that program was basically a fiscal support vehicle.

It allowed the ECB to buy short-term government bonds. And it had IMF conditionality, so it meant that a country that went under this facility would be required to do things that the Troika or the IMF or the EU told it to do. And the reason that the TPI was created in 2022 was because Italy basically doesn’t want this thing. It doesn’t want any kind of conditionality. It sees it as an infringement of its sovereignty. And so the TPI was created, and the TPI is insanely circular. The TPI says if the EU says your debt is sustainable…

Then we can intervene without conditionality because the EU has said your debt is sustainable. So there’s no fiscal adjustment that’s needed. Everything is fine. But the EU in its assessment of fiscal sustainability uses yields that are artificially low thanks to intervention from the ECB. So the whole thing is completely insane and it makes no sense.

Sadly, to come to your question. The biggest cheerleader. Do I think the TPI is going away? Not without severe political pressure. And frankly, I think the current cast of characters at the ECB that represent Germany need to be replaced. So for Joachim Nagel, the president of the Bundesbank, to come out in favor of euro bonds, that’s madness.

It is not in the interest of German taxpayers for anything like that to happen. The incentives, and I’ve written about this, you know, in management, we talk about a principal agent problem where the management of a company starts to kind of devolve and move away from what really is in the interest of shareholders.

And at the ECB, something similar is happening. Representatives from Northern Europe have basically watched what’s happened over the past 10 years. Jens Weidmann quit. Axel Weber quit. There are many other senior German ECB figures that basically said, you know what, I’m out. I can’t be part of this undermining of German fiscal sovereign space. I have to resign.

And people like Isabel Schnabel, people like Joachim Nagel have learned the lesson that Well, if we want a successful career at the ECB, we got to go along with the high debt majority. It’s inevitable. And so I think… TPI will not go away until Germany puts its foot down. And that has to come from the German government.

Do I think that the current German government is going to do that? No, I don’t think Friedrich Merz is going to do that because it will mean significant bond market volatility in the Eurozone. It would mean a return to a situation where spreads would bang out. I don’t think he has the stomach for it.

What is my take on the Draghi report? How would your proposition change? Should it materialize? First of all, I have a lot of admiration for Draghi. He’s a force of nature. Of course, he knows that many of the things in Italy that are broken need to be fixed.

The reason that his government fell in 2022 is because he was trying to Yeah. And so he was trying to change very minute things to increase the government’s tax take on housing wealth. That cost him his job. He’s not the first person in Italy with good intentions who basically got kicked out.

Monti was similar during the sovereign debt crisis. And so do I think the Draghi report is the right thing for Europe? You know, I think that. If Europe just recognized the significance of debt and all the dysfunction that comes from it, it would be way better off. Of course, there are things like productivity, labor market regulations, product market regulations, banking union, yada, yada, yada. The list is endless, but… Take banking union, right? You can’t really push a banking union if debt levels are significantly different across countries and if there’s a subsidy, an artificial subsidy for high debt countries that then enable something like the unit credit takeover. Don’t get me wrong.

I think Unicredit is an amazing bank. And I think the current management team have done an amazing job turning it around. And I think Commerzbank, you know, faces some pretty significant challenges, although I think it’s gotten better too. Anyway. Okay, Fernand says that Draghi’s not popular in Italy at all. Yes, no, I think that’s true.

I think any political leader that says it like it is, and basically that debt needs to come down and fiscal policy needs to come down, I don’t think you’re going to win any popularity contests, but you’re doing a huge service to Italy as a country and ultimately to Europe.

Tara Vier has a question on exports from Germany. You’re right and you’re not right. So the pushback to a lot of what I’m saying is, well, Germany benefits because the euro is weaker because it’s in a currency union with all these other countries. And so Germany, yes, maybe it’s paying for high debt countries, but that’s just a reasonable payment for all the advantages it gets from a weaker euro. The pushback to that argument, I think, and I think, by the way, this is a really unhealthy way of thinking because the euro is a joint project. If we’re constantly tabulating who wins and loses, then I think we’ve lost the spirit of the solidarity, right?

This is not a ledger where we’re constantly doing pluses and minuses. But I will say… You need to weigh against that interest rates when the euro was first created and in the run-up to the euro, interest rates in places like Italy and Spain came down massively. So there was a huge consumption boom.

That consumption boom should have been taxed. It wasn’t. And in a way, it set the stage for the sovereign debt crisis that then happened in 2010, 2011, 2012. So there were big benefits on both sides from the creation of the euro. And I don’t love the argument that you get from Southern Europe that It is only the Germans that are deriving a benefit from the euro.

Okay, Alex has an observation that we need more unpopular leaders. Yes, we really do. And by the way, the picture on that is changing. I think obviously the rise of these populist parties is changing the political landscape. And I think, you know, the political center,

when I look at what’s happening in Germany, it’s just so broken. It is not representing, it is not doing what people want. And so there is a real reason why the AFD is gaining in the polls. And I don’t think it’s necessarily driven by racism or anything like that. Fernet, maybe I’ll close with your comment.

The euro is first and foremost a political project. I completely agree. But that is also its biggest vulnerability. If a large creditor country like Germany and others, I mean, think of Finland. You know, Finland is facing a major threat since it has such a massive border with Russia.

If solidarity in the eurozone only goes north-south and never south-north, Then there’s a problem. And I think that’s basically the crux of the issue with the euro. So again, just to recap, I think the euro, the way it currently works, unfortunately has become kind of a fiscal support mechanism for high debt countries.

And central to that is the ECB. My wish is for Germany and other Northern European countries to say, okay, enough with that. We are a currency union, not a fiscal union. The ECB from here on is prevented from any kind of bond market intervention. That will then allow defaults, sovereign debt defaults, and that will return the euro to a good state. Sovereign defaults obviously are painful, but they also create fiscal space, and that is what euro… I am not trying to bash any individual countries. We all end up in equilibria that frankly are not our fault, right? I’m bald. There’s nothing I can do about that. It’s just how I was born. We’ll be right back. And I think there are ways that we can do that and become stronger together. (…)

And with that… My best wishes to all of you. May we move forward as good Europeans and become stronger and do the things that are needed to make that happen. My best wishes to all of you. Bye-bye.

 

 

 

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