The Euro: What Next?

by Andrew Stuttaford

If I had to guess—and that’s all anyone can do—this (from Ambrose Evans-Pritchard) looks like a reasonable speculation of what we can expect to see this week:

Brussels has warned that Europe will “disintegrate” unless leaders grasp the nettle this week. It is a scare tactic. There is no necessary linkage between a euro break-up and the end of the EU. One might equally argue that the surest way to bedevil Europe is to persist in trying to hold this unworkable currency together with coercive powers.

But having cranked up the rhetoric, Europe’s leaders will have to conjure some pro-forma triumph for the headlines, as they have at each of the last seventeen crisis summits.

No doubt there will be a “bazooka” of sorts, a mish-mash of big talk on the EFSF bail-out fund, with IMF flanking operations, and accompanying ECB action to keep banks afloat for longer, all cloaked in a fiscal union that isn’t what it seems.

Mandarins will slip the figure €1 trillion somewhere into the communiqué to nourish a hungry media.

And a good part of that number will have to come (however laundered) from the European Central Bank, perhaps given enough cover by the promises of the discipline of a Fiskalunion to come.

But while this is all going on, keep an eye out for evidence that trust in and between Europe’s banks is increasing. At the moment that evidence is hard to come by (which was the key reason for the coordinated central bank intervention last week). Here’s what the FT reported on Friday:

Borrowing by eurozone banks from the European Central Bank has jumped to the highest levels since March, in a sign of deep strains in the financial markets.

Traders said the jump in overnight lending by the ECB highlighted the inability of virtually all eurozone banks, with the exception of the very strongest, to get funding from the markets.

The rise in lending to €8.64bn on Thursday – the latest figure – alarmed some traders. It is the highest daily level since increases in March when crippled Irish banks were forced to turn to the central bank for large amounts of cash.

One trader said: “Just look at my screen. It tells the story. I have one big European [commercial] bank willing to lend and 40 banks wanting to borrow. And look at those names, they aren’t little regional banks. They are some of the biggest banks in the eurozone and they can’t get funding in the marketplace. They have to go to the ECB.”

And where will the ECB turn? The printing press? The IMF? A bit of both?

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