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“Erase And Rewind” (English, “erase and rewind”)


What was considered impossible in monetary policy just a few years ago has a chance to become real.


Dynamics of the ECB balance taking into account the buyback programs announced for 2021. Source: UBS

In an open letter, 100 European economists offered the ECB to zero the debt on government bonds that the Central Bank has on its balance sheet. According to them, through the ECB, the European Union owns 25% of the debt of the countries themselves, and to pay off the debt “to oneself” it will be necessary to collect more taxes, or refinance at the expense of new debt. Instead of paying the countries of these debts to the Central Bank, economists propose to oblige the states to spend “forgiven” funds on greening the economy and projects in the social sphere, an estimated 2.5 trillion euros.

In the ECB itself, this idea is considered legally impracticable: statutory documents prohibit the ECB from funding EU member states. However, politicians do not think so, and the head of the European Parliament called it “an interesting working hypothesis.”

Technically, implementing this idea is really problematic, but if necessary, there will be a way to implement it. The additional program of the ECB for the purchase of assets amid the pandemic, in fact, is also indirect financing of states. Logically, debt zeroing is contrary to market laws and casts doubt on the assessment of what we used to call “the issuer’s solvency”. But if you look at the idea through the eyes of politicians and economists, it no longer becomes so crazy. Sooner or later, you will still have to look for an elegant solution to reduce the government debt burden. In the last crisis year alone, the debt of the EU states increased by more than 10% of GDP: from 77.6 to 89.8%.

Debts on the balance sheet of the ECB:
Dynamics of the ratio of public debt to GDP of the EU countries. Source: CEIC Data

To look at the problem of debt from such an angle without a twinge of conscience allows the modern monetary theory, which is gaining popularity in the West in scientific and professional circles. It assumes that it is impossible to assess the issuing state of fiat currencies as an ordinary economic entity, in particular to limit it in issuing debt. Public debt, within the framework of this theory, is an investment in the economy to solve the problem of employment of resources. Simply put, the debt burden on the state is not so important for assessing the state of the economy and does not create the risks that everyone usually talks about.

Convenient theories and political ambitions tend to meet. But do not forget that theories can be wrong, and if the European authorities are able to conduct this experiment, then they may face bigger problems than the growing balance sheet of the ECB.

/ Ilya Grigoriev /

@AndreyHohrin
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