Is There A New Focal Point Of Instability In The Euro, Related To Political Uncertainty?

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In Sober Look, Marcello Minenna gives us a clue about a possible new breach in the euro’s structure. A few years ago (2011-2012), when the euro was going through its worst time, one of the consequences was that the central banks in the peripheral countries increased their debt position with TARGET2: an acronym for a payment system which assigns debtor-creditor positions amongst banks in the region, in accordance with the transactions with their clients. It’s assumed that these positions are short term.  However, at the height of the euro crisis, the central banks in Spain, Italy, Portugal, Ireland and Greece accumulated an increasing amount of debt, a sign that something was going wrong. It’s no coincidence that three of these countries were bailed out.

German economist Werner Simm sparked a controversy when he claimed that these debts were prejudicial for Germany, stating that they were the result of the trade deficits accumulated by these countries compared to Germany. All this was rejected by Whelan & Al, who showed that it had nothing to do with trade balances. That said, it was a clear sign of some imbalance, but it had another origin: the capital outflow from countries called into question over their public debt levels.

It must be said that the problem ended with the arrival of Draghi, who re-established confidence in his icon countries’ ability to pay their debts. This nipped the outflow of capital in the bud, at least in some cases.

But once again some imbalances appear amongst the member countries, which are reflected in the increase in their liabilities and the ECB-TARGET2 system.  In other words, there has been a resurgence of capital flows out of the peripheral countries towards the centre, and not because their trade balances are not in good order: it’s definitely about the relocation of capital from the private non-banking sector. Note that one of the countries affected is Spain, which has increased its debt with the system to 262 million euros. Meanwhile Germany has seen its creditor position rise. In the graph you can see how the breach which had closed after the 2011-2012 crisis has opened up again.

The author just focuses on analysing the case of his own country, Italy: to explain this new movement, he analyses its financial situation, particularly those items which can be seen in the next graph:

It’s clear that while capital investment towards Italy from the outside (green line) has corrected its very negative trend, the outflows from Italy towards Germany (red line) has accentuated it, which is reflected in its increasing debtor position (blue line) with the system.

In other words, private non-banking investors once again perceive risks of intra euro turbulence (that a country’s assets may be re-denominated in another currency, due to the partial or total breakup of the euro). In addition, there is the fear sparked by the new regulation which came into effect in January 2016, which hands over the responsability for a bank’s bailout to its depositors. Both of these risks or fears feed off each other, as is obvious.

So is the author’s argument applicable to Spain? I think it is.

I would also add the matter of the growing political uncertainty in Spain. Certainly the most recent data on the country’s external position confirms that something is gradually happening in this respect: an increase in private individuals’ positions in overseas investment funds, as well as the rise in the Bank of Spain’s liabilities (after the peak of the 2012 crisis), as we can clearly see in the graph:

There is no doubt that in 2015, and even more quickly in 2016, money placements abroad are rising at the same time as the Bank of Spain’s debtor position is increasing (after the normalisation which followed the huge hump in 2012). The positive trade balance is being used intentionally to cover up this worrying movement.

 

About the Author

Miguel Navascués
Miguel Navascués has worked as an economist at the Bank of Spain for 30 years, and focuses on international and monetary economics. He blogs in Spanish at: http://http://www.miguelnavascues.com/