Eurozone dream in tatters as ‘financial vandalism’ threatens stability

With the Eurozone’s cash provide shrinking for the primary time since 2010, a banking skilled has stated Europe’s economic system has been broken by what he known as “incoherent financial vandalism”.

Bob Lyddon additionally believes the state of affairs is being exacerbated by members of the EU27, whom he claims have “given up on any pretence of coordination”.

The cash provide, one of many key indicators utilized by the ECB to measure to impression of its coverage of elevating rates of interest, fell for the primary time since 2010, the Financial Times reported earlier this week.

The shopper value index for the 20 nations which use the euro foreign money stands at 5.3 %, unchanged from July, supported by meals, alcohol and tobacco costs which elevated by 9.8 %, in accordance with official figures printed at this time by from EU statistics company Eurostat.

Another key inflation quantity – so-called core inflation which excludes gasoline and meals – additionally eased in August, falling to five.3 % from 5.5 %.

That quantity will likely be a key consideration for the ECB in deciding whether or not rates of interest have to go greater or can stay unchanged whereas financial institution officers assess the impression of upper charges on development.

Bob Lyddon, the founding father of tax specialists Lyddon Consulting Services, foresaw troubles forward for the financial union.

He informed Express.co.uk: “Eurozone policy-making in governments and at the European Central Bank has parted company from the real economy, and not just within the usual ‘Club Med’ member states.

The European Central Bank, like the Bank of England, has become a tracker fund of the Federal Reserve, aping the Fed’s interest rates changes to protect the value of the euro on international markets, regardless of the impact on their own economy.”

The ECB had “drastically reversed” its erstwhile coverage of shopping for up massive portions of long-term bonds, and was now dumping them for money, Mr Lyddon stated.

He continued: “Cash moves out of the private banking system and into the central banking system.

“This ‘Quantitative Tightening’ causes deflation, just as ‘Quantitative Easing’ caused inflation.”

The Eurozone, like most economies, makes use of three separate yardsticks M1 (referring to liquid property similar to money), M2 (which incorporates M1 plus different much less fluid property similar to financial savings) and M3 (which incorporates M2 plus massive time deposits, institutional cash market funds, short-term repurchase agreements (repo), and bigger liquid property), Mr Lyddon defined.

He added: “The Eurozone M1 measure of money supply has tanked by 9.2 percent over the last year, M1 being all note and coin in circulation, plus current account balances and overnight deposits.

“Now the broader measure M3 – which is M1 plus deposits and other financial contracts with an expected maturity below two years – has gone negative too.

“Money is being sucked out of the economy.”

Mr Lyddon warned: “The results of this radical volte-face are appearing at member state level, such as industrial producer price deflation in Germany being six percent in July.”

Rather than a gradual slowdown in price increases, this mean they were falling “dramatically”, Mr Lyddon confused.

Referring to Joachim Nagel, he stated: “The president of the Bundesbank seems not to have noticed: he stated this week that ‘monetary policy…needs to be stubborn’ in the face of persistent inflation.

“Translated into English that means further interest rate rises and contractions of M1 and M3 (and of M2 by the way – the lot.)”

Such an strategy was having a knock-on impact at Government stage, Mr Lyddon identified.

He stated: “Interest rate rises have already caused the annual cost of servicing Germany’s debt to rise from €4 billion in 2021 to €40 billion now, and this might cause Germany to even exceed its predicted budget deficit for 2023 of 4.25 percent of GDP.

“The answer: corporate tax breaks of €32 billion, increasing the budget overshoot.

“The answer: slash spending, to achieve the aim of the German finance minister to cut the deficit to 0.4 percent in 2024.”

Mr Lyddon declared: “This is incoherent financial vandalism, made worse because the moving parts of the EU at member state level have given up on any pretence of coordination.”

Julian Jessop, Economics Fellow on the Institute for Economic Affairs (IEA) was extra sanguine concerning the state of affairs, telling Express.co.uk: Money and credit score development is slowing sharply in all main economies as central banks tighten coverage to deliver inflation again down.”

This included the UK, the place knowledge earlier this week confirmed that the Bank of England’s most popular measure of the cash provide was flat within the 12 months to July, he stated.

However, he added: “While this is good news for inflation, it also suggests that the risks of recession are growing.

“This strengthens the case for the Bank to keep interest rates on hold rather than raise them any further.”

European Central Bank President Christine Lagarde has stated that the rate of interest choice on the September 14 coverage assembly will rely upon incoming knowledge, a shift from a year-long collection of conferences the place fee will increase had been introduced forward of time.

The ECB should juggle combating inflation with greater charges in opposition to the impression of costlier credit score for customers and companies.

Inflation has declined after hitting its peak in October at 10.6 %, however the lower has slowed in current months and economists say the “last mile” towards returning inflation to the financial institution’s two goal often is the most troublesome.

A key issue is unemployment, which remained at 6.4 % in July, the bottom for the reason that launch of the shared euro foreign money in 1999.