Gold Market Wire
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The Long View
EU Bond Saga Reaching Tipping Point
March 31, 2020 - (Gold Market Wire) - Despite dancing around the issue for a quarter of a century (and more) the singular issue ofa unified European debt market – i.e. Eurobonds – with all that they imply, like meticulous oversight of national spending and harmonized taxation as well as the creation of a “transfer union”- refuses to go away.
The Euro is a currency without a true bond market. No wonder the ECB has to buy everything in sight. Along with zero interest rates which threaten the wholesale collapse of the European pension systems, the Euro's debt markets are completely moribund.
Now the issue of “Corona Bonds” is being floated as a temporary issuing that can create a common front. There are even ruminations that the 9'southern' nations, with France leading the charge, may try and issue such bonds on their own. The Germans and the Dutch will see it as a circumvention of their core role in EU financial matters. They, after all, hold the only surpluses. And who would buy such bonds anyway? If the ECB does its usual dance and starts buying them all, they will effectively be circumventing the two surplus economies by offering debt financing to the poorer nations, and further damaging the currency. The situation is a mess.
This is the moment of truth for the Euro. The Corona Crisis has driven the situation to the brink. If Italy is not 'rescued' by the rich northern countries via the creation of EU-wide Bond, then they will consider the EU as a political force that has no further interest in creating the political union it claims to seek. To make matters worse, Italy's debt to GDP ratio is a staggering 135%, and GDP has just cratered – which will push the figure even higher. An EU-wide Bond to assist the nations whose economies are essentially beyond the point of no return? It is hard to see the logic in that, unless the intention is to further crater the currency.
No one honestly believes, for a moment, in the temporary nature of any form of EU-wide Bond. It has been the "missing link" in the grand strategy of Brussels and the Europhiles. The idea of “CoronaBonds” as a back door mechanism to try and forge a common debt amongst EU member states, with Germany and the Netherlands essentially funding Italy's massive debts, leaves those two nations bristling at the idea. If funds are transferred, how will they justify the spending of their nations surpluses in the land of the profligate, especially to their domestic populations? And who will administer the spending and oversight of such funds? Italy? Spain? Greece? That would be unthinkable. This is going to end in a Battle Royale, and the resolution to it will determine the fate of the Euro and the political destiny of Europe for generations.
Italy is now at the cross roads. If the EU fails to fashion a rescue of the Italian economy (is it even possible at debt levels this high?) the Euro is finished. If they do, internal political turmoil within Germany and the Netherlands will become a potent force, capable of destroying the EU altogether.
In a continent racked by separatist movements too numerous to count, Brussels has a task on its hand that is orders of magnitude bigger than anything it has ever faced. It is Greece x 10.
There will be blood. Count on it.
Needless to say, the dollar bulls are smelling that blood - no matter what the GoldBugs think about the ever-imminent destruction of the US Dollar.