- The Eurozone financial fragility is growing with economic giant Germany accumulating debts of 1.0687 trillion euros and more.
- If the Euro crumbles under its own weight, a faster Bitcoin and crypto adoption is likely in the Eurozone.
The euro has existed as an official currency for only 21 years. However, following the monetary union in 2002, the fate of the euro was already uncertain. Consequently, then ECB President Mario Draghi announced in 2012 that the common currency would be defended using all available means.
Over a decade after averting the collapse of the eurozone, there is a renewed risk of its downfall. The Eurosystem is grappling with significant over-indebtedness, as noted by financial market expert Alasdair Macleod.
Both the ECB and the national central banks of member states have engaged in excessive money printing through the purchase of government bonds. This strategy provided governments with more financial flexibility and aimed to stimulate inflation. The bond purchase program injected a total of EUR 8.828 trillion into circulation at its peak.
Following a period of accommodating monetary policies, inflation gained momentum. The ECB discontinued bond purchases, leading to a reduction in total assets as maturing bonds were not replaced with new ones.
With the ECB increasing interest rates to combat inflation, government bond yields rose, causing their values to decline. This resulted in market-to-market losses, amounting to 700 billion euros in the past year alone, according to Macleod.
Although this amount might not seem significant compared to the current balance sheet total of 4.865 trillion euros, Macleod emphasizes that it is nearly six times the equity deposited within the Eurosystem.
Will Germany Continue to Defend the Euro?
With the interest rates remaining this high and the rising yields, the ECB would find it extremely difficult to attain the target inflation rate of 2 percent. In that case, the members of the eurozone will need to face the situation and make extra payments to avert the potential collapse of the euro.
The decision on this matter isn’t automatic for the ECB. Parliaments in many member states need to decide whether to continue supporting the euro with substantial payments. This might be particularly challenging in countries like Germany, where the rising AFD opposes current European initiatives.
Germany has become a financial source for the Eurosystem, accumulating debts of 1.0687 trillion euros from other euro member states at the German central bank. This practice originated from both struggling economies seeking funds and those with access to loans at high interest rates. This has led to over 1 trillion euros in EU bills being settled by the Bundesbank, with no intention of repayment.
Given this situation, Germany’s interest in defending the euro is doubtful. The euro wasn’t a desired choice, and Germany adopted it partly due to France’s demands during German reunification negotiations. Moreover, the transition from the D-Mark to the euro posed challenges, as the strong D-Mark was used internationally and its reserves converted to euros.
In accounting terms, these reserves transformed into liabilities for the Bundesbank within the Eurosystem. Last year, in September 2022, the ECB interest rate was at just 0.5 percent. Now, it’s at a staggering 4 percent. The Flossbach von Storch Foundation commented:
Even if average bond and deposit rates rose by two percentage points, the valuation losses and interest payments would be greater than the reserves and equity of the Eurosystem. The Eurosystem would look like a hedge fund that has gambled away with a gigantic loan portfolio financed by debt.
Will Europeans Adopt Bitcoin and Crypto?
Until now, the ECB has averted the formal bankruptcy of the Eurosystem using a single strategy. The bonds purchased to boost inflation are not recorded at their present, significantly lower, market worth. However, they documented them at their initial purchase cost.
The bigger question is whether these developments would push towards adopting Bitcoin and crypto. So far, regulatory uncertainty has held back people from participating majorly in Bitcoin. However, if financial fragility grows in the Eurozone, things could change suddenly.
This could lead to a faster adoption of Bitcoin and other cryptocurrencies. Also, if the US approves a spot Bitcoin ETF, a similar approval could follow in the EU triggering faster Bitcoin adoption.
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