On Thursday, Germany’s Sueddeutsche Zeitung carried a story suggesting Germany was working on the creation of a European Stability and Growth Investment Fund, which according to Reuters would run as a largely independent institution next to the European Central Bank. The facility would, however, be used to backstop ailing euro-zone members.
As Reuters reported:
The fund would provide loans against collateral in the form of gold reserves or equity in state-owned companies, the Sueddeutsche Zeitung wrote on Thursday without citing sources.
In a position paper to be presented to European allies at the next meeting of euro-zone finance ministers in mid-January, Germany will affirm its “national interest” rests in maintaining the single currency.
The euro, however, must “orientate itself on German stability interests” as a “concession to Germany, as the largest economy in the euro zone, serving as an anchor of stability.”
According to the Sueddeutsche, the new fund would in principle have access to “unlimited refinancing” in order to secure the health of the single currency. Euro-zone members would provide financial guarantees to the fund proportionate to their size.
In the meantime, the German Finance ministry has staunchly denied the plan, claiming it was drafted by “lower-level officials” and did not reflect the government’s position.
Nevertheless, it’s an interesting turn of events. Not least since it evokes some rather worrying emergency trends of the past.
We draw attention to the following paragraph from chapter six (Summer of ’22) of Adam Fergusson’s When Money Dies:
Okay, it’s not an exact parallel. But the above extract clearly demonstrates the risks assosciated with operating multi-tiered financing regimes.
After all, according to the Reuters story, this would be an independent financing body running with a state guarantee but with the freedom to issue at bequest upon the pledging of acceptable collateral.
It would be issuing loans, not legal tender, but in the event of further duress it is possible that such loans — especially if backed by gold and high-grade state equity — could become the “good money” that propels the “bad money” into decay a la Gresham’s law in reverse.
As Wikipedia summarises Fergusson’s point:
Adam Fergusson pointed out that in 1923 during the great Inflation in the Weimar Republic Gresham’s Law began to work in reverse, since the official money became so worthless that virtually nobody would take it. This was particularly serious since farmers began to hoard food. Accordingly, any currencies backed by any sorts of value became the circulating mediums of exchange.[7] In 2009 Hyperinflation in Zimbabwe began to show similar characteristics.
And alas we already know Europe is a land of two-tiered rates and two-tiered bonds. We also know that there is obviously a preference for good quality collateral appearing in the market — and, further still, that the system is already starting to choke on some of the unsecured Emergency Lending Assistance assets that have been created.
Given that, should we be surprised that German top-tier officials — though noncommital — seem to be trying to nip such plans in the bud?
Related links:
When bunds (and ECB credibility) are risk assets – FT Alphaville
The distorted European bailout – FT Alphaville
‘Some useful things I’ve learned about Germany’s hyperinflation’ – FT Alphaville