TBT: in 2011, the need for ECB QE was quite clear (plus, EZ breakup combinatorics update)

In 2011, Greece had not yet defaulted, and the contagion had not fully spread to Italy and Spain. The Eurozone was trying to do the minimum possible,  as the failing crisis management of J-C Trichet was unable to avert horrendous damage to living standards and the EU project.

Despite the very real and very weak fundamentals in the PIIGS and self-inflicted “suicidal austerity”, I saw that there was also a self-fulfilling feedback loop that could be broken by massive quasi-monetary buying. It was another year before Draghi committed the ECB to such a safety net, and then a few more years before the central bank finally started bond buying (QE) in early 2015. Better late than never…

For the record, here is what I wrote then,

“There is still a great need for reforms, adjustment in competitiveness, the core to abandon its suicidal austerity, etc. But this is the way that the EZ and its members can go “All-In”. At worst, it will buy them a lot of time and take risk out of the markets and in particular the banking system.”

A bit later, for fun, I looked at how many Euro break-up scenarios there were (e.g. Grexit first, followed by Portugal’s returning to the escudo, and the others remaining is one such scenario; if the order is reversed that is a different one). I got 967 trillion. Of course, the actual unfolding reality is that no members have left so far (Britain is exiting the EU, but is a euro opt-out). On the contrary, there has been further Eurozone enlargement with two members joining: Lithuania and Latvia. So, ignoring any more countries choosing to abandon monetary sovereignty and transforming all internal debt into external debt, the new calculation is that there are 331 quadrillion ways for the EZ to break up. But unlike 2011, I’m not holding my breath.


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