The European Central Bank’s mishandling of the money printer has endangered the eurozone. Bitcoin offers an alternative that separates money from the state.
This is an opinion editorial by Marie Poteriaieva, a Ukrainian-French crypto industry observer and educator, following the space since 2016.
Something is rotten in the European Union.
The euro has reached parity with the U.S. dollar for the first time in twenty years.
In June, euro area annual inflation hit 8.6%. The spread between eurozone member states’ interest rates is concerningly wide.
Of course, energy problems brought up by the war in Ukraine played a sinister role, just like the disrupted supply chains contributed to the economic hardship at the peak of the COVID-19 pandemic.
However, what most media tends to forget is the role of the European Central Bank in all of this. While the ECB tries to turn people’s attention away from its faults with a crypto-regulation crusade, more Europeans are wondering if money should really be dependent on politics.
ECB Mishandling Inflation
Just like the Federal Reserve, the ECB did not hesitate to turn on the money-printing machine after the COVID outbreak and has created almost €4 trillion in two years, doubling its balance sheet.
No central bank has done anything as drastic as this before, but instead of taking necessary precautions and laying out a contingency plan — a logical strategy when it comes to large-scale, real-life experiments — the ECB’s President Christine Lagarde put on a nice suit and went on reassuring Europeans that it was all under control.
These denial performances went on and on, even when inflation became reality, even when the Fed started raising interest rates … and then suddenly on June 9, 2022 the ECB announced the upcoming 0.25% interest-rate hike in July, and then one more in September. European markets tanked.
Why so late (three whole months after the Fed)? Why so abrupt? Why so modest? Has the ECB simply panicked? Lagarde has chosen the worst possible timing for this kind of announcement, raising doubts as to the professionalism of her office. However, this was not the only problem she had to face.
ECB Endangering The Eurozone
Unlike the U.S., the eurozone is composed of 19 sovereign countries, which have their own economies, more or less capable of withstanding interest rate hikes.
While some less-indebted governments, like Germany or Netherlands, will be able to pay a bigger interest on their bonds, other countries with a higher debt-to-GDP ratio, like Italy or Spain, will not. The cost of maintaining the debt will be too high.
This makes countries like Italy a bigger risk, which in turn, increases the yield that potential lenders would expect in return for borrowing them money. The higher the interest rates, the worse the situation for these countries, making them a bigger risk, leading to an increase in rates. This is the vicious circle of indebtedness and half of the eurozone could now face a debt crisis, endangering the euro for everyone.
The difference between interest rates within the eurozone is known as the spread, and the ECB’s poorly timed announcement pushed it wider: Italian 10-year bond rates climbed above 4% and Spanish bonds hit 3% (both have since corrected to 3.37% and 2.47%, respectively). German 10-year bonds trade at 1.25% and Dutch 10-year bonds have a 1.57% yield.
The ECB had several emergency meetings to discuss this problem. On June 15, it announced that it would design a new “anti-fragmentation tool,” and on July 15, it announced it will be buying vulnerable debt, i.e., continuing doing the very thing that has put the euro in trouble in the first place.
How far could this practice go? Imagine if, for every German bond that has come to maturity, the ECB buys an Italian one. Not only will the ECB find itself pumped with risky bonds, but Germany will definitely not be happy, creating a dangerous crack in the eurozone.
It has been almost a month since the ECB’s announcement, but still no magical “anti-defragmentation tool” in sight. In the meantime, the euro is weakening by the day, reaching parity with the dollar, and falling below the Swiss franc (both have traded above 1.66 in the past).
ECB Attacking Cryptocurrency
More Europeans are starting to wonder if the ECB involvement hasn’t made things worse for the euro, and if Christine Lagarde has any idea what she is doing.
Several live interviews have contributed to these doubts: when a Dutch interviewer kept asking how the ECB was going to reduce its swollen balance sheet, all he got was “it will come.” Not really reassuring.
However, Lagarde has an ace up her sleeve: Whenever the conversation becomes intimidating, she turns to cryptocurrency, which she assures “is not money, full stop.” Lagarde does not hesitate to accuse it of all possible sins, including money laundering (who needs real data, when so few people fact-check?).
The ECB has repeatedly urged EU lawmakers to approve new rules on cryptocurrencies “as a matter of urgency,” and they recently did. The infamous Markets in Crypto Assets (MiCA) law and the associated anti-money laundering (AML) rulebook lay out the world’s most stringent cryptocurrency regulation that would, among other things, oblige service providers to collect and report the data on the participants of every crypto transaction, even as small as €1.
This did not satisfy Lagarde, who made another appearance at the end of July, urging for a MiCA 2, supposed to “regulate more profoundly” the industry.
The intensity of her revulsion for bitcoin and the associated efforts that she deploys, all while the euro — which is her primary job — is in distress, cannot but suggest hidden agenda(s). For example, distracting Europeans from their real problems with a battle against imaginary ones. Or else, preventing them from turning to bitcoin.
Of course, bitcoin volatility makes it difficult to be used as a universal store of value or means of payment, yet.
However, its inherent independence, scarcity, borderless and undiscriminating nature make it a very suitable candidate to replace fiat currencies. Moreover, as the grassroots adoption grows and block rewards decrease, speculative price swings are bound to decline, making the bitcoin price more stable, while the Lightning Network ensures its scalability.
Is it this perspective that scares the ECB so much? We wouldn’t know, but its determination to paint bitcoin black and obstruct its use are remarkable.
In the meantime, the attention span of the eurozone citizens appears to be longer than Lagarde might have hoped for, and more voices rise to blame the ECB’s irresponsible and short-sighted policy for the inflation and the danger she put the EU in.
This trend is in line with the rising mistrust in central banks all over the world (a recent Financial Times article compared them to Tinkerbell: They exist only if people believe in them, and this belief is now fading).
It is a good time to remember the famous quote by Friedrich Hayek. “[T]he root and source of all monetary evil is the government’s monopoly on money.” We need to call for a separation of money and state.
The Austrian economic school, of which Hayek was an eminent representative, argued that central banks’ monopoly for monetary creation and their closeness to the state create a conflict of interest, as the state gets the power and “easy” financing via its proximity to the money.
This statement is even more true in the 21st century than it was in the 20th century. One just has to check how grotesquely indebted most of the states are now. However, another thing that the 21st century brought to the debate is Bitcoin: the most suitable tool to start the “soft” separation of money and state.
Maybe the ECB’s fears are justified after all.
This is a guest post by Marie Poteriaieva. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.