Who prints Euros?

I must have misunderstood something.

Quantitative Easing is the euphemism for: the US Government prints bonds, while the Federal Reserve prints money. Then the reserve buys the bonds, in effect lending the money to the government. I think this is essentially correct. Thus the “bailout” in the USA was financed by inflationary creation of circulating currency.

Countries in deep debt could revert to this technique: print money, pay the debt, and suffer the currency devaluation. Euro countries can not do this, as they do not each have a currency of their own to devalue. But now for today’s question.

Why does the European Central Bank not simply print euros? Give them to Greece, Ireland, Italy, Spain, Portugal, whatever? Suddenly there would be enough cash to keep everyone operating.

There are two catches. In the US model, eventually the government is expected to repay its debt to the Fed, by redeeming its bonds (and T Bills or whatever security was given in return for the fresh new cash). It is unclear whether this repayment will reverse the currency devaluation; presumably it could. The main point is, the borrower is expected to repay.

In the case of Greece (not to pick on a specific country, but it is one often in the news) the ability to repay is part of the dilemma. The lenders put excruciatingly tough demands on the borrower country – tax increases, service cuts, privatization of key revenue generating assets – whatever it takes to convince the lender that the borrower will be able to collect the funds to repay.

This does work against itself, of course. The economy of a country with suddenly downsized bureaucracy is the economy of a country with more unemployment. Thus less tax revenue. Thus more burden on social services. Selling key “crown corporations” sacrifices long term value for short term cash. If this were not so, these “crown corporations” would not have buyers, eh?

The second catch is, devaluation of the currency is no longer a single-country matter. Germany is not likely to sit on its figurative hands while their hard-fought economic gains are p…ed away by outside printing of euros. The have nations are struggling to keep what they have.

The ironic truth is, when or if a country, such as Greece, does default on its debts, the holders of that debt suffer losses. I believe the biggest holders of Greek debt are in France and Italy. Already the lowering of credit ratings has put banks in these countries in difficulty as their “reserve ratios” are impacted when cash-like assets are no longer considered fully cash-like.

The astute will recognize that it was the failure of AIG (due to insufficient cash reserves) that triggered the devaluation of all the paper that AIG insured, making that debt no longer cash-like in reserve calculations of other financial institutions. Thus a chain reaction between institutions, where all of them suddenly needed more cash.

Anyway, the real potential losers (after the countries being auster-ized: having one’s society put through a blender due to austerity measures) outside the countries in difficulty are the major and central banks of other Euro countries. Thus the bailout is probably a forced option. The alternative is pan-European calamity and default. Expect runs on these banks if this happens.

So the dumb question is, who prints Euros? and, When will they start?

Leave a Reply

Your email address will not be published. Required fields are marked *