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The euro: a counterfeit
The bottom line is that if money is transferred from the southern (Z) countries to the north (N), it will not physically arrive or be present at those N banks.
And the other way around also applies.
Money from a Z creditor (possession) flows to a N bank and then the amount is booked as debit (debt). The bank receives the money administratively, does not receive it physically, but then books it as a credit for that creditor, making the bank indebted.
So all that administrative shifting creates an enormous mountain of debt of money that people do have credit, but are not present at the N banks.
When Z banks fail, those balances are foetsiesies and the N banks are dragged along with them.
Below is how it works exactly (not really).
Why the Euro is not the single currency we think it is.
The euro has been in use
since 1 January 1999. Today, 23 countries (1) use it as their sole
means of payment. They form the euro zone, an apparent monetary
union. The European Central Bank (ECB) supervises this union.
Officially, it monitors the creditworthiness of the currency.
Everyone is convinced that the euro is a single currency, like the
dollar in the United States, managed by one central bank.
Specialists prefer to speak of a common currency because it is
used as a common currency.
However, the euro is neither. It is the collective name for a series of national coins, namely 21 different euros (2).
Let's explain how this came about. The idea of a single currency arose during the Second World War. The concept only became more concrete when the Maastricht Treaty was drawn up. One country, however, was opposed to the idea: Germany. Why would that country indeed sacrifice its very strong mark for a coin whose fate was no longer in its hands ? But how can you increase cohesion between the then member states of the European Community without using the same currency ? A common reference currency such as the ECU, the unit of account which served as a reference at the time of the European Monetary System between 1979 and 1993, proved inadequate. It did not prevent changes in exchange rates.
An ingenious system was devised to give the appearance of a fully-fledged monetary union with an apparent single currency, so that the existing national currencies were not jeopardised. Today, this system shows its fundamental shortcomings. What did the designers come up with? Firstly, they proposed a name : the euro. Each national currency participating in this unification simply had to change its name. So the Belgian franc was renamed the euro, just like the French franc, the Dutch guilder, the German mark, and so on. Secondly, their intrinsic value was assimilated to give the impression that all these national euros were equivalent and therefore interchangeable. For the Belgian franc, the ratio of 1 euro to 40.3399 francs was applied. Each Member State acted in the same way and on 1 January 1999 all national euros were fully exchangeable without any exchange rate difference.
In the case of a genuine single currency, the ECB was the only central bank responsible for this. The national central banks would then act as a branch of the ECB with no other powers. Now it appears that all national banks have kept their powers. Although the ECB determines monetary policy, the national banking system is still under the tutelage of the national central banks, with their own approach. A payment platform specifically created for this purpose, TARGET2 (Trans-European Automated Real-time Gross settlement Express Transfer), was intended to enable the coherence of this system. A second version has been operational since 2008. This platform settles some 345,000 transactions every day for a value of around 1,800 billion euros. 55,000 financial institutions use it.
If we were dealing with a true monetary union with a single currency, such a platform was completely useless. The ECB would have been assigned this task. The presence of TARGET2 and the fact that the national central banks have kept their powers proves that several euros are in circulation. A simple example illustrates this. Suppose you bought a product from an Italian manufacturer. You need to arrange the invoice by bank transfer. You will instruct your bank to transfer the amount to the Italian bank indicated by the producer on his invoice. For you, the sock is finished. In reality, the transaction takes place in a different way. You will find a description of this on the ECB website (3). You will learn that your bank acted through TARGET2. Both the Belgian and Italian banks are indeed members of TARGET2 and can transfer money directly between them. This is at least how it has been suggested. However, this description is incorrect. Presumably to keep up appearances that there is only one euro in circulation.
In reality, the transfer takes place with the intervention of the two central banks concerned, the National Bank of Belgium (NBB) and the Banca d'Italia. Your Belgian bank will transfer your payment order to the NBB where it has a current account. The NBB will debit that account for the sum to be transferred and credit the current account of the Banca d'Italia opened with it. At the same time, the NBB will inform its Italian counterpart of the transaction via TARGET2. After which the Banca d'Italia will debit in its books the current account of the NBB by crediting the current account of the Italian bank receiving the money in this way for the benefit of the Italian manufacturer. Your transfer has thus triggered a whole series of accounting operations, without any actual transfer of funds.
As a result of your payment, the NBB now has a debt to the Banca d'Italia, whereas the Banca d'Italia has a claim on the NBB accordingly. However, this has far-reaching consequences. As pointed out, the sum transferred is still in the possession of the NBB but is only managed for the benefit of the Banca d'Italia. The status of the transferred euros has changed. They no longer belong to the NBB although they are still with it. This means that the NBB is no longer responsible for the creditworthiness of these euros. That task has now been taken over by the Banca d'Italia. The latter therefore covers the euros in question. If the Italian producer withdraws those euros from his account, his Italian bank will hand him the euros, euros made available by the Banca d'Italia.
This payment system did not cause any significant problems until the current crisis, which arose in March 2007, broke out. Within TARGET2, debts and receivables are always in balance, but their distribution is flawed. Due to the current crisis and the lack of credibility with which the European institutions are dealing with them, considerable capital has fled from the weak Member States to the stronger ones. The central banks of Germany, Luxembourg and the Netherlands saw a steady influx of capital in the form of bank transfers, capital which they had to cover without really having it in their hands. Indeed, Article 63 of the Lisbon Treaty leaves capital movements inside and outside the euro area completely free.
At the end of April 2017, the Bundesbank thus had claims amounting to no less than EUR 843.4 billion (4). This amount corresponds to just over a quarter of the country's GDP! The vast majority of these claims come from the southern problem countries of the Union, such as Italy, Spain and Greece. The Banca d'Italia owes its Eurozone colleagues no less than EUR 411.6 billion, the Banco de España EUR 366.4 billion and the Bank of Greece EUR 76.9 billion. Amounts that these central banks are unable to repay. By way of comparison, the NBB owes 17.3 billion euros. Should a country like Italy decide to withdraw from the eurozone, it would immediately have to conjure up EUR 411.6 billion to pay off its creditors. On top of that, it would have to collect just under 100 billion to repay part of the bank notes it received from the ECB. The peninsula would have to cough up about 500 billion euros immediately. An impossible task.
The state of the Bundesbank doesn't look good either. The Bank is acutely aware that it will see little of these claims. Nevertheless, it remains responsible for these amounts because they are in accounts with German banks and can be called up at any time by the account holders. Cautious Italian investors, for example, who want to safeguard part of their assets, will be inclined to open an account with a German bank and transfer that part to it. In this way, they will change the status of their euros. Their assets will no longer be Italian, but German. If the euro zone were to explode, with the return of national currencies, those Italian investors would know that their German assets would be converted into new German marks instead of new Italian lira, a currency which would very probably fall rapidly in value.
It is precisely this aspect that poses the greatest threat to the continued existence of the euro as an apparent single currency. This threat also explains Germany's stubborn stance in European financial matters. As long as the German government dominates European politics, it will do everything in its power to conceal this impending doom and at the same time oblige the other Member States to bear their share of the burden. The election of Emmanuel Macron as President of France is a huge relief for Germany in this respect. After all, he will never put sticks in the wheels and will slavishly obey the German orders.
The outlook looks very gloomy, as there is no solution for the time being. After all, the treaties have not foreseen anything. Adjusting them is almost impossible because the smallest change requires unanimity. It is obvious that deficient Member States in the TARGET2 system have no interest in leaving the euro. And no one can drive them out. By maintaining the euro, they oblige the European authorities to help them. If they fail to do so, they will write off those debts unpaid. As a result, those transferred euros will have to be fully covered immediately by the other member states. This exceeds their support for the time being.
A complete overhaul of this system is needed, accompanied by the creation of a genuine banking union and the pooling of sovereign debt at European level. There is no other way out. But given the way in which the competent authorities behaved in the past, the worst is to be expected. The euro will go from one crisis to another, and each crisis will be worse than the last, leading to measures whose feasibility will prove doubtful. The way in which the European institutions, the ECB and the International Monetary Fund (IMF), the so-called Troika, dealt with the Greek and Cypriot problems does not lie. It became, and still is, a mess. However, it provides additional evidence that all euros are different.
Indeed, contrary to the requirement laid down in Article 63 of the Treaty of Lisbon, which guarantees the free movement of capital, neither Greeks nor Cypriots may freely dispose of their money. The transactions authorised in euros are limited. Worse still, access to their bank accounts is limited and they are only allowed to withdraw money from vending machines in a limited way. All contrary to the prevailing treaties. Greek and Cypriot euros are thus less accessible than their foreign namesakes, although they remain completely interchangeable with all the others. Experts will tell you that this is due to the lousy state of the Greek and Cypriot banking system. Complete nonsense. This is about changing the status of cash as soon as it enters the banking circuit. However, this is another story that will be touched upon another time.
(1) Andorra, Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Monaco, the Netherlands, Portugal, San Marino, Slovakia, Slovenia, Spain and the Vatican City State.
(2) Of the 23 countries, four did not have their own currency: Andorra (Spanish peseta), Monaco (French franc), San Marino and the Vatican City (Italian lira). 19 countries changed the name of their currency into euro. In addition to these homonymous euros, there are two additional ones: those issued directly by the ECB, plus all badges, bank notes and coins with their own status.