The euro system and its currency are descending into crisis. Comprised of the ECB and the National Central Banks, the system is over its head in balance sheet debt, and it is far from clear how that can be resolved.
Normally, a central bank is easy to recapitalise. But in the case of the euro system, when the lead institution and all its shareholders need to be recapitalised all at the same time the challenge could be impossible.
And then there’s all the imbalances in the TARGET2 system to resolve as well before national legislatures can sign it all off. Additionally, but part of the TARGET2 problem there’s the repo market with €8.7 trillion outstanding, set to implode on rising interest rates, destroying commercial bank balance sheets which are already highly leveraged.
This goes some way to explaining the deep reluctance the ECB has about raising interest rates. While producer prices in key member states are rising at over 30% year-on-year, and consumer prices by over 8%, the ECB keeps its deposit rate at minus 0.5%. It knows that if euro bond yields go any higher their situation which is already untenable will disintegrate into a full-blown crisis.
Therefore, the euro is sliding. Markets can see that all the ECB is doing is talking the talk and otherwise is frozen into inaction.