One of the key issues on the table: Europe’s capacity to carry out large-scale fiscal spending.
They need to fund AI. They need to fund defense. And they continue to commit to the climate agenda.
As we’ve discussed over the past several months, the trillion-dollar question remains: Who will fund it?
The inconvenient truth is that it can only happen if the ECB monetizes the debt — backstopping the sovereign bond markets, particularly in fiscally weaker member states.
But that approach only works if other major global central banks are moving in the same direction — coordinating for the sake of global financial stability.
Here’s the problem: Unlike much of the past 15 years, global governments and central banks are no longer aligned. Monetary policy is diverging. Shared global goals have given way to national interests.
This divergence will likely accelerate, especially when Trump hand-selects a new Fed Chair. And that could happen sooner than expected. He called for Jerome Powell’s resignation today.
This is bad news for Europe.
On the funding front: As we’ve covered in recent notes, the new U.S. dollar stablecoin legislation sets up to attract fresh global capital into the U.S. Treasury market. And a stronger, more stable U.S. Treasury market means more global inflows — and that’s capital that won’t be funding Europe’s fiscal ambitions.
Add to that: As the burden falls on the ECB to buy its own debt, to stabilize European bond markets, the euro will pay the price. That sets up the risk of capital flight out of Europe, and into safe havens like U.S. Treasuries.
Bottom line: This ECB Forum was a public airing of the structural flaws in the European Monetary Union. The same flaws that were exposed during the Global Financial Crisis — and nearly broke the union — are being exposed again as Europe attempts this large-scale fiscal expansion.