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EU Financial System Has 'Terminal Cancer' - Economist

© AFP 2023 / ARIS MESSINISA picture taken on July 11, 2015 in Athens shows euro coins and banknotes with the map of Europe
A picture taken on July 11, 2015 in Athens shows euro coins and banknotes with the map of Europe - Sputnik International
As the European Central Bank (ECB) continues to keep its monetary policy unchanged, German financial analyst Marc Friedrich desribed its efforts as "disastrous" and "desperate." Keeping the interest rate at zero percent and pumping money into the economy would only further delay a collapse in the European financial system.

The current policy is "expensive" as the central bank is trying to buy time to "keep the money carousel going, and all at the expense of people," Friedrich said in an interview with Sputnik Germany.

"As the bank sees the situation, there is no other instrument," he added.

Last week, Mario Draghi, president of the ECB, announced keeping a zero interest rate. At the same time, the regulator also said that it would from January reduce its quantitative easing (QE) program to 30 billion euros ($35 billion) a month, adding an extra 270 billion euros ($314 billion) of bonds to its assets by September 2018.

According to Friedrich, the central bank should have ended its QE program by December 2017, but in fact it will be expanded until September 2018, which is an "irresponsible game with tremendous collateral damage for EU citizens."

"This [prolonging] will not be the end of the story. There will be an extra 270 billion euros and then 2 trillion. And we all will be responsible for that. … The ECB is getting more and more reckless and this only delays a collapse, first of all in an attempt to save southern European countries, including Italy. I see no good in this policy. The interest rate remains zero and it will remain at this level in the future," the economist pointed out.

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Commenting on further monetary steps by the European regulator, Friedrich explained that the additional 30 billion euros that is expected to be spent on bonds is "virtual and will be simply printed."

"This money comes out from nowhere. Each commercial bank, and a central bank too, can make money from nothing and this would drive the inflation rate up. [The whole financial system] now stands on a shaky ground. So, the bubble in the stock, financial and real estate markets will further expand, with growing collateral damage. One day, we'll be hit by a tsunami and our central banks will not be able to help," the analyst suggested.

Friedrich also underscored that economic growth is still sluggish across the European Union, with only Germany making visible advances. However, according to the economist, while the euro is affordable for the German economy, for countries such as Italy and Greece the common European currency is "too expensive," which results in a widening economic gap within the 28-nation bloc.

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"While Germany is breaking exports records south European countries are facing the risk of default. This is extremely negative for economic development and people," Friedrich said, adding that the central bank’s plan to stabilize the market and then increase interest rates is unlikely to work.

Commenting on possible ways to overcome this stalemate, the economist noted that, first of all, interest rates should be increased to a "decent  level." Moreover, the euro should be gradually abandoned, while writing down debts for southern European countries and re-introducing sovereign currencies.

"Of course, these measures are radical, but the problem is that our financial system has terminal cancer. The end is near. This means that surgical intervention is needed. The current therapy is not working. The only result possible from the current situation is further economic degradation and the rise of far-right and far-left political forces," Friedrich concluded.

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