Single currency, many differences

Unlike sterling, which is backed by Britain’s bullion and currency reserves and tax receipts, the political risk around the euro is a Venn diagram of European central banks and nation states.

While the NCBs are presented as branches of the ECB, they have an autonomous and sovereign status in national law and are owned by their nation state.

A situation where all eurozone NCBs have equal and shared liability to pay out would indicate a real currency, if the backing for it was also shared. It is not, though: the bullion and currency reserves backing the euro are owned by the eurozone NCBs, not by the ECB. Similarly, these reserves back the debts of each eurozone sovereign severally: there is no pooling.

Curiously, a eurozone NCB’s reserves back both the note and coin on a joint and several basis, and its nation’s sovereign debts on a several but not joint basis. This is asymmetrical but has led to sovereign debts enjoying lower yields than the economic performance of their country
has justified.

This has all changed. The bund spread illuminates both the differences in economic performance and the understandable propensity of the capital markets to look through the currency of a debt to each sovereign’s ability to pay, and to look past any policy measures that were aimed at economic convergence superseding the issue of variations in creditworthiness.