Vast liabilities are being switched quietly from private banks and investment funds onto the shoulders of taxpayers across southern Europe. It is a variant of the tragic episode in Greece, but this time on a far larger scale, and with systemic global implications.

There has been no democratic decision by any parliament to take on these fiscal debts, rapidly approaching €1 trillion. They are the unintended side-effect of quantitative easing by the European Central Bank, which has degenerated into a conduit for capital flight from the Club Med bloc to Germany, Luxembourg, and The Netherlands.

This 'socialisation of risk' is happening by stealth, a mechanical effect of the ECB's Target 2 payments system. If a political upset in France or Italy triggers an existential euro crisis over coming months, citizens from both the eurozone's debtor and creditor countries will discover to their horror what has been done to them.

Such a tail-risk is real. As I write this piece, four out of five stories running on the news thread of France's financial daily Les Echos are about euro break-up scenarios. I cannot recall such open debate of this character in the Continental press at any time in the history of the euro project.

As always, the debt markets are the barometer of stress. Yields on two-year German debt fell to an all-time low of minus 0.92pc on Wednesday, a sign that something very strange is happening. "Alarm bells are starting to ring again. Our flow data is picking up serious capital flight into German safe-haven assets. It feels like the build-up to the eurozone crisis in 2011," said Simon Derrick from BNY Mellon.

The Target2 system is designed to adjust accounts automatically between the branches of the ECB's family of central banks, self-correcting with each ebbs and flow. In reality it has become a cloak for chronic one-way capital outflows.

Private investors sell their holdings of Italian or Portuguese sovereign debt to the ECB at a profit, and rotate the proceeds into mutual funds Germany or Luxembourg. "What it basically shows is that monetary union is slowly disintegrating despite the best efforts of Mario Draghi," said a former ECB governor.

The Banca d'Italia alone now owes a record €364bn to the ECB - 22pc of GDP - and the figure keeps rising. Mediobanca estimates that €220bn has left Italy since the ECB first launched QE. The outflows match the pace of ECB bond purchases almost euro for euro.

Professor Marcello Minenna from Milan's Bocconi University said the implicit shift in private risk to the public sector - largely unreported in the Italian media - exposes the Italian central bank to insolvency if the euro breaks up or if Italy is forced out of monetary union. "Frankly, these sums are becoming unpayable," he said.

David Fuller's view

This is not just ‘right-wing press’, as some may think.  AE-P is monitoring the European press for financially sentient views and people are openly talking about a breakup of the EU.  This was always probable at some point because no shared currency has survived for long without a federal system.  This has never held much appeal for Europe’s diverse cultures and only the EU’s bureaucrats would favour it today. 

Interestingly, among the French presidential candidates, only Marine Le Pen will benefit from increasing anti-EU sentiment.  This will do her no harm either – Why Marine Le Pen did a great thing by refusing to wear a headscarf.

Here is a PDF of AE-P's article.