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Welcome to the Eurozone, where banks pay to lend to each other

Germany's Finance Minister Wolfgang Schaeuble Interview At Medef University 2014 Business ConferenceGermany's Finance Minister Wolfgang Schaeuble Interview At Medef University 2014 Business Conference
Wolfgang Schaeuble, Germany's finance minister, says the ECB has gone as far as it can in supporting the economy.Bloomberg via Getty Images

“EONIA’s gone negative???” I hear you cry. “Holy Cow!!!”

Well maybe not. The Euro Overnight Index Average is a pretty nerdy number that usually only means anything to a small bunch of bankers who shovel large blocks of money around Eurozone financial markets, but today it stands for the Looking-Glass World loopiness created by the Eurozone’s most recent economic swoon.

It fixed below zero for the first time Thursday night–at -0.004%, meaning that, yes, banks would rather pay for the privilege of lending to each other than lend it to consumers or businesses (or even governments) at a decent return.

“We’re just doing the rounds of spinning money around the financial markets instead of getting it out into the economy,” said Marc Ostwald, an economist with ADM ISI in London, with a nod to ECB data showing another €12 billion drop in credit to households and businesses in July.

Market interest rates in the Eurozone have collapsed in recent weeks, driven by fears for a stalling economy, and by increasing expectations that the European Central Bank will sluice a new wave of money into financial markets next month.

In contrast to the first waves of the euro crisis, when people stampeded almost exclusively into German government bonds as they fled from investments in the Eurozone’s stressed periphery, this tidal wave of risk aversion fear has lifted all bond markets. Even Italy, which is on a clear long-term track to bankruptcy with a €2 trillion government debt mountain growing faster than the economy, managed to sell 10-year (yes, 10-year) bonds at 2.39% Thursday, only 0.05% above what the U.S. government pays.

The implication is that people are no longer betting on the Eurozone to break up– they just can’t see for the life of them how it’s going to start growing again. Figures released Friday showed the 18-country currency bloc’s jobless rate was stuck at 11.5% in July, while annual inflation fell to a new five-year low of 0.3% in August.

German Finance Minister Wolfgang Schäuble told Bloomberg TV Friday that it’s no use looking to the ECB–whose policy-making council meets again next week–for the solution.

“I think monetary policy has come to the end of its answers and therefore what we urgently need is investments,” Schäuble said. That depends on confidence, and confidence depends on having sustainable budgets, he explained.

Schäuble has traditionally been able to rely on the ECB for support when lecturing countries like France and Italy to get their act together, but ECB President Mario Draghi sounded a different note last week, telling the Federal Reserve’s conference at Jackson Hole that the biggest problems today were on the demand side, rather than the supply side.

He also pushed for more “coordination” of fiscal policy (hinting that Germany should loosen its, to give the make the bloc’s overall fiscal stance more “appropriate”). And he gave a nod to French and Italian efforts to stall the Eurozone’s budget police, and carve out exceptions for their investment spending.

Schäuble didn’t say what he thought of all of that.