A few days back, in Turmoil in the Markets, I drew attention to the likelihood of the European Central Bank engaging in Quantitative Easing to prevent the Eurozone sliding further into recession and deflation. Here’s a round-up of some responses to the ECB’s Mario Draghi’s announcement of 1.1 trillion euro QE package.
ECB President Mario Draghi’s decision to undertake quantitative easing allows the 18 nations that have abandoned their local drachmas, lire, deutschemarks, etc. in favor of the euro to directly borrow money and buy their own national debt. The initial bond buying program is more than twice the size expected and includes eurozone peripheral members referred to as the PIIGS: Portugal, Italy, Ireland, Greece, and Spain. More importantly for the Davos crowd, the ECB’s commitment is open-ended for “whatever it takes” to create at least 2 percent inflation.
Although the Left has been screaming for such action over the last eighteen months, Draghi’s primary duty as president of the ECB was to control inflation. But when the eurozone actually fell into deflation of -0.2 percent last month, the ECB Board approved allowing the monetary debasement. But the plan only commits the ECB to buy up to 20 percent of the bonds and delegates 80 percent of the purchases to be bought by individual member’s central banks. This means each country will retain their nation’s default risk.
The structure of the deal will probably not impact the effectiveness of quantitative easing, but the political message is foreboding: “If things go badly, everyone is on their own,” according to Stratfor. This game changer is the first reversal from the process launched in 1951 for a eurozone becoming “an ever closer union,” with the eventual goal of becoming a “United States of Europe.”
Telegraph’s Ambrose Evans-Pritchard:
The decision amounts to an act of political defiance by a majority bloc in the Governing Council – unmistakably a debtors’ cartel of Latin states and like-minded states – and therefore opens an entirely new chapter of the EMU story.
This Latin revolt is to violate the sacred contract of EMU: that Germany gave up the D-Mark and bequeathed the Bundesbank’s legacy to the ECB on the one condition that Germany would never be out-voted on monetary issues of critical importance…
What is at stake is German political consent for the euro project. Bernd Lucke, the leader of the AfD anti-euro party, called today’s decision an “act of desperation and the introduction of eurobonds by the back door” by the ECB.
The Bavarian Social Christians (CSU) are also furious. “With this decision, the ECB has crossed the Rubicon,” said Angelika Niebler, the party’s parliamentary leader. The Bavarian finance minister, Markus Soder, said: “unlimited purchases of sovereign bonds threaten to bring down the whole system.”
On the Left, Die Linke lashed out at the decision, calling it a gift for insiders. It plunders the savings of the poor to make the “super-rich even richer” by driving up asset prices.
Mr Draghi may have saved Italy from a debt-deflation trap in the nick of time. He may have gained another year or two for Southern Europe to recover before radical populist parties sweep the stale elites from the political scene. But in doing so he risks losing Germany.
Zero Hedge’s collection of responses (my emphases added):
First the insanity of the ECB QE itself. The problem with Europe’s economy, what drives it into high unemployment and deflation, is that people are not spending. If QE would really be aimed at reviving the economy, or at battling deflation, it would need to assume that people will start borrowing on a massive scale just because Draghi buys bonds – and soon perhaps even stocks – from bankers. There simply is no logic in that. The stated goals, pro-growth and anti-deflation, are not true. It’s a sleight of hand.
In order to achieve the stated goals, money would have to reach the real economy. As it stands, the best Draghi can do is to ‘hope’ it will. That’s not enough by a mile. This is not about doubts over its effectiveness, that’s baloney, we know it’s not effective when it comes to the stated goals. It will still leave Europe with no growth, and deeper deflation, and now €1.1 trillion deeper in debt. While banks can grow their reserves.
and in the same piece:
QE For The Eurozone Is A Gigantic Confidence Trick. It Should Fool No One
…It was promised that it would yield new investment. It has not. It was promised that it would “pump money into the economy”. It has not. It was also feared that printing money would lead to hyper-inflation. It has not, for the simple reason that no one gets to spend the money. It is a bookkeeping transaction between a central bank and a commercial bank. It means nothing as long as banks are told to build up their reserves. Money in circulation matters. The whole of Europe, including Britain, is chronically short of demand, which is why deflation is such a menace.
Nobody is applauding QE much, it seems. It’s not going to help. Germany will back away.
And now my two bits.
Last week my bank told me that I had been cleared to borrow £3,300 (which I hadn’t asked for). But what am I supposed to spend it on? I’ve stopped spending, because a smoker like me is not welcome anywhere.
Up until 2011, I was a regular twice-a-year visitor to Spain. Since Spain banned smoking in January 2011, I haven’t been back. And I haven’t been anywhere else either.
I don’t go anywhere much in the UK either, because I’m not welcome there too (even though it’s my native country). I visited London a year or so back, and when I stepped off the train in Paddington, and took a look out onto the access road that leads inside the station, there was a forlorn crowd of about 100 people standing there, silently smoking. It’s etched in my memory.
I don’t do anything much now except, in summer, get in my car and drive to some distant pub with a garden, to sit and drink a pint of beer, and smoke a few cigarettes, and drive back again. I don’t want to stay in any hotel or B&B, because I’m not welcome in those places either. So my range is restricted to about 50 miles max, if I want to be home by nightfall, and of course my alcohol consumption has to be restricted too.
You can wave all the £3,300 loans you like in my face, I’m not going to spend it, because there’s nothing I want to spend it on.
The European economy isn’t being strangled by a shortage of money. It’s being strangled by regulations. Regulations on businesses (ask Dick Puddlecote!). And regulations on consumers (No smoking, no drinking, 20 mph for the next 2 miles, etc, etc). We have a whole army of highly paid bureaucrats and lobbyists working round the clock to make us stop spending money, and making it harder and harder for the producers to sell things (e.g. Plain Packaging).
People can’t buy or sell what they like, so they’re stopping buying and selling.
What Europe needs isn’t QE or low interest rates. What Europe needs is deregulation. And the EU is itself the primary regulation generator. So that’s what’s going to have to go.
The best thing that Greece (and most of southern Europe) could do would be to leave the EU, and leave behind all of its innumerable rules and regulations at the same time (like I was suggesting last night).
But nobody seems to see things this way. So I can only suppose that, as the engine of the economy meets stronger and stronger regulatory resistance, it’ll just stall completely. And there will be a whole slew of business failures across the whole economy, and sky-rocketing unemployment, and civil disturbances.