Can the Eurozone be saved after it's been "saved" by Mario Draghi?

Călin Rechea (translated by Cosmin Ghidovean)
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Can the Eurozone be saved after it's been "saved" by Mario Draghi?
Călin Rechea (translated by Cosmin Ghidovean)

When I read that "Mario Draghi declared victory in the battle for the euro," in an interview with the Financial Times, I remembered how people used to complete the expression the "victory of socialism" before 1989, by adding "...against the Romanian people."

If this is what victory looks like, what would a "battle" without a clear winner look like? How about the defeat?

The new quantitative easing measures, announced by Mario Draghi at the penultimate meeting he led as ECB president, revealed the deep rift between their necessity and their effectiveness.

"The European Central Bank is a fractured and exhausted institution, regardless of the theoretical possibilities - which are irrelevant anyway - of extreme monetary stimulus", wrote Ambrose Evans-Pritchard in an editorial in The Telegraph.

For Tuomas Malinen, professor of economics at the University of Helsinki and executive director of consulting firm GnS Economics, the revolt against Draghi shows that "there are still normal people at the ECB", but "the bank has become such a burden for Europe's economy. that it is necessary to limit its actions or to completely abolish it".

Following last week's monetary policy session, the same British journalist said that "Mario Draghi leaves Europe near a recession, in a deflationary trap and without ammunition", and called Christine Lagarde "his unlucky successor".

Evans-Pritchard acknowledged that "Draghi saved the euro," but stressed that "those magic words" would not have been uttered had Berlin not lifted the ban on buying bonds of countries threatened by sovereign default.

"Nothing moves in the Eurozone without Germany's permission," a senior Berlin government official said, according to the British journalist.

Starting from Draghi's famous promise from the summer of 2012, that "the ECB will do everything to save the euro", a recent article in the publication of "Review of Financial Studies", entitled "Whatever It Takes: The Real Effects of Unconventional Monetary" Policy "shows that the launch of the OMT program (Outright Monetary Transactions), a first step in the quantitative easing program, has led to the expansion of lending to zombie companies, which used the money not for investments and new hires, but for accumulating cash reserves.

The three authors, which include an economist from the Bundesbank, point out that "companies with high creditworthiness in industries with large numbers of zombie companies have suffered from this process of credit misallocation, which has contributed to the slowdown in recovery" .

Three other economists, including two from the ECB itself, subsequently published the article "Life below Zero: Bank Lending under Negative Policy Rates", again in the "Review of Financial Studies", which shows that negative interest rates lead to higher costs for banks that have a high volume of deposits, and "the introduction of this policy by the ECB in mid-2014 has led to the taking on of higher risks and lower lending for these financial institutions."

The two articles are part of the growing category of studies that show that the belief in the sustainable economic recovery of the Eurozone by pushing the interest rate even deeper into the negative territory and restarting the money printing press is irrational.

Despite the accumulation of arguments against the ECB's monetary policy, Mario Draghi said at last week's press conference that he "tried to carry out his mandate in the best possible way", and the legacy he leaves is that of "never giving up".

Does the "best possible way" also involve a breach of the European treaties, which prohibit the monetization of sovereign debt by central banks?

It was precisely the breach of the treaties that eventually led several former ECB officials, along with a former president of the Bundesbank and former governors of the Bank of Austria and the Netherlands, to attack the current policy of the European Central Bank extremely harshly.

The memorandum shows that the ECB has unilaterally changed the definition of price stability, by equating it with an inflation rate close to 2%. Unfortunately, the former officials did not go as far as to point out that this "equivalence" is absurd, and not just mathematically.

What the former central bankers have pointed out, however, is that "defining the 2% threshold as a symmetrical inflation target is a clear departure from the monetary policy focused on price stability."

Regarding the quantitative easing program, the authors of the memorandum emphasize that "there is a broad consensus that it can no longer have positive effects on economic growth", the only justification being to protect over-indebted governments against a possible interest rate hike.

While Zerohedge compared the memorandum to "a cry against Draghi's monetary insanity", the editorial leadership of Financial Times criticized it very harshly, in an article titled "The euro's guardians face a roar of the dinosaurs."

"From an economic point of view, the ECB has already entered the territory of monetary financing of government spending, which is strictly prohibited by the Treaty," the former central bankers said.

"The Memorandum expresses the frustration of a generation whose ideas have lost their influence, and today's Europe may be lucky that such a thing has happened," is the editorial's conclusion from the newspaper.

What ideas could they be talking about? The debating in a civilized environment of monetary policy options compared to a "diktat" from the ECB president without the option to appeal?

Or is it about how the concept of price stability is understood and conveyed the population? That is, is it modern and acceptable to equate price stability with actual exponential price growth?

The issue of major divergences in the ECB's leadership was particularly elegantly addressed by Bundesbank President Jens Weidmann in a speech from the Bank of Austria to mark the end of Ewald Nowotny's term.

Weidmann quoted Schumpeter, who once said that "recognizing the relative validity of one's beliefs, but nevertheless defending them with determination, separates the civilized man from the uncivilized."

Then Weidmann moved on to Karl Popper, who said that "only a critical discourse can give us the maturity of considering an idea from several perspectives and its correct evaluation".

Perhaps the chairman of the Bundesbank is hoping for an improvement in the ECB's decision-making process with the beginning of Ms Christine Lagarde's term.

Unfortunately, there isn't much for the Europeans to look forward to, given that the former head of the IMF openly supports the economic absurdity called "negative interest".

Recently, two German lawyers, Kai-Oliver Knops, who is also a professor of civil and commercial law at the University of Hamburg, together with Wolfgang Schirp of Schirp & Partner, have launched a new lawsuit against the ECB, as Die Welt writes.

"We consider negative interests not only economically wrong, but also illegal," said the two lawyers, who argue that negative interests are a tax imposed on owners of bank deposits, and the ECB and the EU have no fiscal authority.

Mario Draghi's last press conference as ECB president started with a question about the effectiveness of negative interest rates and quantitative easing, given that the IMF has just warned about their effect on the financial system.

"The IMF did not specify that negative interest rates are ineffective," said Draghi, who went on to say that "in fact, the overall evaluation is generally positive when it comes to the interest rates, and very positive for us."

Unfortunately, none of the journalists present wanted to spoil the "party" by pointing out a very simple aspect: no economist worthy of that name can support the forcing of negative interest rates by central banks, especially an economist who holds a Ph. D. in economics from MIT, under the guidance of Stanley Fisher.

Why? Because, before being considered the price of money, interest reflects the time preference of consumers. Under what conditions would anyone prefer 90 euros over one year instead of 100 euros today?

After taking Draghi's defense in the face of the open attack by former prominent ECB officials, the Financial Times editorial team came back for another round after the last monetary policy meeting and stressed the need for the next ECB leader to "extend the toolkit".

What would the new tools be? Obtaining a consensus on the need to "support the recovery from fiscal policy".

That is the conclusion which was reached after substantial praise and tear-jerking outbursts directed at Mario Draghi, which prompted a reader commenting on the article to write that "the groveling in this article is outright comical and made me cry".

Draghi's countless calls for the launch of stimulus tax policies have even been attacked by the executive director of the largest insurance company in Europe, Allianz.

Oliver Bäte said, in an interview with the FT before the new interest rate cut and the relaunch of the quantitative easing program were announced, that Mario Draghi has politicized the European Central Bank, and the call for implementing fiscal reforms is devoid of any consistency, given that "The tax reforms were not done because you encouraged people to spend money that they do not have."

"We created independent central banks precisely to prevent this from happening, "said the general manager of Allianz, who also accused the ECB of contributing to the multiplication of the risk in the Eurozone, by avoiding breaking the circular link between governments and the commercial banks who buy their bonds.

Oliver Bäte was not shy in claiming that "Draghi is not independent", because "the politicization of the monetary policy in the euro area" is obvious.

Maybe everything that Mario Draghi did as President of the ECB is justified by the supreme imperative of saving the Euro at any cost, but the effects of the policies adopted during the eight years of mandate raise doubts over the affirmations along the lines of "everybody from Italy now says that the euro is irreversible", as Draghi said in the last press conference.

In a recent analysis of Professor Eric Dor, from the IESEG School of Management in Paris, it is stated that "the financial fragmentation of the euro area is the main challenge for the ECB and the sustainability of the monetary union".

That fragmentation is characterized by increased divergence between capital flows, major differences in terms of non-performing loans in the national banking systems, the heterogeneous character of inflationary pressures, which contribute substantially to the divergence between the real incomes of the population, but also the divergences in the unemployment levels or the real interest rates.

This is the true legacy of Mario Draghi, and a "simple" fiscal union, presented as a panacea in front of journalists and at his last press conference, is far from sufficient.

It would be possible, in fact, for such a union to contribute to the deepening of the imbalances in the euro area, if this is still possible, amidst the stimulation of "aggregate demand" through new "joint" loans, the distribution of which will give rise to new conflicts between Eurozone governments.

Can the euro zone be saved after it was saved by Mario Draghi?

Călin Rechea

"The European Central Bank is a fractured and exhausted institution, regardless of the theoretical possibilities - which are irrelevant anyway - of extreme monetary stimulation." (Ambrose Evans-Pritchard)

"The ECB has become such a burden on Europe's economy that either limitations need to be placed on actions or it needs to be completely abolished." (Tuomas Malinen, professor of economics at the University of Helsinki).

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