Sunday, 9 September 2012
Opening the bottomless pit – Europe overruled by the ECB?
The post of the European Central Bank president (ECB) is not the most desirable at the moment. But still, Marion Draghi has to make some decisions that might decide about the future of the Euro-Zone and of the EU as a whole. Last week, such a decision was made, and the outcome is pretty much uncertain.
The ECB has decided to buy large quantities of bonds of the crisis states, so that these can get additional fresh assets for their budget reconciliation. The sheer matter of fact that the ECB President Marion Draghi more or less unilaterally decided to purchase crisis states’ bonds for an unlimited period of time makes it more or less obvious that the member states and the national central banks were respectively powerless in the view of this decision.
Most likely, this step was in particular a sign to the national central banks, and above all to the German Central Bank (“Deutsche Bundesbank”), that the ECB is not bound to any national requirements or reservations. German central bank president, Jens Weidmann, has repeatedly opposed the ECB’s plans to buy bonds in large quantities, which would lead for Germany to contribute massive financial assets into the European Stability Mechanism (ESM) – something the German government wanted to prevent from the very beginning. Basically, it was once against Germany alone in opposition against the overall European tendency to postpone the obvious deterioration of the Euro crisis within the Euro-Zone, and the imminent crash of Greece, which might in the end lead to Greece’s withdrawal from the Euro-Zone.
The German position has in fact changed a little bit. Although critics blame the very recent ECB decision as a severe risk which would lead to an even more severe fiscal and economic crash of the crisis states, the German economic expert Peter Bofinger on the other hand states that this step is a necessary “medical emergency act”. Otherwise, it would be impossible for the crisis states to fight their budget deficits in the view of high interest rates. However, he also sees the risk for a Europe wide inflation limited as the main factor for inflation – wages and salaries – do not increase, specifically not in the crisis states. Their tendency is facing in the opposite direction, and it is certainly not limited to the crisis states alone.
Other, more critical, voices state that this ECB decision is an intervention into the member states’ national fiscal affairs, and they accuse the ECB for having breached EU legislation. The ECB presents a rather unique dilemma, since there is hardly any parliamentary control over the common monetary EU institution. Also, the ECB is neither obliged to take any political responsibility to any governmental institution, nor to national governments or central banks; not even to the highest EU institutions like the Commission, the Council, or the Parliament. In a certain way, by buying “toxic assets” from the crisis states, the ECB might degenerate to a “bad bank” itself. This was in fact the term used by an economic expert of the German liberal party (FDP).
One issue is pretty clear; the ECB’s strategy to buy bonds and provide fresh assets to crisis states will not set an end to the current crisis, not even remotely. On the contrary, the simple matter of fact that the highly indebted crisis states can get fresh assets from the ECB will even lead to a massive increase of their budget deficits. Even though that these assets are linked to strict requirements, this move will in the long run lead to a bigger deficit and therefore deteriorate the already crumbling situations in the respective countries.
However, there is at least some good news: the Spanish austerity programme is running according to plan, if you want to believe the status reports from Spanish Prime Minister Mariano Rajoy – unemployment rates and the increasing brain drain prove the opposite. And our policy makers are, officially, determined to keep Greece in the Euro-Zone at all costs – with all evolving positive and negative consequences. The question is, however, if the ECB’s radical step might really help Greece, Spain, Italy and the others in their austerity and budget reconciliation programmes. The plan could easily backfire, especially as the deficits might not be significantly reduced.
Europe is desperate for useful decisions, but wrong decisions are just as devastating as no decisions at all. This ECB step has already been discussed in the past few weeks, but now it was taken rather hastily. Hastily decisions have only rarely led to efficient results, and the way it was taken will not be beneficial for the internal integrity of the European Monetary System (EMU) and the reputation of the ECB. Especially the German central bank is particularly upset of the rapid decision of the ECB’s president, and a number of members of the German Parliament (“Deutscher Bundestag”) have already announced to take legal steps against the ECB’s decision.
The odyssey is entering the next step, but without a visible end; and it is apparent that the ECB has just opened a bottomless pit. There is a say in Germany, fitting quite well in this situation, referring to the imminent collapse of Greece, and of the Euro-Zone as a whole:
“Postponement does not mean prevention.”