By Pedro Sousa
Make no mistake: what is happening between the European Central Bank’s Mario Draghi and the German government is extremely significant for economic growth and wellbeing across the whole of Europe. Mario Draghi, the president of the ECB since November 2011 – succeeding Jean-Claude Trichet – has in his CV quite a diverse set of experiences between working in the Italian Treasury, the World Bank, Goldman Sachs, and as governor of the Bank of Italy. Nowadays, he is facing quite possibly his most important task of his career: saving the Eurozone from disintegration. After the global financial crisis of 2008, Draghi’s job has become harder and more experimental in response to the challenges of post-crisis economies. His job is clearly not easy. He has to deal with German representatives that, according to his description, have “no to everything” as a response to all economic initiatives aimed at strengthening Europe. All of this while working in a Frankfurt-based central bank. Wolfgang Schäuble, Germany’s finance minister, has repeatedly criticized the ECB’s facility to stabilize the Eurozone sovereign debt markets, and its programme of buying financial assets through quantitative easing. The attacks are now becoming more desperate and unprecedented.
Germany’s attacks matter because they challenge the ECB’s operational independence to set monetary policy for the benefit of the whole Eurozone. There should not be a need to remind the German government to respect ECB’s independence. But Germany keeps pressing the ECB to undo its cheap-money policies. Draghi has hit back at German criticism stating that low borrowing costs were symptomatic of an underlying problem of global excess of savings and lack of appetite for investment for which Germany was partly to blame. It is in fact the German government and the “no to everything” attitude that should be criticized for holding back investment and spending. Fortunately for the Eurozone, Draghi keeps getting the better of Germany’s central bankers. With an admirable mix of lucidity, vision, and wisdom, he has aggressively cut interest rates and providing the market with liquidity by buying government debt, a policy known as quantitative easing, in an effort to resuscitate the Eurozone’s stagnant economy. These are similar to steps taken by the Federal Reserve in the US and the Bank of England. These ECB measures should be positive for both financial markets but more importantly the real economy. There is a clear need for bolstering demand in the Eurozone. Since December, the ECB has revised down its 2016 growth projection from 1.7% to 1.4%. The ECB has predicted inflation in the Eurozone will be just 0.1% this year, 1.3% in 2017 and 1.6% in 2018 – all under its target for inflation close to but below 2%.
The ECB’s mandate is not to guarantee yields for savers, but to meet the ECB’s inflation target and do what’s best for the Eurozone economy. To think that Draghi would hold interest rates well above zero while ensuring a spiraling down of the Eurozone economy to deflation and recession, simply to benefit the deposits of a particular segment of the population that historically has benefited from the Eurozone currency and open markets, is completely absurd and misguided. Without the ECB’s aggressive response, the permanent damage to the Eurozone’s economy would have been much graver. Given the state of the economy, adopting Germany’s plan would be disastrous. Governments would have to apply even more harmful austerity measures, further damaging weak demand, creating dramatic unemployment numbers and putting at risk the whole banking sector. Draghi seems to understand the “tragic” high levels of youth unemployment that threaten social harmony in Europe by preventing people from playing a full and meaningful part in society. It is not reasonable to expect the young to carry the burden of an ageing population if policymakers do not give them the tools required to become economically active citizens. Ultimately, young people are paying for mistakes that were not theirs. Near-zero inflation and fears of decades of Japanese-style low or no growth will jeopardize Europe’s future.
German criticism of the ECB’s latest round of stimulus in March seems to be a purely political motivated response to the political problems within the country itself, most notably the unprecedented wave of migrants. The influx of the one million asylum seekers has boosted some right wing parties and the political mainstream parties are concerned about them taking away votes. With elections in Germany next year, Draghi has become the target for Germany’s Eurosceptic populists, thus, mainstream parties delve in this anti-ECB narrative because they are terrified of losing older voters. Ironically, the German government has benefited from Draghi’s policy by borrowing money for almost nothing, helping the country balance its budget, a major political victory for Merkel and her finance minister.
The German government has continually come out against the world’s major economies launching a coordinated fiscal stimulus package to tackle stagnant growth in the Eurozone and the growing signs of economic distress around the world. Draghi needs to stand firm. Germany’s representatives have to go beyond their domestic political games and understand what is obvious to everyone else: there needs to be government spending and fiscal stimulus to boost European demand and economic growth. Draghi knows that monetary policy – interest rates, quantitative easing and incentives to borrow – can only do so much. Governments cannot leave central banks to do all the work on driving the economic recovery. There is a need for expansionary macroeconomic stabilization policy to support demand. Some clearly understand this. For example, Pier Carlo Padoan, Italy’s finance minister, has strongly presented the case for fiscal stimulus in recent EU Council and IMF meetings. In order to reap the full benefits from our monetary policy measures, other policy areas must contribute decisively. With record-low long-term interest rates in many advanced economies, the case for boosting public investment becomes even more evident. Draghi has argued for infrastructure spending and has challenged policymakers to do their job. And he is not alone in thinking that the ECB is carrying too much of the burden for stimulating the Eurozone economy. The OECD and the IMF think the same. Both organizations believe higher government spending and sensible fiscal policy would be key to increase growth and shared prosperity – in particular, from countries with room for public spending. Governments, businesses and households would be incentivized to boost demand, fueled by low-cost loans on offer. Eurozone needs “yes to Eurozone prosperity” in its representatives. Draghi has to win this battle – by overcoming and out-maneuvering the current German conservatism and dogmatism – for the sake of the EU and the global economy.
ECON+ 