Discussion between Wolfgang Schäuble, German Federal Minister for Finance, on the left, and Pierre Moscovici, Member of the European Commission in charge of Economic and Financial Affairs, Taxation and Customs. They both participate in the meetings of Eurogroup, the key decision-making body in the Eurozone. These two men are by far the most influential persons in the euro area. (EC Audiovisual Services).
Since last March the European Central Bank has being pumping at least €60 billion a month into Eurozone’s financial system, under its ‘expanded asset purchase program’, aimed at reviving the stagnating price level and energizing the sleepy real economy. The objective is to bring inflation close to 2%; the target rate set by ECB’s monetary policy objectives. Unfortunately, Eurostat, the EU statistical service, announced last Friday that according to its flash estimate, the July inflation rate was stuck at 0.2% as in June, marking an unwanted fall after the 0.3% in May.
It probably may be rather early to judge the new extraordinary ECB monetary strategy planned to pump €1.14 trillion into the economy in monthly installments until September 2016. Yet, this €1.14tn may be too little too late compared to what the US central bank did as from 2008. At that time, right after the severest financial crisis broke out in the western economic volume, the Fed started pumping trillions of dollars into the American financial system. Until November 2004 the US central bank had spent $4.5tn and actually managed to bring the largest economy of the world out of the danger zone, helping it to regain a sustainable growth path.
The ECB blocked by Germany
All along those seven years after 2008 and until January 2015, the ECB, blocked by Germany, remained motionless despite the fact that the European banking system was and still is in a much worse position than its US counterpart. It was right from the beginning that Berlin blocked a generous quantitative easing program. Such a policy would have had as target to drag inflation away from the dangerous zero zone and help the real economy restart. In such a case the other major effect would have been a fall of the foreign value of the euro. Judging facts in retrospect, Germany is seen as wanting to block that and keep the euro/dollar parity at the high levels of 1.40 . But why? Let’s dig in on that.
Berlin’s idea was to greatly increase the dollar value of the German euro reserves, estimated at more than one trillion. Obviously, Berlin strived to acquire more assets abroad by spending fewer euro. Who wouldn’t have longed for a gift of some hundreds of dollar billions? Under this policy of expensive euro though, Germany condemned the other major Euro area countries like France and Italy to an expensive euro and economic recession. Germany itself had a lot to gain from the highly priced euro. With an expensive euro she may cheaply acquire foreign assets using her euro reserves, while her exports enjoy a very low price elasticity. The German industrialists have stated that their exports have nothing to fear from a euro/dollar parity of up to 1.40 .
Why inflation matters
Coming back to the July developments, the inflation rate remained as in June, in a region dangerously close to zero. Economists had hoped that the May rise of the consumer price index to 0.3% could have marked an irreversible turn to the better, up from the straight zero in April and the negative showings in March and February. Unfortunately, this didn’t turn out to be so. All along the past seven deflationary years Germany has had been loudly arguing that there is nothing wrong with the zero or even negative inflation rates. Under such selfish economic thinking it’s not a surprise that the ECB has been chained to inaction and blocked from supporting the real economy, with big money injections as the Fed did. Facts show that the expensive euro has been Germany’s main goal, no matter how much harm this may do to the rest of Eurozone countries.
Yet the euro fell
However, despite the fact that the Eurozone inflation oscillates close to the zero area, the euro has lately lost a good part of its value vis-à-vis the dollar falling below the 1.1 benchmark parity. Why? The answer is obviously Greece. Again the German economic elite, represented authentically by the Federal Minister of Finance Wolfgang Schauble, went nuts with Athens, and did and still does whatever they can to push the Greeks out of Eurozone. In this way they hope that the euro will regain the 1.40 level with the dollar. Obviously, Berlin becomes crazy with whatever may depress the foreign value of the euro, be it a generous aid program to Greece or a wholesale quantitative easing, much higher than the €1.14bn the ECB is currently applying.
It seems though that all good things have an end. This time France and Italy supported strongly by the US have cornered Germany to agree and keep Greece in the Eurozone and on top of that write off a good part of the Greek debt. The Americans don’t mind much if the euro is cheap compared with the dollar. They are afraid of the Germans only in the case when the Teutons armed with an expensive euro can start buying vast amounts of US assets very cheaply.
Then came Greece
As things stand now Greece is to stay in Eurozone, and consequently the euro/dollar parity will remain at lower levels. On top of that, if in a few months ECB’s €1.14tn quantitative easing program proves insufficient to revive the euro area economy the ECB may consider increasing it and further suppressing the foreign value of the euro. France, Italy, Spain and more euro area countries supported strongly by the US have every reason to see the Eurozone economy start growing again and this can be done easier with a cheaper euro. The Americans are not anxious about their trade deficits. All they care for is that the dollar remains the king of the world and the only reserve currency. The US actually ‘owns’ now the largest part of the Middle East together with its oil deposits and their new-found allies, the Kurds, are there to see to that.
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