ECB will be the catalyst of Eurozone’s reunification

Michel Barnier, Member of the European Commission in charge of Internal Market and Services, Jonathan Faull, Director General of the DG “Internal Market and Services” of the EC, and Benoît Cœuré, Member of the Executive Board of the European Central Bank (ECB) (from left to right) at the conference “Financial Stability and the Single Market – The Keys to Growth in Europe”. (EC Audiovisual Services).

Today Thursday the new governor of the Bank of England, Mark Carney, is expected to confirm from Nottingham, a historic city in east Midlands, that the central bank of Britain is not to raise its basic interest rate from the currently very low level of 0.5%, “until the Labour Force Survey headline measure of the unemployment rate has fallen to 7%”. It’s the first time ever that the central banker of Britain is announcing such a policy measure, which clearly overshoots his mandate and ignores the repercussions on inflation in favour of economic growth and employment.

On this side of the English Channel the European Central Bank in Frankfurt am Main can’t do the same despite the fact that inflation pressures are non-existent in Eurozone at 1.6%, while in Britain it surpasses the benchmark of 2% and oscillates around 2.5%. This generous decision of BoE’s Monetary Policy Committee has been questioned but Carney, of Canadian origin, will clarify today that the central bank of Britain will hold to this decision despite the fact that the British capital markets have started pressing interest rate upwards. Carney is expected today to deliver his first public speech after he took office on 1 July, in Nottingham’s city’s chamber of commerce.

If BoE can why not ECB?

Mario Draghi, the governor of the European Central Bank would have done the same as the Canadian and probably with more dynamism, if Berlin had left the ECB to act as the central bank of the entire Eurozone and not only of Germany. With very low or even negative inflation in more than half euro area member states and unemployment in double digits, the central bank should have undertaken a real crusade to transmit its monetary policy of cheap and abundant money where it is needed most, that is in Greece, Italy, Spain, Ireland, Portugal and elsewhere helping the SMEs there realise their plans.

The central banker of Britain came out with such a bold measure touching the area of the government’s economic policy and the fiscal sector just to brink the unemployment rate to 7% from its current levels of 7.8%. All that despite a real inflation risk lurking about, given that the rate of change of consumer prices in Britain has reached 2.5%, much higher that the BoE’s target set at 2% and strong upwards tendencies.

In contrast in Greece inflation is negative at -0.5% and unemployment skyrocketing at 28% and yet the ECB does nothing for this country. The same is true for France, Italy, Ireland, Portugal, Spain and other euro area member states, where inflation is well anchored at very low levels due to the deep recession the economies are in with unemployment rising fast. If the BoE is doing this just to bring down the unemployment rate by 8 decimal points, what a worthy of its name European Central Bank should do for Eurozone, where the average unemployment rate is 12.1%?

ECB to act

It is as if the ECB is there to serve only Germany, protecting its currency from imaginary inflation dangers, an idea which has developed into a national Teutonic obsession. The fact that the ECB is based in Frankfurt, on German soil, must play an important but improper role here. The ECB should immediately liberalise itself from the German influence and start financing even from tomorrow the Greek, Italian, Spanish, Portuguese, Irish and all other governments of Eurozone where inflation is very low and unemployment high.

This may be done prudently through purchases of prime government debt paper under certain conditions, in a context of a Eurobond issue. The truth is that this prospect is not any more a maximalist proposal of some extreme federalists. Berlin is not able anymore to control the pressures from the majority of Eurozone capitals. After the German elections of 22 September a lot of things will change in European Union. Everything will start from the governing council of the ECB. Not to forget that only last July this body changed drastically ECB’s policy and started guiding the economy.

Draghi’s statement

The relevant statement of Mario Draghi was perfectly clear on that. On 4 July in the Press conference after this historic decision of ECB’s governing council he said, {The Governing Council has taken the unprecedented step of giving forward guidance in a rather more specific way than it ever has done in the past. In my statement, I said “The Governing Council expects the key… – i.e. all interest rates – …ECB interest rates to remain at present or lower levels for an extended period of time.” It is the first time that the Governing Council has said something like this. And, by the way, what Mark Carney said in London is just a coincidence}. On that occasion some journalist had commented that Draghi was doing in ECB what Carney did in the BoE.

Obviously this was the first step towards a new era in Eurozone, where the ECB will decide to serve all euro area member states in equitable way. Direct financing of governments is the only way to this end because the banks are unable to transmit the cheap and abundant ECB’s money where it is needed. Only in this manner the Eurozone can be reunified, because today it suffers from multi-fragmentation and cannot survive like that.