Did Draghi ask the Germans to accept a drastic change of austerity policies?

European Central Bank (ECB) Forum on Central Banking in Sintra, Portugal. Discussion between Mario Draghi, President of ECB, on the right, and José Manuel Barroso, President of EU Commission on the left, in the presence of Jeroen Dijsselbloem, President of Eurogroup. (EC Audiovisual Services, 26/05/2014).

European Central Bank (ECB) Forum on Central Banking in Sintra, Portugal. Discussion between Mario Draghi, President of ECB, on the right, and José Manuel Barroso, President of EU Commission on the left, in the presence of Jeroen Dijsselbloem, President of Eurogroup. (EC Audiovisual Services, 26/05/2014).

With the unemployment rate always at double digit levels (11.5%), inflation falling again nearer to naught (0.3% in August), the Economic Sentiment Indicator (ESI) dropping and the Business Climate Indicator idling flat, the Eurozone economy is steadily heading to a dormant state at best or to a new long recession at worst. Speaking of overall economic policy in Eurozone though, a proactive stance to revive the sleeping giant, there is an awkward and obviously limping arrangement. While the monetary leg has become of truly Eurozone dimensions and aspirations under the management of the European Central Bank, the fiscal policy component remains stubbornly national and austere.

Mario Draghi, the President of ECB’s Governing Council, obsessed by this dualism for quite some time and seeing Eurozone slowly but surely diving into the shallow waters of stagnation, couldn’t stand idle anymore. Actually he has repeatedly observed this defective interaction between monetary and fiscal economic policies. In any case he knew about this policy flaw from the very beginning, when the ECB was founded, many years ago. Let’s start from the beginning.

Correcting the structural flaw

ECB’s statutory mandate doesn’t permit it to finance governments and thus support growth through increased public spending. At times of recession such practice is common place and all the other major central banks of the world can do it and are doing it rather in excess. The Fed in the US, the Bank of England in Britain, and the Bank of Japan saturated their countries with newly printed money, trillions of it, and in this way all those economies have returned to a more or less steady growth path. Eurozone stands in the developed world as the odd man out, remaining for more than five years in recession or stagnation.

Now however, after all those long years of inaction, this Eurozone policy shortcoming has become of crucial importance. The 18 member states money zone runs the danger of returning to recession and this time it will be for a much longer period. Falling inflation, at 0.3% in August, can at any moment turn into the negative part of the chart and destroy large parts of the value of all investments and assets. In this eventuality, Eurozone will be led to a self-fed destructive economic collapse.

Draghi takes action

In view of all that Draghi couldn’t stay silent any more. Speaking at the time-honored annual central bank symposium in Jackson Hole USA on 22 August, he decided to say it all. For the first time he explained in details that “It would nonetheless be helpful for the overall stance of policy if fiscal policy could play a greater role alongside monetary policy. The euro area has suffered from fiscal policy being less effective and available, especially compared with other advanced economies, reflecting the fact that the central bank in those countries could act and has acted as a backstop for government funding… the existing flexibility within the rules (n.b. fiscal restrictions included in the ‘Two Pack’ Directives) could be used to better address the weak recovery and to make room for the cost of needed structural reforms. Second, there is leeway to achieve a more growth-friendly composition of fiscal policies, for instance by lowering the tax burden in a budget-neutral way.”

In this way the President of ECB not only says plainly that the central bank is doing its best to bring inflation at the acceptable levels of close to 2% and in this manner help growth, but he also points a finger to governments and the Commission to adopt a more growth friendly fiscal policy. In this way though, Draghi is recommending policies owned only by governments and not the central banks.

Since Germany is the self-proclaimed guardian of fiscal orthodoxy aka austerity in Eurozone, both Angela Merkel and Wolfgang Schauble Federal Chancellor and Minister of Finance respectively, reportedly telephoned Draghi to demand explanations for trespassing into the government field. Even the title of Draghi’s speech in Jackson Hole, ‘Unemployment in the euro area“, must have caused an annoyance to Berlin. Eurozone’s statutory charter and by oath Draghi’s mandate is to take care of inflation and nothing else.

Change or stagnate

Whatever Draghi replied to the German queries, the truth remains that economics may not be an exact science but in Eurozone’s case everybody is adamant. The euro area needs a drastic policy change. So Draghi, while talking to the Germans probably didn’t chew his words. Fiscal policy has to play its part of the game in a significant way, along the lines of the monetary measures, if a sustainable growth path is to be achieved. Jean-Claude Juncker, the new Commission President Elect has clearly agreed to that. Given that loosening the fiscal restrictions within the rules of the ‘Two Pack’ is his job, the Brussels obstacle is already surpassed. Add to that the Italian and the French pressures for a relaxation of the fiscal severity, and Berlin remains the only impediment towards a new lenient overall economic policy.

Germany however cannot keep on blocking the needed changes. More so after Berlin allowed last June the ECB to distribute trillions to Eurozone banks, to support them in their quest to make the needed improvements of their problematic balance sheets. Much of this money will be directed to German banks, which have already received billions in authorized by Brussels subsidies as well as in unauthorized government aid. Given that, Germany cannot continue to pretend being the guardian of financial sanity in Eurozone.

The sooner the Merkel government understands that, the better for everybody, including the German unemployed, the partimers and those in badly paid ‘mini jobs’.

 

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Featured Stings

Basel III rules relaxed: Banks got it all but become more prone to crisis

Gender Equality as a platform to improve Medicine

Why Eurozone’s problems may end in a few months

European Youth Forum welcomes the European Commission’s proposed revision of the Union Code on Visas, however it does not go far enough

A Valentine’s Special: heart has nothing to do with it, it’s all Brain

Brexit Update: EU endorses unprecedented compromise to help Cameron out of the referendum mess he got himself into

“The markets have moved on renewables, policy makers must keep up”, A Sting Exclusive by Erik Solheim, Head of UN Environment

The G7 adopted dangerous views about Ukraine and Greece

More unemployment and lower wages to make European workers competitive?

Ukraine-EU deal sees the light but there’s no defeat for Russia

EU and African leaders to jointly tackle the migration crisis across the Mediterranean

EU to spend €6 billion on youth employment and training futile schemes

ECB to buy corporate bonds: Will government financing be the next step?

Economic recovery won’t tackle youth unemployment problem

Post-Brexit muddled times: the resignation of UK’s top ambassador and Theresa May’s vague plans

Fair completion rules and the law of gravity don’t apply to banks

Italy can stand the US rating agencies’ meaningless degrading

The European giant tourism sector in constant growth

A Sting Exclusive: “Our ambition is by 2020 Indonesia to become an emerging power of World’s Maritime Access”, reveals the Chargé d’Affaires at the Embassy of Indonesia in Brussels, treating WEF, ASEAN and EU-Indonesia relations on the eve of the World Economic Forum East Asia 2015 in Jakarta

Why lay people don’t expect anything good from G20

Why is Merkel’s Germany so liberal with the refugees? Did the last elections change that?

Russia won’t let Ukraine drift westwards in one piece

Eurozone: Negative statistics bring deflation and recession closer

No tears for Cyprus in Brussels and Moscow

Climate change and health: creating global awareness and using earth resources wisely

Global Citizen – Volunteer Internships

The EU stops being soft with 10 Downing Street about Brexit

Court of Auditors: EU spending infested with errors well above the materiality threshold of 2%

The three sins the EU committed in 2015

G20 LIVE: G20 Leaders’ Communiqué Antalya Summit, 15-16 November 2015

The European Parliament rewrites the EU budget in a bright day for the Union

EU members commit to build an integrated gas market and finally cut dependency on Russia

European Junior Enterprises to address the significant skills mismatch in the EU between school and employment

The Eurogroup offered a cold reception to IMF’s director for Europe

EU budget: Will Germany alone manage Britain’s gap?

From inconvenience to opportunity: the importance of international medical exchanges

Turkey presents a new strategy for EU accession but foreign policy could be the lucky card

The EU cuts roaming charges further while the UK weighs Brexit impact

How will EU look after French, Dutch and German Elections and what will be the implications for Youth Entrepreneurship?

IMF’s Lagarde to Peoples of the world: You have to work more for the banks!

Mental Health: starting with myself

IMF: How can Eurozone avoid stagnation

Progress in medical research: leading or lagging behind?

iSting: Change Europe with your Writing

19th EU-China Summit: A historical advance in the Chino-European rapprochement

EU-India summit: Will the EU manage to sign a free trade agreement with India before Britain?

Environmental labelling, information and management schemes are central to the circular economy

The ECB still protects the banks at the expense of the EU taxpayers

IMF: Sorry Greece, Ireland, Portugal we were wrong!

How wealthy people transmit this advantage to their children and grand children

European Youth Forum demands immediate action & binding agreement on climate change

Doctors vs. Industry 4.0: who will win?

Draghi will not hesitate to zero ECB’s basic interest rate

EU Commission – US hasten talks to avoid NGO reactions on free trade agreement

China’s New Normal and Its Relevance to the EU

SPB TV @ MWC14: The TV of the Future

Eurostat: Real unemployment double than the official rate

Creating shared value: an opportunity and challenge for entrepreneurship

WEF Davos 2016 LIVE: “We need more Schengen but reinforce control!”, France’s Minister of Economy Emmanuel Macron emphasises from Davos

EU is now giving Google new monopolies to the detriment of European citizens and Internet companies

More Stings?

Comments

  1. mehxnzguvdjemmzknvxeyzxdnrntneimwnrmmefhgwbnfsiyacofruppgppwujot

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s