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

the European Sting Milestones

Featured Stings

Stopping antimicrobial resistance would cost just USD 2 per person a year

It’s time to move: 5 ways we can upgrade our SDG navigation systems

What lies ahead for the Korean Peninsula?

Lies and reality about incomes and wealth in the EU

More electric cars on EU roads by 2030

‘Education transforms lives’ says UN chief on first-ever International Day

The Ultimate Career Choice: General Practice Specialist

VW diesel scandal and climate change: can increased independent car checks lead to cleaner mobility?

These are the 3 key skill sets workers will need to learn by 2030

Forward Agenda: What can we expect from 2019?

Privacy is a human right, we need a GDPR for the world: Microsoft CEO

Eurozone: Despite anemic growth and shaky banks marks record trade surplus

This billion-dollar campaign wants to protect 30% of the planet by 2030

Chart of the day: These countries have the highest share of electric vehicles

Ukraine undecided over a strategic partnership with the EU

When did globalization begin? The answer might surprise you

Trump beats Clinton but Americans will learn the hard way that the US can’t change with an election

MEPs list conditions for new EU-Azerbaijan deal

This is how AI can help you make sense of the world

ECB doesn’t dare touch Eurozone’s big banks

Youth for Climate Change

Ambassador Zhang Ming: “Work Together for a Better Globalization”

How to talk about climate change: 5 tips from the front lines

Health Committee MEPs back plans to boost joint assessment of medicines

Saudi Arabia must halt air strikes in Yemen, says UN panel

Any doubt?

Algeria must stop arbitrary expulsion of West African migrants in desert: UN migration rights expert

How populist and xenophobic movements in the EU tear apart European businesses and startups

A Sting Exclusive live from Brussels: Solheim’s consequential visit leading the world and the UN

First EU collective redress mechanism to protect consumers

Quicker freezing and confiscation of criminal assets in the EU

This woman solved one of the biggest problems facing green energy

Shifting Tides: Policy Challenges and Opportunities for the G-20

First Western Sahara talks at UN in six years, begin in Geneva

TTIP: why it is worth not to pull the covers over your head?

Here are three ways blockchain can change refugees’ lives

Libya: $202 million needed to bring life-saving aid to half a million people hit by humanitarian crisis

Why and how Germany had it again its own way in Cyprus

UN chief calls for ‘increased commitment’ to resolution on 10th anniversary of Georgia conflict

Ambassador Zhang wishes from Brussels great success and prosperity for the China-EU relations in the Year of the Dog

MEPs back plans to halt spread of drug resistance from animals to humans

This afternoon Britain will be once more isolated from mainland Europe

Conflict and climate change challenge sustainable development effort: UN report

EU Top Jobs summit ended with no agreement: welcome to Europe’s quicksand!

EU to lead one more fight against climate change at G7 summit

‘Repeated attacks’ could close down key hospital in eastern Libya, says WHO

The strong version of the EU banking union gains momentum

7 ways for businesses to capture the youth dividend

A European student just sets the question of the day: What kind of education policies are missing in Europe?

Contact the Sting

EU economy: Between recession and indiscernible growth

Global Talent – Professional Internships

Using ‘leprosy’ metaphors in political rhetoric ‘fuels public stigma’ and discrimination: UN rights expert

EU Commission: Germany can make Eurozone grow again just by helping itself

Can indoor farming feed the world?

The US bugged Europe: Is this news?

Why CFOs need to rethink what it means to create value

EU makes key TTIP document public as protests get louder

Key Brazilian border crossing for Venezuela refugees reopens as asylum numbers pass last year’s total

Miguel Arias Cañete European Commission

EU should invest more in climate and not sit back on its laurels and watch

Trump ostracized by his party and world elites but still remains in course; how can he do it?

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 )

Connecting to %s