ECB intervenes to clean May’s and Schäuble’s mess

Last Thursday ECB’s Governing Council convened in Tallinn. Estonia is a member of Eurozone and traditionally ECB’s Council is at times hosted by the central bank of one of the 19 euro area member states. From left to right: Ardo Hansson Governor of Central Bank of Estonia, Mario Draghi, President of ECB, Christine Graeff Director General Communications. Tallinn, 8 June 2017. (ECB Audiovisual Services work, Photographer: Arno Mikkor ).

Last Thursday 8 June, on the day the Britons were punishing Theresa May for her mistakes and arrogance, the European Central Bank under Mario Draghi was preparing for a less favorable politico-economic environment and a much longer disinflationary period. Indirectly, Mario Draghi blamed the dying out inflation on the avowed neoliberals, of the kind of May and Wolfgang Schäuble. The Brit is culpable of creating unwarranted chaos and the German for vying to crushingly exploit Eurozone’s labor force, not to say anything about his condemnation of southern Europe. Draghi said it straight away, that the hard working Europeans are not paid adequately. That’s why economic expansion cannot winkle out inflation from the dangerous region of structural disinflation, or reduce hidden unemployment.

Neo-liberalism leads to chauvinism

Despite the fact that the two politicians mentioned above are implicated in different conjunctures, their cathexis about economic and social strictness or even chauvinism is dangerously upsetting Europe. May’s ‘Dementia tax’ and hard Brexit stance has just pushed Britain to uncharted waters of uncertainty and instability. At the same time, Schäuble’s stern economic ideology haunts the EU and threatens the very existence of Eurozone. No need to say that the German minister of Finance is the man who dictates euro area’s economic policies.

He has condemned the south of Europe, but still he makes sure that Germany takes advantage of other people’s woes. Neo-liberalism on both shores of the English Channel now threatens Europe even with internal enmity. Both the governing elites in Britain and mainland Europe and of course in Trump’s America are now looking to ‘discover’ foreign enemies. If they manage to convince the voters that the source of internal economic misery is to be found outside the borders, they can even start a new dreadful era of explosive nationalism in world affairs. Let’s return however to the latest developments.

A disastrous Tory plan

Thank God May proved incapable of fully selling her frightful story to Britons. She wanted a powerful mandate from voters, to start a war of some kind with mainland Europe. At the same time, she aimed at bringing a ‘coup de grace’ at the Labour Party. This last political formation is the only adversary to the plans of that party of chauvinist Tories, who brought May to eminence and who long to conquer once and for all the political and social life of their country, by isolating British society from Europe.

Last Thursday, those who chose to really resist May’s schemes proved to be the younger generation and the more educated people in London and the rather well to do southern English shires. It was a kind of rerun of the Brexit vote, with the terrified by globalization working classes of the north of England voting in increased numbers for May. At the end of the day, on 8 June both the Tories and the Labour Party gained more votes than in the 2015 election. However the socialists (40%) managed to cover the distance from the Tories (42%), and the rather neck to neck outcome deprived both of them from an absolute majority in the House of Commons.

Governing Britain with extremists

In any case, May’s 318 conservatives MPs with the backing of the 10 extreme right wing Democratic Unionist Party (DUP) deputies of Northern Ireland can support a government in the Parliament of 650 seats. The majority of 328 though is quite a fragile one, making 10 Downing St. dependent on 10 semi-fascist Irishmen.

Logically, the complete failure of May’s plans of a few weeks ago, when she called this early election, surely has a strong impact on her ability to conduct the Brexit negotiations with Brussels. Having lost the majority, she cannot expect the EU not to take advantage of it. It was her alright, who tried to gain such a prerogative with the aggressive expectation of an electoral triumph. Politics is a nasty business. Failure and misjudgment never go unpunished.

Draghi vs Schäuble

Now let’s cross again the English Channel and return to the surprise which Draghi held in store – the capping of the three years old extraordinary monetary policy was not even discussed. He clearly said “the economic expansion has yet to translate into stronger inflation dynamics. So far, measures of underlying inflation continue to remain subdued. Therefore, a very substantial degree of monetary accommodation is still needed”. Not to forget that ECB’s core mandate is to bring inflation close but lower than 2%. To achieve that though Draghi has to use his only available policy means, the monetary policy. We are going to see here below, how Draghi wants to help real wages rise for the benefit of the hard working Europeans, by using his singular means. And this in direct opposition with euro area’s ‘boss’, Mr Schäuble,

Draghi explained that the economic recovery of the past many months has not produced any tangible betterment for the working people. He concluded that, “All this recovery is happening with very strong creation of new jobs…At the same time, we have evidence that many – it’s hard to say what is the percentage, but many of these new jobs are so-called ‘low-quality’ jobs, where we’re talking about temporary employment, we’re talking about part-time employment…It may well be that this is actually slowing the growth of nominal wages as well”.

Badly paid Europeans

In short, what he says here is that the current economic expansion doesn’t benefit everybody, which means that the wages part of GDP doesn’t grow at all. Without being a…trade unionist he said “certainly the backward-looking negotiation of nominal wages, looking as a sort of reference of inflation, looking at low inflation rates as a basis for current negotiations”. In reality, Draghi blames the employers (in the public and the private sectors) for using the low inflation background to deny labor a share in the presently increasing product and productivity.

Of course, Draghi has not become a preacher of the ‘rights of workers’. He sees though, that if labor doesn’t take a share of the increased overall product/income, inflation will continue to be stuck at very low levels. As a result, the ECB will be obliged to continue spreading around €60 a month, until real wages get a bigger share of the output and real unemployment truly falls. Until then he said, “We need to continue to accompany the recovery with our monetary policy”. But then again, Draghi has more reason to stick with his injections of freshly printed money into Eurozone.

Τroublemaker Britain

He confirmed that “If the outlook becomes less favorable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase program in terms of size and/or duration.” In this way he proclaims clearly that there might be a need to further increase the monthly injections of money and/or extend the duration of the relaxed policy. Understandably, an unstable Britain may create a less favorable general outlook or disturb the financial conditions.

In conclusion, for all those reasons, the ECB will continue supporting the Eurozone with low cost money, so that mainland Europe is able to confront any possible new risks. And those risks may be the continuation of the present unfavorable conditions in the labor market or an unexpected worsening of the political setup in Britain.