Berlin vies for a Germanic European Central Bank

Sabine Lautenschläger (on the left) is a Member of the ECB’s Executive Board and Vice-Chair of the bank’s Supervisory Board of the Single Supervisory Mechanism. She is pictured here at the annual banking supervision press conference – 27 March 2017. (ECB work, some rights reserved).

Last week, the deep German state struck again targeting the heart of Eurozone. The hit was effectuated by Sabine Lautenschläger, a middle aged Stuttgart born ex BaFin (Federal Financial Supervisory Authority) employee and presently member of the powerful executive board of the European Central Bank. Sabine now wants the ECB to abandon its extraordinary monetary policy, which was conceived to save the euro area from the dying inflation and support the southern Eurozone countries to get along with their debt refinancing.

With her limited cognitive background in economics shaped by a law degree from Bonn University and no working perception of the financial universe because of her all public service career, she demanded that the ECB should rather sooner than later taper its expansive policy. Quite egotistically Sabine urges her colleagues in the Governing Council of ECB to increase interest rates and stop pumping €60 billion a month into the economy. She ignores the needs of more than half of the euro area member states for continuation of near zero interest rates, and wholly endorses the German screams for higher interest rates on the huge cash reserves of this country.

Just hoarding cash

Germany, with a savings ratio of nearly 30% of GDP and a foreign trade surplus of €300 billion last year, doesn’t spend on consumption neither does it invest proportionally at home or abroad. It just hoards the money it gains from its exports to the euro area countries. The state sector saves instead of spending a bit more than it receives (fiscal austerity) and the same is true for households. At the same time, the other euro area countries do not follow the same austere policies and their saving ratio is much smaller. Add to that a German labor market much more patronized by the deep state and more brutally liberalized than elsewhere in the EU, and you end up with the Teutonic success story.

The result is that, during the last eight years, this country has managed to create a sizeable labor cost advantage compared with the rest of the EU. Not to say anything about the free overflowing of its industrial sector to the central European countries. For example, Slovakia of 5 million people produced last year one million cars, making her the largest per capita car producer of the world. Needless to say that most of those cars come from German assembly lines.

Ruthless exploitation

In this way, Germany, even without having a substantial productivity advantage compared to the rest of the world, last year managed to export goods of a value of €1.2 trillion. This left the largest trade surplus of the world, bigger even compared to China. Germany, though, fails to substantially recycle these huge surpluses through investments within and without, while the other huge exporter, China, has been doing that regularly during the last few years. Not to forget, that the German and Chinese foreign account surpluses are somebody else’s deficits. In the long run, this arrangement will explode, with devastating results for all.

In such an unstable environment, Sabine chose to overtly press the ECB to change its appropriate for this low inflation era monetary policy, and start exclusively favoring Germany with higher interest rates. To this effect, she chose to speak to the German newspaper ‘Mannheimer Morgen‘ in an interview published last Saturday. When asked to comment on ECB’s monetary policy she said, “The expansionary monetary policy has both advantages and side effects. As time passes, the positive effects get weaker and the risks increase. So it’s important to prepare for the exit in good time…Still, we need to address the issue: how should the return to normal monetary policy be arranged? What will be the time frame, what will be the tools and what will be the sequence? That’s why we on the ECB’s Governing Council should now answer the questions I just asked”.

Inflation still falls

Obviously, Sabine is pressing the ECB hard to abandon its low interest rates policy and return to strictness. She doesn’t seem to mind much, if inflation is still far below ECB’s statutory target of close to 2% or if the central bank’s mandate obliges its Governing Council to do whatever it takes to reach it. Actually, Eurostat, the EU’s statistical service, last Monday released a flash estimate for the July inflation at 1.3% unchanged from June and well below the target. It’s more important, though, that services inflation, the strongest single item of the overall gauge, is seen to fall (from 1.6% in June to 1.5% in July). The same is true also for the basic sub index for unprocessed food, which fell from 1% in June to 0.6% in July.

In short, real facts oblige the ECB to continue with its extraordinary monetary measures, until the underlying indicators testify that inflation is close to 2% and will stay around the same levels in the foreseeable future. If the ECB follows Sabine’s demand and now starts a debate about the timing and the way to taper the accommodative policy, it’s more than certain that the financial markets will begin discounting it. As usually happens in those markets, the end result, that is, higher interest rates will materialize much sooner than expected.

What Sabine wants

This is what capital markets do, bring the future to the present. Sabine either ignores that, a highly improbable assumption, or wants to force her German target of more expensive money on the European markets. But this policy will serve only Germany because everybody else is in a deficitary state. However, the higher interest rates will also undermine the fragile growth rates Eurozone has just attained. The result will be that Europe will return to recession, a possibility that is to harm even Germany. Unfortunately, Berlin doesn’t seem to possess a wider vision for a long term symmetry in Europe.

For the last twenty years, the fully unified Eurozone business structures and the introduction of the common currency since 2002 have serviced Germany through the real markets (commercial domination). If the machinations of Berlin in the ECB achieve their target, Eurozone will be forced to service Germany through the financial markets too.