The European Central Bank’s decision to introduce a programme of Quantitative Easing (QE) is not a win-win situation but rather an expression of helplessness, writes Prince Michael of Liechtenstein.
The programme, agreed on January 22, 2015, allows the ECB to buy up to 60 billion euros a month in European sovereign debt from March 2015 until September 2016. The total will exceed one trillion euros. A risk-sharing programme with national central banks was also introduced and quality criteria for eligible debt established.
The QE programme was discussed widely, pre-empting the decision and the markets expected it. There would have been a bloodbath on the financial markets without it.
The rationale for the decision is twofold:
One, more money in circulation with basically no interest payments should drive consumption and investment, and create growth and employment. It is hoped this will create controlled inflation as, according to ECB President Mario Draghi’s mantra, inflation is needed to create growth.
Two, it will strengthen confidence in the value of sovereign debt in the eurozone.
This is only one side of the coin.
On the other we can see this is not a win-win situation. It is an expression of helplessness. Helplessness before the fact that politicians in European Union countries are not prepared to address the necessary reforms.
So, is this inaction based on ideological grounds, populist reasons or on complete ignorance?
Necessary basic reforms are crucial in Europe if it is to restore global competitiveness, increase productivity and get the unemployed back to work. This includes reducing the share of national and local government in the economy. This will reduce the overheads of the national economy and reduce the deficit. Deregulation of laws which are too stringent such as labour and competition law, would enhance activities and ease innovation and job creation.
Drastic streamlining of tax laws would provide security to plan, which is essential for new investments. It would also reduce the enormous administrative costs of handling and administrating tax issues for government, business and individuals.
There is another problem – it seems that QE by the US Federal Reserve (the Fed) has helped stimulate America’s economy back to growth. There is, however, one big difference between Europe and the US – the equity of the banks.
The 2008-2009 banking crisis saw the US focus on re-establishing the equity basis of the banks to a level which allowed the banks to lend to business. Europe instead chose the path of stress tests. In a simplified way we can say that if a bank reduced its loan portfolio to business, instead of increasing its sound equity basis, it could also pass the stress test. It also means that banks are reluctant to lend more money to business. This prevents new money trickling into the economy.
Zero to negative interest rates are also destroying savings and reducing personal retirement provisions. Pensions have been hit hard. This situation has been exacerbated by the fact that government pension schemes are insufficiently financed.
The real problem with the QE programme of buying sovereign bonds is that it takes the pressure for reform off the politicians. The ECB has already helped several European governments buy time so they can carry out reforms. Most of them – and especially France – have failed to use this opportunity.
It seems unlikely that these irresponsible attitudes will change with QE.
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