Now that the QE Dream Has Come True, What Next?

Jörg Bibow | January 23, 2015

The ECB is to be congratulated on finally defying its German masters, who have long kept the euro’s guardian of stability in captivity. For a number of years, Germany’s unholy triangle of power over the land of the euro – Berlin, Frankfurt, Karlsruhe – has enforced a diktat that undermined both the euro economy and democracy, causing a deep socioeconomic crisis, the rise of nationalism, and anti-EU sentiments across the continent. At last, the ECB has liberated itself from the scourge of hyperinflation scaremongering that is the self-serving conviction – and declaration of intellectual bankruptcy – of the Germany political elite. It is fitting that the chance for a revival of democratic values and European solidarity is knocking on Athens’ door this weekend.

In the markets’ perception, Mario Draghi over-delivered yesterday on his famous “whatever-it-takes” promise made at the height of the euro crisis in the summer of 2012. The euro and bond yields are down, stocks are up, party time is here. Things are going according to plan and everyone financial is in high spirits.

The question is what Mario’s QE bazooka will really do beyond the markets – for the real economy, that is. The markets are not worried about that issue at this point. Or perhaps some are thinking ahead like this: if growth stays weak, there will be even more QE coming, so all is good in any case. In case you didn’t follow the Q&A carefully yesterday, there was another important course change – or return to hardcore German dogma – on exhibit in what Mario Draghi had to say.

Remember the enlightened Mario Draghi from Jackson Hole in August last year? He talked about the need to make more effective use of available fiscal space (without explicitly mentioning Germany as the country that gets paid for borrowing but still prefers to see its infrastructure rot). Around that time he also showed understanding of the fact that it is impossible to avoid deflation if the country vis-à-vis which everyone else has to restore their competitiveness is close to deflation itself (without explicitly mentioning Germany as the force that is dragging the euro currency union into deflation).

Bad news here. All that is forgotten. Challenging the German belief system by way of QE seems to leave no more room for honest and thought-provoking ideas which the German political elite will see as plainly provocative, it seems. In yesterday’s Q&A session, Draghi revealed how recovery is to be fostered in the euro area these days and the supporting role played by QE:

“What monetary policy can do is to create the basis for growth, but for growth to pick up, you need investment. For investment you need confidence, and for confidence you need structural reforms. The ECB has taken a further, very expansionary measure today, but it’s now up to the governments to implement these structural reforms, and the more they do, the more effective will be our monetary policy. That’s absolutely essential, as well as the fiscal consolidation side. So structural reforms is one thing, budget and fiscal consolidation is a different issue. It’s very important to have in place a so-called growth-friendly fiscal consolidation for confidence strengthening” (Draghi at ECB press conference, 21 January 2015).

As Mrs. Merkel has explained, the idea of structural reform is that everyone improves their competitiveness together – the German dream of the euro area as a “competitiveness union.” Never mind that competitiveness is a relative concept and that you would expect a physics professor to get the point that it’s not possible for everyone to improve their relative position at the same time – other than relative to the rest of the world of course. And the depreciating euro is already delivering quite successfully on that front. Add to the deflationary structural reform agenda the joint endeavor of “growth friendly” fiscal consolidation, and you stare the unchanged euro reality straight into the eyes: more of the same! So it all boils down to how much oomph the plunging euro can steal away from global growth, itself slowing, without triggering more global conflict about currency warfare.

The markets may be excited for a while. I don’t see much reason for anyone else to get overly excited at this point. The Germans will be even more adamant, if that is possible, in forcing the futile competitiveness-cum-austerity wisdom upon their fellow Europeans. But perhaps Athens will enlighten us … Perhaps the Germans are celebrating the prospect of stealing away some of the Swiss’s gigantic external surplus and further boost their own. They may want to think about the Swiss example a little more carefully before it’s too late.


One Response to “Now that the QE Dream Has Come True, What Next?”

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  1. Comment by LucasSeptember 14, 2015 at 9:02 am   Reply

    think that you are missing the point that Matt Yglesias is trnyig to make. The question is whether the institutions of the European Union must operate as politically neutral institutions, respecting the democratically arrived at choices of the member countries or whether the leaders of those institutions may deploy the power of those institutions to impose their personal political preferences. The fact that Mario Draghi has used the power of his office to demand that the democratically elected governments of the PIGGS submit to his political will should be profoundly disturbing to anybody who values democracy.What’s more, the reason you are so untroubled is apparently because you think that the policies Draghi is forcing the PIGGS to adopt are good ideas. But that’s why I made my suggestion about appointing Me9lenchon as head of the ECB and it’s why you shouldn’t ignore it. How would you feel about a power grab by Me9lenchon? From your comment, I suspect the result would be far more to my tastes than yours. Which is my point: If you care about democracy than you should be opposed to the appointed, independent head of the ECB overriding the choices of governments elected by the people. The point isn’t whether a particular action by the ECB is a good idea or not but rather whether it’s antidemocratic to give somebody like Mario Draghi such a far ranging veto power over the affairs of a member state of what is supposed to be a union of democracies. In short, are the heads of institutions like the ECB the servants of the people or their masters? Do the people rule or do the technocrats? I say that when Mario Draghi demands submission to his personal political agenda as the price of having a properly functioning central bank, then he is indeed a tyrant and the EU is no more a democracy than is Iran.

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