THE ECB’S MONETARY PROTESTANTISM
One of the cruxes of the Euro crisis is related to the mandate of the European Central Bank (ECB)
The latter, declared independent from government authorities, inexorably proceeds with its inflation control mandate, the tolerance threshold of which has been fixed at 2%. The pulley that the ECB uses to control inflation rates are its intervention rates, the modifications of which are reflected in interest rate structures of the whole economy.
The ECB mandate differs singularly from the one of the American Federal Reserve (FED) that pilots, in a more interventionist and simultaneous way, price levels and economic activity, the latter itself being reflected in unemployment rates. Political economically, the FED is a more active tool than the ECB.
Why then such a mandate difference between two comparable establishments?
The reason is essentially Germany’s fear (undoubtedly justified) to see its Deutsche Mark, transformed in the Euro, being subjected to successive devaluations by regularly calling upon the ECB. The latter should have regularly increased monetary mass to respond to the budgetary and commercial deficits of the Eurozone’s weakest partners.
However, apart from this German political demand, there is something else: the Germans believe public debts need to be financed by savings that have to maintain their purchasing power themselves. On the contrary, The United States consider that public debts can be paid with monetary creation.
This opposition reflects antagonism between Germany’s Lutheranism and America’s Monetary Paganism. The German currency is hoarded, while the dollar is nothing but transactional. Since the inflation of the Weimar Republic (1923) and the confiscation of 94% of their belongings during the replacement of the Reichsmark by the German Mark in 1948, the Germans demand a strong, deflated and disciplined currency. Contrarily, the Americans feel that monetary value is nothing but a secondary factor to create employment. Across the Atlantic, money printing is thus more operational and less sacred. Moreover, compared to the euro, the dollar depreciated by 100% between the end of 2000 and mid-2009.
Nevertheless, the ECB today faces serious challenges. Is it acceptable that the ECB confines itself to fighting against inflation while European economy has fallen into recession and the weak states, that are imposed mortal austerity, no longer succeed in financing themselves under tenable conditions? Why isn’t it decided that the ECB serves to finance the beginning of growth (we talk of reflation or re-inflation), following the example of the United States, that are reindustrialising their economy and monetising their public debt? These interrogatives come with numerous questions.
The first question refers to the independence of the ECB. This autonomy is so anchored in the euro postulate that it is considered inviolable. Yet, ever since four years, porosity between the European leaders and the ECB has completely altered this fake independence. Moreover,
deceit nearly shows when the president of the ECB calls into question the European social modal. At the most, this independence should be considered as an imprecise democratic state, knowing that after each crisis, central banks are normally placed under state control. The ECB’s dependence should thus be specified in a transparent way, rather than letting it evolve in opportunist decision-making zones.
A second, considerably more important question, should be asked about public debt level and ECB role compatibility. In the absence of growth, it has become impossible to reimburse public debts with a currency that maintains its purchasing power. This reality is independent from the existence of the euro, but the single currency reinforces this antagonism for it is common to increasingly more divergent economies.
Bound through a single currency, the weak European countries cannot longer depreciate their currency, whereas devaluation is a healthy adjustment factor. Consequently, the only thing that is left is austerity and rigour that are “internal” devaluations, i.e. purchasing power reducers. Yet, these internal devaluations are killed in economies centred on internal consumption, for the latter contracts, worsening the infernal public debt spiral.
This underlines inadequateness between public debt levels and the ECB’s mandate. The latter should be authorised, even forced, to directly refinance the States, helping the latter to commit themselves to recover an acceptable budgetary trajectory. Yet, this refinancing is prohibited by the ECB’s Statute. This is a fatal error that the history of the next twenty years will judge very strongly.
Some will set forth that the ECB’s balance sheet is already inflated for absorbing public debt refinancing. This is not incorrect, but there is a snare: the BCE’s two last refinancing operations (LTRO) consisted in lending the banks 1.000 billion euros. Part of this money came back to the ECB immediately under the form of deposits, whereas another part was used by the Italian and Spanish banks to buy the public debts of their countries back, confronting the German postulate with the fact that national savings have to finance national debts. This orientation diminishes the Eurozone’s systematic risk (for public debt retention re-migrates towards its country of origin and interferes less in the European banking system) but worsens the fragility of each country individually.
Ultimately, there is the credibility issue of the European project. The euro remains a homogenous currency, but for how long?
For foreign investors, interest rates already separate what is called an extended “Euro-Deutsche Mark” zone and the peripheral countries that are slowly drifting towards a return to national currencies. The fact that the ECB does no proceed with massively refinancing these peripheral economies, implies that it has also chosen to crack the euro. But the whole truth should be seen! It is important to prepare this fragmentation rather than hoping to discipline weak economies using austerity plans that will turn out to be useless and socially destabilising.
The biggest error in economy is to tie you in a postulate and to believe that monetary organisations are irreversible. They never are: history is swarmed with lapsed currencies. The euro has all but become unnatural to economic reality. One thing is certain: a currency never domesticates a community for we cannot impose an inadequate monetary standard to a population that refutes it. This is exactly was is happening in the peripheral economies. It’s this reality that the ECB needs to be confronted with, for its democratic legitimacy has become questionable.
