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Monday, 2 February 2015

Mario Draghi's quantitative easing program ‘Euro-style’ is nothing more than a complaint against the European politicians for kicking the can down the road. Unfortunately, its effects for the real economy will be close to nought

It was the talk of the town last month: the (presumed) start of a large Quantitative Easing program in Europe.

The question was not so much whether chairman Mario Draghi of the European Central Bank would indeed start such a QE program. It was rather how large it would be and if it would make a lasting impression on the financial markets after all, although the markets already had priced such a seemingly inevitable event.

Well, Supermario did not disappoint and pulled a bazooka of epic proportions from his sleeve: a sovereign and bank bond purchase program, sized at a staggering amount of €60 billion per month and with a forecasted maximum size of €1260 billion. That is, when the program will end as scheduled in September, 2016.

On top of that, the program would become open-ended, when its goals would not have been fulfilled at the planned maturity date in September next year.

Northern Europe was flabbergasted, to put it mildly.

President of De Nederlandsche Bank (DNB) Klaas Knot and Bundesbank-president Jens Weidmann immediately ran forward to the microphone, in order to create their own Shaggy moment by openly stating in the press: “It wasn’t me! I have voted against this!”

Many Northern European politicians – especially the ones from ‘the usual suspects’ Germany, The Netherlands and Finland – almost choked in their coffee and tea, after they heard the news. They were immediately ready to give their opinions about this scandalous QE program:

"The European QE program is a disgrace for the hardworking Northern Europeans. The European Central Bank is squandering our hard-earnt money upon the Southern European countries and France, as these countries are not able to balance their budgets and structurally reform their backwarded economies.

And now the Northern European countries must suffer for the mistakes and stupidity of these Southern European countries." 

Well, you get the picture...

The painful conclusion is, unfortunately, that it would be much more quiet when people and media would enquire thorougly, exactly WHICH measures these northern Euro-zone politicians took THEMSELVES, in order to fight the crisis in the Euro-zone: not only during the past months, but even during the past five years. 

That is the underlying problem and perhaps the real reason for the deployment of QE1 in the Euro-zone: politicians sitting on their hands, while frantically defending the current, non-effective policy. Much more than forcing additional austerity measures upon Southern Europe, while propagating balance and debt stability in the spirit of the Stability and Growth pact, has not been done.

Yes, there are some cautious signals of slowly returning growth in Spain and even the situation in Greece has become a little bit better, when you just look at the sheer economic data alone.

Food banks are now crowded with people, who were normal middle-class citizens in earlier years and some areas in Athens show the signs of genuine poverty and despair. The worst thing is: Greece is not a country in the Third World, but in arguably the strongest and largest economic block in the world.

Instead of being just a (poorly effective) means for improving the economies in the Southern European countries, the concepts austerity, budget balancing, debt slashing and structural reforms have seemingly turned into the main purpose of the Euro-zone approach towards the economy. Not only in the southern countries (aka the PIIGS), but also in France and the northern countries, who have their own issues with their anemic economies.

If austerity, debt slashing and structural reforms did not help the economies in the Euro-zone yet, it was because there had not been enough austerity, debt slashing and structural reforms, in the eyes of the Euro-zone politicians and pundits. Consequently, it was time to double the efforts!

And that the consumers already raised the white flag in many Euro-zone countries? 

“Well, who cares?! We know we do the right thing there. Austerity, debt-slashing and structural reforms are the only medicine that really works eventually. Angela Merkel told us and she is always right. On top of that, she has the most money and influence in the Euro-zone, hasn’t she?!”

This stubborn denial of both the grim consequences of the blatantly failed austerity policy for the population in the Euro-zone countries and the emerged reality in especially the southern (and northern (!)) Euro-zone countries, is archetypal for the ‘governmental autism’ of the Euro-zone leaders. 

In my opinion, this governmental autism is one of the main drivers for the rise of the populist right-wing and left-wing parties all over Europe. The 'leading' European politicians structurally do not understand a large part of their grassroots anymore. The technocratic and mechanical leadership of the Euro-zone lost touch with their population, as they forgot to supply their citizens with a little hope and tangible prospects upon a better future. 

The simple point is that the European politicians have let their common citizens down. And they have especially let their youth down: the embarrasing youth unemployment rate of 23% in the whole Euro-zone (December 2014) and the fact that it changed by less than 1% during the whole of 2014, proves this beyond a reasonable doubt. 

Spain, Greece, Italy and Croatia with their youth unemployment rates of well over 40% are burning accusations of this governmental autism of the European leaders.

No decisive programs have been started against unemployment and against youth unemployment. Besides that, there has never been a majority within the European Council (read: a majority having a German approval), in favour of measures that will really get the European economies in motion. 

And nowhere the effects of these missing turn-around policies were more devastating than in the southern European countries, where all democracies have a relatively recent past of dictatorship and still endure large societal and political problems as a consequence of their past.

Instead of being given a little bit of hope and prospects by the Euro-zone and the European Union, the common citizens of Greece, Spain, Portugal and Italy have been received with feelings of scorn and disdain from the northern European countries. 

One cannot read one single article about Greece and (also) Italy or the words corruption, tax evasion, embezzlement and clientelism have been etched upon his retina. Especially the people, politicians and pundits in The Netherlands and Germany all know it all too well:

The Greeks and Italians are corrupted scoundrels, their economy is a fleabag and pumping additional money in it, is just as bad as directly throwing it into the fire. Their only option should be to return to the Drachme, while devaluating this currency into oblivion. They should have never been accepted by the Euro-zone in the first place”.

The stubborn attitude of especially Germany, with respect to their refusal to loosen the bridles for the Southern European countries, can – in my humble opinion – be held directly responsible for the extremely sluggish recovery of the European Economy and the substantial societal unrest in many countries, leading to the ubiquitous rise of the populist parties.

It seemed that only one person could do something really dramatic for the European economy, without being interfered by the German political leadership, and thus send a powerful signal to the European Council. 

And so Mario did what  - in his eyes - he had to do: he pulled his bazooka and started the European Quantitative Easing program; probably not because he really thought it would help the European economies, but in order to provoke the European politicians into action themselves.

In an excellent Op-Ed, former CFO Jan van Rutte of the Dutch nationalized bank ABN Amro touched a raw nerve, when he spoke about the sense and nonsense of Quantitative Easing.

With increasing astonishment I followed the recent developments, concerning the ECB measure to buy sovereign and corporate bonds on a large scale: quantitative easing. My astonishment not only applies to the measure itself, but also to the circumstance that the involved advisors and presidents of the national central banks could not block it apparently. 

The measure is aimed at bringing more liquidity into the European economic circulation, spurring inflation, increasing consumer confidence and enhance investments. However, the decision does not solve the core problem. 

The banks in Europe have commonly ample liquidity at their disposal, at this moment. This is especially true in case of the Dutch banks. On top of that, the pension funds and insurers have much liquidity at hand for investments.

Yet, financial institutions are often reluctant with their credit supply, mostly because the outlook for their customers, who are requiring credit, is quite poor. This outlook, and consequently the effective demand, will only improve, when consumer spending increases.

This will not happen by pumping more liquidity into the system, but through enhancing purchase power; for instance through tax measures and by creating room for wage increases. Or by diminishing the unemployment, for instance through infrstructural projects financed by the government and the financial industry. 

Consumers will also dare to invest more, when the uncertainty about new austerity measures diminishes or – in case of The Netherlands – the uncertainty about further declines within the Mortgage Interest Deductability. Obviously, the current problems are playing at the demand side of the economy; not at the supply side as a consequence of missing liquidity.

Of course, Jan van Rutte is absolutely right with the conclusions of his Op-Ed. 

Sponsoring the supply-side, through Quantitative Easing, will not do anything about the obvious problems at the demand side of the economy. Van Rutte points that out very clearly in the red and bold texts of his article. However, that is the very part of the economy for which the European politicians and official are responsible. It lies beyond the grasp of the European Central Bank

Unfortunately, the intrinsical nature of a Quantitative Easing program - buying sovereign bonds and bank bonds from the individual countries with "printed" money from the European Central bank - is not suitable for helping the real economies of Europe into action; hence, the demand side.

The money flow pours into the large European banks and the state budgets of the individual countries, but there the flow will stop abruptly, as Van Rutte already pointed out. 

Countries - especially the ones where the money is needed most by their citizens - will not decrease their direct and indirect taxes, due to the mandatory austerity, budget balancing and debt slashing, as a consequence of the rules in the Stability and Growth Pact and the German emphasis on structural reforms.

The banks will also not lend more money to private citizens and small and medium enterprises, because of the QE money, as the financial and economic circumstances among their borrowers did not change at all. Even when the money is virtually free, banks still hate to lose it upon bad debtors.

Only very large companies and other very large, creditworthy investors will be able to profit from QE, but these parties already had ample investment funds and cash at their disposal, due to the strongly elevated stock rates and the nearly free lending money at the banks. In other words: these parties never experienced liquidity problems in the first place.

And so the situation works out that people and institutions that don't really need money, will receive it in enormous quantities. The private citizens and small companies in Europe on the other hand, that really need to have more disposable money and/or business opportunities - either through stimulation of innovation, infrastructural maintenance and the creation of jobs or through higher disposable income, less taxes and more avalaible loans for the smallest companies - will get none. 

That is the perverse reality of quantitative easing. 

Yet, I had the feeling that Draghi could not act differently, as he probably had to send a powerful signal to the European Council and the European Commission that something had to be done. 

And now that he has done it, I hope it will work as a powerful wake-up call for the European politicians and officials. Still, I am not very optimistic about it.  

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