Back in July, Germany’s economic “wise men” took a look [14] at bailout “success” and “failures” and came to a rather disconcerting conclusion. Here’s what the Council of Economic Experts said in their report:
A permanently uncooperative member state should not be able to threaten the existence of the euro. In view of this, the Council of Economic Experts recommends that the withdrawal of a member state from the currency union must be possible as an utterly last resort.
Yes, “a permanently uncooperative member”, and by “uncooperative” they of course meant states which do not subscribe to the German brand of fiscal rectitude and who may seeking to rollback previously agreed upon austerity measures. To be sure, there’s a whole to be said for honoring one’s commitments, especially when those commitments came with billions in loans attached to them, but the report served to underscore the extent to which Berlin effectively controls the eurozone by wielding the purse string.
Anyway, one thing we know about Germany is that officials have a low tolerance for anything that even looks like irresponsible fiscal policy or other types of shenanigans that could, in the end, create crises which is why no one was surprised to see Wolfgang Schaeuble give a number speeches [15] over the past several months in which in incorrigible finance minister derided money printing and ZIRP.
Well don’t look now, but the same Council of Economic Experts is out with their latest annual report and they are not happy with ECB QE and contend that the further expansion of the central bank’s balance sheet could risk sparking a new financial crisis. Here’s more:
Another important debate centres on the current low interest rate environment in the euro area. In January 2015, the European Central Bank (ECB) further eased its already very accommodating monetary policy by introducing a new sovereign bond-buying programme. Recently, it put forth the possibility of further easing. Core inflation has, however, stood near 1 % for months, and has recently risen slightly. Simple interest rate rules, such as the Taylor Rule or a rule that explains past ECB interest rate decisions quite well, suggest that monetary policy should be tightened given the current economic outlook.
While the risk of deflation is currently low, there are risks for the development of the economy in the longer term. The ECB’s bond buying programme has created favourable financing conditions and provides member states with an incentive to defer much-needed budget consolidation and structural reforms. However, further structural reforms to strengthen markets and competitiveness are crucial for a self-sustaining economic recovery.
In addition, monetary policy is leading to a build-up of risks to financial stability which could pave the way for a new financial crisis.
Persistently low interest rates erode the earnings of banks and life insurance companies, and raise the appetite for taking risks. Although there are so far no signs of excessive credit expansion, some sectors, like real estate, are showing some signs of exaggerated prices.
Macroprudential policy alone cannot guarantee the stability of the financial system. It is important to avoid delaying an exit from the low interest rate environment for too long. A timely end to monetary policy accommodation could effectively prevent the further build-up of risks in the financial system.
Considering current economic developments and balancing deflation risks against the risks to longer-term economic developments and financial stability suggest that the ECB should slow down the expansion of its balance sheet, or even end it earlier than announced.
Apparently nobody asked Peter Bofinger for whom "cash in an anachronism [16]."
So, contrary to what the ECB said in minutes from its April policy meeting, intentionally driving down borrowing costs for fiscally irresponsible member states isn't at all compatible with budget reform and indeed, suggest that was outright absurd in the first place. Recall what we said:
This of course highlights something rather absurd about the ECB’s asset purchase program specifically, and about Brussels’ stance on fiscal discipline more generally. Namely, there’s something quite contradictory about telling governments to tighten their belts while promising to buy any and every piece of paper their treasury departments care to issue. In fact, it’s probably fair to say that a €1.1 trillion QE program simply cannot peacefully coexist with a strict, currency bloc-wide austerity policy.
And of course now, Draghi is set to double down in December with either an expansion of PSPP, another depo cut, or both.
Also, it's worth noting that if the wisemen think the current program is embedding an enormous amount of risk, just wait until the ECB starts monetizing muni bonds, corporate bonds, and stocks.
Finally, while we agree with the Council's take on PSPP, we'd be remiss given recent political events in the periphery if we didn't remind you of the following quote from their July "special report":
"Firstly, the crisis response averted a systemic crisis and thus maintained the cohesion of Monetary Union. Secondly, the time was used to implement reforms to make Monetary Union more resilient against economic crises. Thirdly, the economic situation in Ireland, Portugal, and Spain has improved markedly."
Tell that to Portugal's Costa and the new government in Lisbon [17].
