The ECB’s last big mistake (1/2)



Central banks would hold THE truth – even if their strategy is to accumulate bubbles and imbalances for policies that do not improve the situation, quite the contrary. One of the big mistakes economists make is to greet central bank announcements as if they were the revealed truth. It is surprising and concerning that it is now considered obligatory to stand up for every decision of central banks – in public anyway. In private, many colleagues shake their heads in amazement at the accumulation of bubbles and imbalances. And, as in many other cases, the lack of constructive criticism leads to the complacency of institutions and a chain of errors that all citizens will end up deploring. Support the status quo Monetary policy in Europe has changed. While it was initially a tool to help states undertake structural reforms, it has become an excuse not to implement them. The uninterrupted financing of the fiscal deficits of countries which maintain structural imbalances has not helped to strengthen growth. Thus, the Eurozone was already suffering from a reduction in its GDP growth estimates even before the Covid-19 crisis. This gives credibility to the populist speeches of the extreme left which defend a policy of massive monetary creation and Modern Monetary Theory (MMT), threatening progress and growth in the Eurozone. We cannot fight the populists by giving them credibility, and the medium and long term impact of this misguided policy on the euro zone will undoubtedly be deleterious. Today, many far-left European politicians tell their fellow citizens that structural reforms and fiscal prudence were carried out by evil politicians guided by malicious intentions. The measures put in place by central banks amount to giving credibility to their speech according to which there would be unlimited money available for all possible and imaginable projects. It is surprising to hear some serious economists at the European Central Bank or the Federal Reserve say that they do not understand how the idea that one could safely print more and more money endlessly can spread throughout the political debate, when it is the central banks themselves which are at the origin of this illusory feeling of security. The central bank may be able to hide the risks for a while, but it cannot eliminate them. The negative interest rate problem Greece, Cyprus, Lithuania, Slovakia, Spain, Portugal and Slovenia are already borrowing at negative real interest rates. However, negative rates are not necessarily a sign of confidence in the policies pursued by these governments. Rather, it is an aberration resulting from the current monetary policy which has the effect of camouflaging the risks – but sooner or later they will come to light. When politicians claim that negative interest rates reflect the confidence of the markets in their countries, that is a complete lie. The ECB is poised to hold nearly 70% of outstanding sovereign debt in the Eurozone and is buying all of the net sovereign debt issues, according to Pictet Bank and the Financial Times. There is simply no longer a market. Maintaining this transitional confidence in the ability of the ECB to hide risks depends on the euro zone’s ability to increase its trade surpluses and market output, but above all on Germany’s willingness to continue financing it. It will not be eternal; it is not without limits and it is certainly not without risks. A decade of abundant liquidity Many readers will tell us that this is an exceptional policy to face the Covid-19 crisis which requires emergency measures. There is only one problem with this argument: it is false. The ECB’s monetary policy has been ultra-expansionary for more than ten years, both in times of crisis, recovery, growth and stabilization. Interest rates were gradually pushed into negative territory and asset buyback programs were maintained during periods of growth and financial stability when there was no risk of a liquidity shortage in the market. economy. In fact, the European Central Bank has become the hostage of states which do not wish to reduce their structural imbalances and which on the contrary seek to maintain them, given that the cost of debt is low and the ECB “supports” them. The ECB should be concerned that the most radical political parties, often in line with the economic policies pursued in Argentina and Venezuela, such as Podemos and Syriza, for example, applaud this monetary madness in which they see a validation of their theories . It is no coincidence that the reform movement within the Eurozone has come to an abrupt halt since 2014. It coincides exactly with the massive injections of liquidity. Structural reforms and fiscal prudence are seen as harmful policies. Low interest rates and liquidity injections have never created an incentive to reduce imbalances, on the contrary, it is a clear incentive to increase debt. The major problem here is obvious, as we will see tomorrow. For more information and advice like this, it’s here and it’s free

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