Without the aid of the European Central Bank, the eurozone would have broken apart long ago. Under the management of its president, Mario Draghi, the ECB stabilized European financial markets in 2012 with the courageous step of announcing unlimited purchases of government securities if necessary to save Europe’s single currency.
The measure, which was taken against the vigorous opposition of Germans on the central bank’s board and their subsequent resignations, has led to a distinct reduction of risk premiums for bonds issued by European crisis countries. Some of the countries have been able to step out of the protective umbrella and borrow money on the capital markets on their own.
Even if this success is now largely indisputable, the eurozone is basically making no headway toward real recovery, unlike the United States. Six years after the financial crisis’ start and four years since the beginning of the euro zone’s crisis, growth remains anemic despite Germany’s upsurge, and the unemployment rate remains at an unacceptably high level.
This stubborn weakness is having an undesired consequence: the inflation rate is moving toward deflation. In periods of stagnating prospects for sales, companies can’t raise prices. The ECB is alarmed, and rightly so. Danger exist of a Japanese scenario: declining prices and years of stagnation.
If the economy of the eurozone is once again to thrive upon a solid foundation, monetary policy must receive fiscal-political support, for example through an investment program.
Financial policy endeavors assiduously by means of new measures to stimulate economic circulation and prevent deflation. Prime interest rates are close to zero, parking money at the ECB is subject to penalty interest, and unlimited liquidity is made available to banks insofar as they lend money to companies.
All this is well-meant but futile. The only thing the central bank is accomplishing is inducing euphoria in financial markets. The abundant flow of money leads to rising stock prices that distance themselves ever further, at least in Europe, from fundamental economic reality. It’s the rich topsoil on which speculative bubbles flourish. Viewed against this background, no way exists to avoid seeing that financial policy has exhausted its possibilities.
If the economy of the eurozone is once again to thrive upon a solid foundation, monetary policy must receive fiscal-political support, for example through an investment program. Only in this way can increased demand be achieved throughout the euro zone; as a consequence, the demand for liquidity will also be invigorated. Then monetary stimulus will finally cease running on idle and, through extremely favorable terms for financing, will contribute to an acceleration in growth.
In addition, this would represent a chance for the financial markets to attain a stable footing. If the ECB were to announce a gradual end to the generous provision of money because of an improved economic situation, it would in addition put investors under time pressure to invest quickly. This could be the beginning of a self-sustaining economic upsurge in Europe.
Gustav Horn is director of research at the Macroeconomic Policy Institute at the Hans Böckler Foundation in Düsseldorf, Germany. He can be reached at: firstname.lastname@example.org