ECB: Germany Wins, Europe Loses

Readers know that I had expected the Bundesbank to throw some bones to Draghi so that he could save face at today’s ECB board meeting. As far as I can tell, they gave him almost nothing. I had thought that he would be allowed to cut the overnight rate, offer a new low-cost bank loan program, and engage in bond-buying for “monetary reasons”.

What they allowed him to say was that, if and when countries conclude austerity agreements with the Troika, then the ECB would be willing to buy government bonds in the secondary market in order to bring yields down. This is almost nothing. What Europe must have now is (1) massive quantitative easing in order to create inflation and grow nominal GDP; and (2) unconditional purchases of Spanish and Italian bonds until their yields are driven down to affordable levels. No more conditions, no more austerity. (That can be addressed after the crisis has been defused.)

Clearly, the Bundesbank drafted the ECB’s press release. It prescribes a full-fledged examination by the Troika in classic IMF style, imposition of a Troika-designed austerity plan that would not only cut budgets and raise taxes, but also labor market and other structural reforms. As we have seen elsewhere, such programs are highly detailed and require a complete loss of sovereignty, something that both Spain and Italy have strongly resisted.

Instead of rescue by ECB printing press, Germany continues to offer rescue by draconian thrift, which the Italian and Spanish political systems are incapable of delivering. Neither country has any hope of being able to perform surgery on itself in the way that the Northern countries have done in the past. The German plan is based on the fallacy that after you have strangled the patient and destroyed his political system, he will be able to easily re-enter the debt markets at low yields. Markets just don’t work that way. These countries will be basket cases for years after the Troika is through with them.

There is only one way left to rescue the eurozone, and that is reflation, strong nominal GDP growth, and “fiscal monetization”. Only the ECB can deliver these goods. This will require the formation of a majority on the governing council to outvote the Germans and their Northern allies. Draghi is now irrelevant, having shown that he cannot bring the Germans around to his point of view. He represents no one.

Now the South must begin the process of (1) forming a pro-inflation bloc; and (2) wooing countries on the fence to turn their backs on Germany and vote with the bloc. Looking at the make-up of the governing council, it appears to me that a majority could be gathered for the anti-German position, as few countries stand to benefit from the failed German plan.

The World’s Opinion Page

Help support Project Syndicate’s mission

subscribe now

Once it is clear that the Northern bloc is going to lose, the Northern countries will have the opportunity to accept the outcome or exit the eurozone. I don’t think that any of them will exit (other than Finland), but if they do it will simplify things. The man in the middle is, of course, Hollande. If he is smart, he will join Club Med and escape from Merkel’s embrace. He has certainly sent signals along those lines.

The alternative to ECB rescue is chaos, default, and disorderly breakup.;
  1. Television sets showing a news report on Xi Jinping's speech Anthony Wallace/Getty Images

    Empowering China’s New Miracle Workers

    China’s success in the next five years will depend largely on how well the government manages the tensions underlying its complex agenda. In particular, China’s leaders will need to balance a muscular Communist Party, setting standards and protecting the public interest, with an empowered market, driving the economy into the future.

  2. United States Supreme Court Hisham Ibrahim/Getty Images

    The Sovereignty that Really Matters

    The preference of some countries to isolate themselves within their borders is anachronistic and self-defeating, but it would be a serious mistake for others, fearing contagion, to respond by imposing strict isolation. Even in states that have succumbed to reductionist discourses, much of the population has not.

  3.  The price of Euro and US dollars Daniel Leal Olivas/Getty Images

    Resurrecting Creditor Adjustment

    When the Bretton Woods Agreement was hashed out in 1944, it was agreed that countries with current-account deficits should be able to limit temporarily purchases of goods from countries running surpluses. In the ensuing 73 years, the so-called "scarce-currency clause" has been largely forgotten; but it may be time to bring it back.

  4. Leaders of the Russian Revolution in Red Square Keystone France/Getty Images

    Trump’s Republican Collaborators

    Republican leaders have a choice: they can either continue to collaborate with President Donald Trump, thereby courting disaster, or they can renounce him, finally putting their country’s democracy ahead of loyalty to their party tribe. They are hardly the first politicians to face such a decision.

  5. Angela Merkel, Theresa May and Emmanuel Macron John Thys/Getty Images

    How Money Could Unblock the Brexit Talks

    With talks on the UK's withdrawal from the EU stalled, negotiators should shift to the temporary “transition” Prime Minister Theresa May officially requested last month. Above all, the negotiators should focus immediately on the British budget contributions that will be required to make an orderly transition possible.

  6. Ksenia Sobchak Mladlen Antonov/Getty Images

    Is Vladimir Putin Losing His Grip?

    In recent decades, as President Vladimir Putin has entrenched his authority, Russia has seemed to be moving backward socially and economically. But while the Kremlin knows that it must reverse this trajectory, genuine reform would be incompatible with the kleptocratic character of Putin’s regime.

  7. Right-wing parties hold conference Thomas Lohnes/Getty Images

    Rage Against the Elites

    • With the advantage of hindsight, four recent books bring to bear diverse perspectives on the West’s current populist moment. 
    • Taken together, they help us to understand what that moment is and how it arrived, while reminding us that history is contingent, not inevitable

    Global Bookmark

    Distinguished thinkers review the world’s most important new books on politics, economics, and international affairs.

  8. Treasury Secretary Steven Mnuchin Bill Clark/Getty Images

    Don’t Bank on Bankruptcy for Banks

    As a part of their efforts to roll back the 2010 Dodd-Frank Act, congressional Republicans have approved a measure that would have courts, rather than regulators, oversee megabank bankruptcies. It is now up to the Trump administration to decide if it wants to set the stage for a repeat of the Lehman Brothers collapse in 2008.