I’ve been worried for quite some time that the European Central Bank was losing its independence, thus undermining the long-run prospects of the euro.
Well, yesterday’s announcement that the ECB would buy the dodgy debt of nations such as Spain didn’t make me feel any better.
Central banks should not be bullied into creating too much money simply because politicians are too corrupt, venal, and short-sighted to control spending.
Here is some of what Allister Heath of City A.M. wrote earlier today. He begins with a wise warning about moral hazard.
There is nothing markets love more than a good dose of monetary activism, especially when they detect a hidden bailout, so it is no wonder that traders and investors reacted so positively to Mario Draghi’s bond buying plan. …Yet generally speaking these days, the more the markets like a central bank intervention, the more I worry. This is because all too often investors are trying to get central banks – and ultimately, the taxpayer – to monetise debt to protect themselves, or because they believe that there are monetary solutions to real, structural problems. I disagree on both counts: excessive debt needs to be written off, with the cost born by the creditors, not redistributed to the taxpayers of more prudent countries or inflated away. It is right that investors should be able to make a fortune if they make a correct bet – but it is equally right that they should lose their shirt when their investment goes sour. This habit of quietly enjoying the former but loudly refusing the latter is one of the main reasons why the City’s reputation is at such a low ebb.
He then explains that the ECB shouldn’t try to mask reality.
…there is a perfectly good reason why the yields of peripheral Eurozone nations have shot up over the past year. It is because the markets have finally started to price risk properly. Higher yields on Spanish or Greek debt reflect the reality of deeply troubled, structurally uncompetitive nations… The market is sending a clear and precise signal, and warning the world that there is a major problem that needs resolution; buying vast amounts of bonds to try and distort or even entirely eliminate that signal and pretend that nothing is wrong with Europe’s weaker economies would be an absurd act of delusion.
I’m not as optimistic as Allister is in this next section, largely because the supposed conditionality will lead to the kind of fiscal gimmicks and moving goal posts that we see in Greece.
…while there are many problems with Draghi’s plans, he is actually being relatively sensible. He will not help Portugal, Ireland and Greece until they are able to access bond markets; even more importantly, Spain and Italy will need to ask for European bailout fund support, and accept the ensuing conditionality, before ECB bond-buying starts. It will theoretically be unlimited in scale but Draghi only wants to “do whatever it takes” as long as politicians toe the line. Given that they won’t, and that many countries will soon be borrowing even more, the crisis will soon flare up again. The simple reality is that the Eurozone in its current form is doomed. Draghi’s plan will buy some time, and his next one even more, as will the one after that. But eventually the size of the fiscal and competitiveness crisis, combined with voter anger in both Northern and Southern countries, will overwhelm all of his attempts at papering over the cracks. It’s just a matter of time.
But I obviously agree with his conclusion. Unless European politicians decide to reduce the burden of government spending, the continent is in deep trouble.
Last but not least, the problem in Europe is not the euro. It is the welfare state. I’m not a huge fan of the single currency, but it is way down on my list of reasons that nations such as Spain, Italy, and Greece are in trouble.
P.S. America will be in the same boat at some point in the future if we don’t reform entitlements.
P.P.S. Allister is the author of this great article explaining why tax competition and tax havens are so important and valuable in the global economy.
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It’s not risky. It’s just plain old redistribution…
The bureaucrats of the central bank, no matter how numerous, are still too few to create real wealth. People create wealth if the natural incentives of benefiting directly from their creations are not blunted, and if the consequences of retreating to mediocrity are equally also not blunted
The Central Bank can only redistribute wealth and that is exactly what it’s doing. It is almost like the principle of conservation of energy applied to economics. So the ECB is only buying time, only to hasten Europe’s systemic and unified decline.
But if not already evident after three decades of sub-par growth, Europe’s decline is inevitable. Gone are the days when three billion people were squashed moribound under even grander aspirations of mandatory collectivism. Those three billion people have now partially awakened, keep further awakening, and are actively competing with the west. Almighty have mercy on Europe and the west should they awaken completely, especially when desperate westerners seem to be resorting to the very mandatory collectivism being rejected by the emerging world. Double suicide. That is the general geopolitical stage upon which all these little milestones of European (and American) decline unfold. Apparently Westerners are on the irreversible course to try to enjoy a few more years of welfare denial, creating an ever fairer society by taking from a declining pool of most productive to insulate an ever more numerous pool of less productive from the consequences of mediocrity — transfer all to the next generation, and hope decline never happens.
Alas, decline and the scary chapters of the gospel of mandatory collectivism are closer than a full generation away…
There is blind faith in Europe, amongst the population, that unification and harmonization, thus the elimination of legislative and economic policy competition, plus an additional layer of redistribution from the barely surviving to the sinking, is a recipe for prosperity. The entire idea is suicidal at its core but Europeans who have grown in mandatory collectivism — where politicians have for decades touted that surrendering command to superbureaucracies is the path to prosperity –have an almost religious belief that the elimination of governmental competition will somehow bring prosperity and somehow allow Europe to do things similar to the US, where people squander 4% of GDP providing worldwide police services — as if the welfare states of Europe can muster another 4% of their productivity to support a Euro-military.
What a sore counter example the internally and intentionally divided prosperous Switzerland must be to europe’s statists.
“Saving Europe” is becoming synonymous to “Saving the Soviet Union”. Cultural diversity and an active example of decline are the only reasons I see for wanting to save European unification. The citizens of the welfare states of Europe are already too burdened by redistribution — and thus already riding sub-par growth trendlines to worldwide mediocrity. These citizens cannot withstand another yet additional layer of redistribution, from barely surviving country to sinking country. These final acts of redistribution will further accelerate the already precipitous decline of Europe in the last four decades. Looks like the foundations for the final pan-European decline are now being pompously set — like many times before in Europe. It is the same scenario of mandatory collectivism once again. Except that the devil never comes dressed in the same clothes, otherwise you’d recognize him.
In the past, it took immense death and destruction for Europeans to finally withdraw from their dreams turned nightmares of mandatory collectivism. So, obviously, the current levels of pain are not enough for Europeans to reverse course on their latest collectivist aspiration of more unification, harmonization, homogenization, and bureaucratization: the project of European unification and the elimination of competition in governance.
It is too late for the US to reverse course and avoid the same fate. The lesson now unfolding in Europe is coming too late and it is in Obama’s best interest to postpone and hide as much as possible what the next chapters in the book of HopNChange are. Decline now has a life of its own in the US too. Even if Romney gets elected, he’ll be unable to reverse even 10% of the Bush-Obama policies and decline will continue, thus paving the way for another desperate round of HopNChange.
I’ve seen this movie before, unfolding almost independently in virtually every European welfare state, even before the time when the idea of European unification became a vehicle for imposing common destiny. Foolish Americans will watch the same movie all by themselves..
Not to worry, none of that will happen. Have Hope in Change. Hope that changing and becoming like the rest of the world will enable you to keep your exceptional prosperity. Keep hoping… It’ll all work out in the end.
The situation in Spain is becoming dire, with some unemployed resorting to foraging in the hills for food. I can not understand how this ends.
Great post! You saved me writing it. Also agree on your comment on the welfare state as the true cause of the troubles. I wrote about this in my post “Europe – staring into the abyss” 0n August 23rd.