It seems largely to have escaped the notice of the media in the comfortable Hobbitland of New Zealand, but on the 22nd January two noteworthy external events occurred: one an earthquake that should have shocked the continent of Europe and the other, a slight tremor that should have been felt in the USA and serve as a warning that the future might not conform to its widely held expectations. Out of concern for those readers, who might be even less economically literate than myself and might find just this first tranche, a sufficient trial of patience, I will save the second event for a later blog.
Here is how the UK’s Daily Telegraph reported the first momentous event https://www.telegraph.co.uk/finance/economics/11362087/ECBs-quantitative-easing-programme-launched-by-Mario-Draghi.html
In a nutshell, to increase liquidity in the cash-strapped Eurozone, the European Central Bank (ECB) has embarked on a better-late-than-never, programme of quantitative easing (QE.) QE is the mechanism whereby the central bank restores confidence to a flagging economy by buying bad and dodgy debts from banks and replacing it with fresh liquidity guaranteed by the state. Needless to say, QE provides a wonderful ‘get out of jail free’ card for incompetent bankers. At least in theory, the banks should use their new found liquidity to lend out to cash-strapped businesses to help get the economy moving again. (In effect, QE relieves the banks of their private debt and shares it out in the shape of increased sovereign debt onto the shoulders of all tax-payers.)
It is anticipated that within a couple of years, the Eurozone’s new programmes of QE will inject into the economies of the countries participating in what used to be a ‘monetary union,’ something in excess of an additional one trillion Euros.
The original concept behind the Eurozone was that the countries within it would gradually merge their economies into a super-state with a unified economy. The original vision has since receded ever further into the distance. The key to the problem is the differing economic performance of the Northern European members and that of their Southern neighbours. In particular, Germany, a power-house of diligent work ethics, with reliance for its prosperity on the export of around 50% of its industrial production, feels aggrieved that countries such as Greece, Portugal, Spain and Italy appear to have a decidedly less pronounced work ethic. Nevertheless, they seem to expect to be able to draw on (bludge on) the same shared economy to provide a similar standard of living. Germany’s leaders are constrained by what their tax-paying electorate will accept in terms of allowing their hard-earned taxes to be used to bail out what they see as feckless Southerners.
While the USA escaped from the recession-induced financial doldrums thanks to the Fed’s long-standing campaign of quantitative easing, by which it bought dubious debt in return for a massive (and inevitably inflationary) government-approved print-run of Greenbacks, the Germans, as by far the strongest economy in the Eurozone, and historically allergic to all inflationary risk, have long refused to allow any such profligacy on the part of the ECB. Now, they have finally succumbed to the clamour of the other hard-pressed members of the Eurozone.
However, the devil is in the detail and it is what lies therein that makes this event truly momentous. At German insistence, the ECB is only exposing itself to one fifth of the risk involved in buying dubious debt. In effect, its risk is limited to about E200 billion, with the central banks of the other, individual, Eurozone countries taking on four fifths of the risk involved. If the debts turn bad on them, it is their national economies that will take the hit, without being underwritten by the strength of the German economy.
What has happened is that the Germans have insisted on a bargain, whereby the monetary union has, in effect, been abandoned. If all Eurozone economies will no longer rise of fall together on the same tide, what is the point of submitting to the disciplines that membership imposes on individual countries?
Ever since Robert Shuman proposed the European Coal and Steel Community in 1950, with the declared aim to “make war not only unthinkable but materially impossible,” the German leadership has tied its future to that of European unity and the search for a permanent solution to the history of intra-European conflicts. In doing so, though the full might of Germany’s future manufacturing prowess were yet to become apparent, Germany set in train the building of an EU structure that would see it as the central economy on which the European Union was based. The Union was reliant for its success on a trading agreement that allowed Germany to sell into the lesser economies, which were bound to it, but were unable to protect themselves with any form of tariff barrier. German exports boomed as its economy became increasingly dependent on its captive market. In return, the captive market, particularly in the less geographically favoured south, became increasingly starved of capital and unable to develop their own economies. Something had to give.
The present German leadership must be aware of the potential consequences of its insistence that the pursuit of a unitary monetary policy be abandoned. One of the consequences is already taking shape in the most troubled of the southern economies, Greece. It may not be long before Greece, and then other EU economies, will be forced to erect trade barriers (they are already erecting barriers to the free flow of labour.) Should this happen, the enormous economic (as opposed to political) advantage that membership of the Union offered to Germany, will be lost.
No doubt the current developments have been foreseen by economists long before the recent imposition of sanctions on Russia. Even economic illiterates, such as myself, can see that as the Ukraine crisis has unfolded, with economic sanctions being imposed both ways and an enormous flight of European capital to the remote safety of the USA, the Eurozone’s QE was inevitable. For the Germans, it must now have become obvious that the EU’s seemingly mindless expansion and the ever increasing dead weight of its bureaucracy, has turned the European search for a harmonious unity into an unrealistic pipe-dream.
Already disillusioned by the USA’s blatant and aggressive surveillance of German government agencies, including Angela Merkel’s private life, recent events in the Ukraine have demonstrated to the German leadership (and its industrial elites) that the USA’s dominance over NATO and the EU’s financial structure was being manipulated entirely to Washington and Wall Street’s advantage. American advantage has come at the expense of extreme disadvantage to Continental Europe and the German economy.
It would appear that Berlin might now be coming round to a vision of a more workable and more prosperous alternative future: of a new Hanseatic League stretching from Shanghai to Gibraltar – with Berlin the crucial node at the Western end. This is a vision already grasped and lobbied for by key German industrialists. It is likely that their views will gradually infect the political elite.