Tags: eurocrisis, european central bank, federalism, France, keynesianism, monetarism, monetary policy
I am of the opinion that to understand the politics and orientations of the eurozone, one must start from assiduously studying the remarks of the European Central Bank’s president, Mr. Mario Draghi, its vice-president, Mr. Vítor Constâncio and the other members of the institution’s executive board. The reason I postulate thus, is that the ECB reflects and/or shapes the broader ideocentric perception of the eurozone in at least two ways:
- It is the incarnation of the timid, gradual yet radical shift in approach to European integration, from the principle of consensus between member states, to that of ‘enhanced cooperation’, even though during the eurocrisis this evolved or devolved into the dominance of duos and cliques such as that of ‘Merkozy’. The ECB represents a ‘federated’ monetary system, within a broader politico-institutional milieu that is not genuinely federal, but which rather represents a hermaphroditic political entity, in that it contains properties of federalism and confederalism. Heretofore the ECB has lacked an essential feature of central banking, namely macro-prudential responsibilities and powers. With the Single Supervisory Mechanism soon to be infused in its corpus, and with the Single Resolution Mechanism to follow soon after, the ECB will represent, in relative terms, the most complete version of a federal institution in the EU.
- The other reason why the ECB is of cardinal importance to appreciating the politico-economic reality and prospects of the EU/Eurozone pertains to the fact that it is the embodiment of a very precise and specific brand of monetarism, namely the Germanic one. As I noted in my last article on the monetary policy prescriptions of Mr. Jens Weidmann the
the European Central Bank was modeled according to the German Central Bank, the Deutsche Bundesbank, both in its unassailable institutional independence and its relatively limited mandate of not delving into the fiscal front, by focusing exclusively on inflation targeting. It could be claimed that the ECB’s extraordinary measures to hold together the single currency area have been in ‘violation’ of its formalistic monetarist mandate, for it is clear that all three programmes on this account, namely the SMP, LTRO and OMT, had all been concocted to indirectly finance budget deficits; in other words to provide a convenient substitute to fiscal measures. Personally I contest such a position on the grounds that the tenets of monetarism do not really exclude such expansive and aggressive praxis, for in truth this economic ideology is but the keynesian worldview shifted from the fiscal to the monetary front (yes Milton Friedman was a keynesian, a ‘right-wing’ keynesian if you like). In very short, the monetarists are of the view that ‘someone should do something’ on the macroeconomic level, and for them this is the central bank rather than the central government.
For these reasons alone, I always find it pertinent to review any significant ECB activity or publication. The January 10, 2013 press conference of Mr. Mario Draghi is a case in notice. Mr. Draghi appeared quite optimistic about the prospects of the eurozone and while recognizing some of the persisting weaknesses on the financial front, he seems to be of the view that the worst is over. In that respect three are the remarks of his that are particularly useful (all emphasis in the quotes is mine):
The economic weakness in the euro area is expected to extend into 2013. In particular, necessary balance sheet adjustments in financial and non-financial sectors and persistent uncertainty will continue to weigh on economic activity. Later in 2013 economic activity should gradually recover. In particular, our accommodative monetary policy stance, together with significantly improved financial market confidence and reduced fragmentation, should work its way through to the economy, and global demand should strengthen. In order to sustain confidence, it is essential for governments to reduce further both fiscal and structural imbalances and to proceed with financial sector restructuring.
…which is then followed by:
In order to ensure adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential to continue strengthening the resilience of banks where needed. The soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalisation of all funding channels. Decisive steps for establishing an integrated financial framework will help to accomplish this objective. The future single supervisory mechanism (SSM) is one of the main building blocks. It is a crucial move towards re-integrating the banking system.
…and concluded thus:
Other economic policy areas will need to make further contributions to ensure a firm stabilisation of financial markets and an improvement in the outlook for growth. Further structural reforms should be rapidly implemented to make the euro area a more flexible, dynamic and competitive economy. In particular, product market reforms to increase competition and competitiveness are essential, accompanied by measures to improve the functioning of labour markets. Such reforms will boost the euro area’s growth potential and employment and improve the adjustment capacities of the euro area countries. They will also add further momentum to the progress being made with regard to unit labour costs and current account imbalances. As regards fiscal policies, the recent significant decline in sovereign bond yields should be bolstered by further progress in fiscal consolidation in line with the commitments under the Stability and Growth Pact.
Mr. Draghi’s prescriptions can be rephrased as “more austerity and more support to bankers”. To make a critical examination of these remarks, it is must be stressed that the serene atmosphere that Mr. Draghi is trying to depict is in great part imaginary, as it stems from the ECB’s actual or perceived activism in propping up the Euro’s financial system. The ECB’s balance sheet which has greatly expanded in this eurocrisis (now at €2.96 trillion) together with the ongoing asymetries in the Eurosystem, as reflected in the Target2 imbalances, and strengthened by the expensive bailouts to sovereigns and banks, are but indications of a crippled financial system (among others), not a robust one which is on its way to full recovery. Litanies to the contrary aside, the ECB will have to cling on to its expansive monetary policy for several months to come, which will probably engender controversies across the Eurozone, with particularly scornful reactions from Germany which is heading to a pre-election period where politicians will of course need to suffice the domestic anti-inflationary sentiments. In that respect I will not be surprised to witness Germany’s neo-mercantilist economic ‘conclave’ becoming loud and vociferous once again.
Secondly, the underlying weaknesses or even malignancies in several parts of the Euro area have not been addressed at all. As fellow bloggers, Emmanuel Schizas and Martin T. have noted in their analyses, contagion has not been contained and there is sufficient evidence to fuel expectations that it might reach France. While I certainly do not agree with the doom and gloom manifested in The Economist’s articles on France, I do believe that the country will be brought under significant market duress. What I expect from the French case, in conjunction with the reverberations of the ECB’s Outright Monetary Transactions, is a gradual but irreversible convergence of euro-wide interest rates at the new risk-free premium that the market will perceive as existing (perhaps with the exclusion of Greece that will require more time to catch up). Towards that end, France will have to deal with permanently higher borrowing costs, which will however not reach exorbitant levels.
The real ridicule that Mr. François Hollande’s administration will face is a political one, as his government’s pompous palaver against ‘austerity’ and the like will be proven to be but a tissue of unrealistic promises. Mr. Hollande will implement vicious austerity, but he will of course do so in impressive style, by embellishing all intrusive policies with patriotic oratory and other attention-getting devices. For us Europeans, the real concern is to see how such specularistic and euphemistic politics will affect the broader picture and how will they influence the European integration process. Predictions along these lines cannot be substantiated on any facts, at least not for the time being, but I do have a feeling that trouble is brewing, especially if the statolatric rhetoric becomes ever-more exuberant.
Returning to the aforementioned remarks of Mr. Mario Draghi, it is crystal clear that the ECB is expecting from all member states to fully comply with the technocratic dynamics on the economic governance of the Economic and Monetary Union and to proceed with fiscal reforms swiftly and decisively. Implicit in such statements is the proposition that the troika’s policy orientations have been correct and sound and that it is the cautiousness, unwillingness and/or complacency of governments which has produced whatever invidious effects on society and the real economy. While a camouflage of scientific objectivity has been thrown over the reality of the troika’s ideological underpinnings, one cannot ignore the fact that egregious errors were committed and are going to be committed because of a misreading of the situation and of misplaced strategical decisions for the years ahead.
Apart from the economics of the subject, the democratically-sensitive people of Europe should challenge the above on the normative and principled level; whether unelected and essentially unaccountable technocrats, such as the ECB’s planning board have the right to compel elected governments to conformity with certain modes of action. Personally I cannot envisage a ‘democratic’ central bank which will also conduct sound policy, but we could at least expect some checks and balances to constrain the ECB’s omnipotence; checks and balances which are now absent, pitiful or derisory.
The Eurocrisis is far from over, but judging from the fact that this has always been a profoundly political crisis, the challenges ahead are on the institutional, constitutional and democratic fronts. I believe that the year 2013, apart from being a year of persistent unemployment, economic stagnation, and in cases, silent desperation, will be of paramount importance in determining the overall balance of power between the forces of technocracy and democracy in Europe. The tectonic plates of the euro area are still shifting and it remains unclear what kind of institutional morphology they will produce. What is evident though, is that if Mr. Draghi’s recommendations are blithely implemented, then it is technocracy that shall arise as the new order in Europe.