Easy money makes an easy scapegoat

It is weaknesses in the EU’s organisation, and in the governments of member states, not the ECB’s monetary policies, and an increasingly centrifugal political atmosphere that threatens the euro and the very Union itself that are most at fault for Europe’s inability to fight off low inflation.

Some European officials, most notably German finance minister Wolfgang Schäuble, have taken advantage of the financial markets’ overbearing dependence on monetary policy, as well as growing popular frustration at economic inequality, to make the ECB the scapegoat for deeply troubling developments in the Union and eurozone .

Schäuble’s repeated suggestion that the ECB is somehow responsible for the rise of populist parties such as AfD in Germany is a politically convenient argument, but also extremely reductive.

First, the organisation of the ECB, and crucially its political independence, are largely the result of German insistence that it be modelled after the Bundesbank. 

Second, there is a profound intellectual insult in the notion that the ECB should take sole blame for the rise of populist parties and some of the very ugly sentiments they embody — rather than the sclerosis of EU institutions, and the provincial politics of some of its member states (read: Germany’s insistence on maintaining a substantial current account surplus, which it maintains largely because it is inconvenient to explain to German citizens how import-export economics actually works in a currency union).  

Indeed, Schäuble, as one of Europe’s most popular politicians, should be ashamed of dumbing down the discourse — a behaviour that in itself helps gives legitimacy to fringe political groups that rely on overly simplistic arguments to grow their support bases.

Luckily, there is growing recognition of the validity of Mario Draghi’s side of the argument.

Low rates, Draghi has argued, are the “symptom, not the cause” of economic turmoil. And, as markets become disillusioned with the power of central banks to unilaterally revive economies, many are starting to finally see the sense in that statement.

This is a good thing, not just because it may lead to a greater push for politicians to take more responsibility for the Europe’s economic future, but also because it may help put to bed some of the ugly, irresponsible and dangerous political claims made against the ECB.

Maybe Europe’s politicians have refused to pursue the structural reforms — urged by Draghi in nearly every press conference he has held since he became president of the ECB — because they don’t know what ‘structural reform’ means.

This week, think tank Bruegel and a joint venture of the Jacques Delors Institute and Bertelsmann Stiftung separately put out policy papers noting that structural reform is necessary to address persistent low inflation, guarantee the continued existence of the euro, increase the democratic legitimacy of EU institutions and prepare for the next crisis.

Echoing Draghi’s admonition, Bruegel’s Grégroy Claeys wrote that “low rates are the symptom of our diseases, not their cause. It is therefore crucial to tackle the structural causes behind the fall in long-term rates, but also to find solutions for the harmful consequences that lower equilibrium rates could have for the conduct of monetary policy”.

Among some the structural deficiencies Claeys identifies are a global savings glut that has most recently emerged in Europe, growing inequality, ageing populations, slowing productivity and disincentives to invest.

Those are problems that need to be addressed regardless of the overall economic outlook, but they aren’t the ones that led directly to Europe’s economic crisis. Beyond demographic and economic structural deficiencies, there is also structural reform needed at level of the EU itself.

Among the significant structural deficiencies, according to the Delors-Bertelsmann paper, are insufficient risk and sovereign sharing among euro area countries.

The authors argue that “the most promising strategy might be to define a structural reform agenda in terms of what it needs to do, and then think about the right mix for each country, and how best to implement it”.

Reform, they argue, is most needed to fix the economic fragmentation of the euro area via a strengthening of the Single Market. “While the goods market is largely complete on paper, many products are in fact still not tradable, and services remain poorly integrated,” the authors noted.

Institutional reform is also required: “the Commission should take a very fundamental decision on how it sees its role in economic policy coordination. Currently, it has two conflicting objectives. It is expected to provide European leadership and, at the same time, to be a neutral arbiter between EU member states.”

The authors also call for an “upgraded” European Securities and Markets Authority, which they say currently “cannot provide sufficient regulatory predictability to significantly lower transaction costs for market participants”; an upgraded rapid-release European Stability Mechanism; stricter adherence to country specific recommendations; and even “overhauling the broader political setup to enhance legitimacy” of the EU’s very democracy.

The latter, they say, is further down the road, but the authors argue small steps that could make a big difference toward dealing with the residual illness left over from the last crisis while preparing for the next one.

There are some convincing proposals in the paper, but probably the most important contribution is its call for politicians to take responsibility for their part in economic stability.

“Member states have proved all too willing to let the ECB permanently shoulder the risk and responsibility for stabilising the system in crisis. We fear that structurally relying on the ECB alone is economically dangerous and politically unsustainable,” the authors wrote.

Perhaps Draghi’s biggest mistake was saying in 2012 that the ECB would do ‘whatever it takes’; a soundbite that instilled in the market the confidence needed for the institution’s actions to work in the first place, but that also obscured the fact that the ECB’s remit is limited. It allowed both markets and politicians to rely too heavily on the ECB.

Now that confidence in the omnipotence of central banks is waning, let’s not fall prey to the political convenience of blaming the ECB. The weakening of confidence in central banks should be an opportunity to remind Europeans that the project of the EU is meant to be a democratic one, and that even if the ECB was omnipotent, the Union would have already failed on that front.

Europe’s politicians have a choice to make: blame the ECB and keep their jobs for now, or take some responsibility for preparing for the next crisis, which, if there are no reforms, will likely spell the end of the euro, if not the Union itself.