The ingredients are there, and economic researchers are warning almost unanimously: inflation, a decline in economic output and the necessary monetary policy of the ECB form an indigestible brew for the states of the euro zone and their common currency. The euro crisis is back. The first are already longing for the D-Mark.
The dilemma became really visible a few days ago: interest rates on exchange-traded Italian government bonds rose to over four percent. In the persistently low interest rate environment, this value is very high – for comparison: German bonds are quoted at an interest rate of less than two percent. So the investors bluntly expressed their distrust in the Italian state. And the European Central Bank probably at the same time: Apparently, the markets at least considered that there could be difficulties with interest payments or the repayment due.
The market then provided the evidence when the ECB announced a new instrument that would remedy the situation without giving any further details. The yield curve immediately sloped downwards. And those of the other southern euro countries at the same time: Greece, Portugal, Spain, and also France. In all of these countries, national debt is particularly high, while economic output is not exactly on a stable growth course. In the long run, this would be the only recognized solid way to restructure public finances.
To bet on it seems extremely optimistic again at the moment. And so the mysterious future “instrument” that the central bank wants to unveil in July acts as a tranquilizer – for example in connection with the already announced interest rate hike of probably only 0.25 percent. At the same time, the ECB wants to scale back its money flow policy: Up until now, it has given money to the national economies by buying up government bonds in the euro zone – and has thus become the lonely major creditor of many member countries.
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Now, however, economists are already criticizing that the measures are too hesitant, too late. Lars Feld, for example, former chairman of the German Council of Experts, would like to see the bond purchase program ended completely. This is against the background that inflation figures are reaching worrying levels. It was eight percent recently, there has not been such a devaluation for decades. Curbing this is the ECB’s top priority and most important task, not controlling interest rates on bonds. The ECB must be careful not to exceed its mandate, namely to intervene in the fiscal policy of the member states instead of shaping monetary policy for the euro zone.
The dispute over the mandate is of course not new. Almost exactly ten years ago, at the height of the last euro crisis, ECB President Mario Draghi spoke the famous words of “whatever it takes” and signaled to the markets: Whatever needs to be done to secure the euro’s existence, it will be done done, and above all: It will be enough. Speculators against the euro withdrew abruptly, and Draghi didn’t even have to unpack his toolbox. With the euro support fund and other aid, especially for Greece, the crisis ebbed away.
However, both Draghi’s justifications for state aid and demands from Brussels to the countries concerned went unheeded. Namely: One should use the time of low interest rates and cheap money to restructure the state budgets and reduce debt. If this had happened – one would not have to talk about the “Euro Crisis 2.0” today. But that is exactly the expression that occurs to economists at the moment: “The interest rate increases are dramatic, that is clearly the return of the euro crisis,” says Clemens Fuest, head of the Institute for Economic Research (IFO) in Munich. “The dangers for the euro zone are all too real,” warns the Italian-born US economist Nouriel Roubini. The Germans should then be the first to squint at their old D-Mark again. A third of them long for her, according to a survey at the turn of the year. At that time the world was still comparatively in order.
The data and facts do not give Germany the role of model boy either. Officially, depending on how you read it, the debt level is only 65 to 70 percent of economic output. However, there are now so many shadow budgets and future pension burdens that economists have calculated twice as much. It doesn’t help to call a 100 billion euro package for the Bundeswehr a “special fund” when it’s actually a debt account. Even 60 billion for beneficial climate purposes remain what they are: billions in debt.
So there will probably be no way around having to do it the hard way. For economists like Clemens Fuest from the Munich Ifo Institute, it is unthinkable that the ECB can keep entire countries afloat. A continued debt policy would jeopardize the existence of the euro. The declining appreciation of the financial markets for the euro can of course be seen in the exchange rate fall against the US dollar. If the descent continues, 1-to-1 parity will soon be reached. A sad mark – after all, many European politicians had dreamed of the euro as the world’s second most important reserve currency, possibly even one that could one day replace the dollar in the world’s government depositories. There is no more talk of that.
The euro countries are now faced with the choice of restructuring their budgets, thereby accepting a recession, or carrying on as before with borrowed money and borrowed trust – and hoping that the measures taken by the ECB to fight inflation will not alone be reflected in the lead downturn. A thoroughly realistic scenario: In view of high inflation, the trade unions are demanding correspondingly high wage agreements. In the end, the costs either have to be recovered through higher productivity – or they end up with the consumer through price increases. The notorious wage-price spiral is beginning to turn.
So the voices in the ranks of economic researchers are increasing that now, on the unpleasant tenth anniversary of the euro crisis, they are finally going to face the hard facts and march through the valley of tears that is coming anyway. However, there is a lack of common political will, no wonder: no one who would set in motion a radical and painful restructuring program would have to worry too much about re-election. That remains the ECB’s “instrument” shrouded in mystery. So we can continue to hope for miracles. Until July for now.
The article “Longing for the D-Mark? The euro crisis is back” comes from WirtschaftsKurier.