This is a slightly shortened version of my original interview on Voice of Russia.
Reality Check: The ECB mentioned the possibility of “negative interest rates”, shocking at least some of the market players. Is this a sign of ECB’s desperation? Is ECB ready to implement negative deposit rates? Will it backfire?
Wolf: Deposit rates have been at zero – a record low – since July. Yet the Eurozone has been sinking ever deeper into recession. Now the ECB is dabbling with more forays into unknown territory, though there is no consensus. While ECB President Mario Draghi thought that the ECB was “technically ready” to push deposit rates into the negative, Governing Council member Ewald Nowotny cautioned that they would not “lead to a short-term result”; and Executive Board member Yves Mersch backpedaled: “No large central bank in the world has gone that way, so obviously we have to be very careful.”
Clearly, the ECB wants to concoct a fix for the Eurozone’s structural problems, some of them caused by the euro itself – not because it’s too weak or too strong, but because it deprives certain countries of their classic tools to “solve” economic and fiscal problems: defaults and devaluations.
The ECB isn’t just worried about the banks or the economy; it’s worried about its own raison d’être: if the euro is the core problem and ends up being dissolved, the ECB would be too. Hence ideas such as negative deposit rates or – in the spirit of doing “whatever it takes” to preserve itself – buying asset backed securities … backed by decomposing corporate debt to lift that crap off the books of collapsing and bailed-out periphery banks. Desperation is taking on epic dimensions.
With these moves, the ECB, in addition to distorting the economy and the perception of risks, imposes an ever harsher degree of financial repression on savers, insurance companies, pension funds, and others; and it is turning itself into a “bad bank,” loaded up to the gills with rotting sovereign and corporate debt. How this might have a happy ending is a mystery.
Reality Check: The Spanish unemployment is at a record high of 26% with 55% of young people out of work. At the same time, the IBEX 35 is +6.15% year-to-date and +25.75% in the last 12 months. Why there is such a difference between the state of the Spanish economy and the performance of the stock market?
Wolf: Stock markets no longer react to the real economy. They’re now nourished by the flow of newly printed money, and by the promise of more printed money, from central banks around the world. If central banks ever stop printing all at the same time – at this point, they seem to take turns – the party would be over.
In Spain, corporate bankruptcies run at a record, and job destruction is even worse than the unemployment rate indicates; with Spaniards and foreigners alike bailing out to seek their fortunes elsewhere, the working-age population has been dropping! But the one thing that central banks have accomplished is to separate economic reality from the financial markets. And not just in Spain: for example, the German DAX is brushing up against its all-time high, yet the German economy shrank 0.6% in the fourth quarter, and has been lackluster so far this year.
Reality Check: On May 6th, Pierre Moscovici, the French finance minister, told the press that “We’re witnessing the end of the dogma of austerity. We’ve been pleading for a growth policy for a year. Austerity on its own impedes growth.” What does it mean for France and the EU as a whole? Spending more money they don’t have and pretend that it is a solution for the crisis?
Wolf: “Austerity” has become a total misnomer. Governments in most countries bought votes by spending money they had to borrow from the future; and they coddled up to their corporate and financial elites with subsidies, boondoggles, tax benefits, and overt or covert bailouts. It worked wonderfully. But it can’t work forever. And now it has reached its limit. But any discussion on how to slow down this insanity is instantly called “austerity.”
Sure, if a country is in a depression, like Greece, raising taxes and trimming a few out-of-whack government expenditures aren’t measures that produce economic growth. But the country has lived high on the hog ever since it got access to cheap euro credit and has run up a huge tab in just a few years. Now that “cheap euro credit” has turned into a trap.
Unlike Greece, France can still borrow at record low yields. Yet, as its economy depends to 56% on government expenditures, any growth has traditionally been produced by pumping up government spending – and borrowing. Meanwhile, the private sector, already anemic before the crisis, is being strangled by new policies.
The government has admitted that its deficit will grow this year; Moscovici’s declaration of an end to “austerity” was just an acknowledgement of a fait accompli. Yet what would help the French economy in the long term would be the revival of the private sector – allowing it to take on a larger role in the economy. Interestingly, nothing indicates that the government has any intention of doing that.
So when Moscovici is pleading for more government spending as “a growth policy,” he is barking up the wrong tree. He should be working day and night on creating an environment in which the private sector, particularly startups and small companies, can succeed. And that would be the solution for all of Europe. Here is the original interview on Voice of Russia.