Heiner Flassbeck gave an interview to the progressive Real News Network in Baltimore last week, after the European Central Bank announced that its quantitative easing measures will be cut in half. The European Commission, from its side, considers expanding the authority of the European Stability Mechanism, a fund which assists the euro zone debtor countries. Flassbeck explains that the European economy is very slowly recovering – the worst now finally seems to be over – but that most of the stimulus that came to Europe in the last months was due to the weak euro. Now that the euro gained against the dollar, Draghi goes for the middle of the road by halving QE. Core inflation is 0.9 – 1% in Europe. The reason is that wages are growing at a very slow pace. In the United States, a slow pace of wage increases means a rate of something like 2.5%. In Europe, we have a nominal wage increase at this point of 1.5%. The ECB has understood – it took them a while – that Europe’s labour costs, that is to say the relation of nominal wage increase to productivity, is the main determinant of the inflation rate in the longer term.
Germany’s stock market is very high at the moment. There is a stock market bubble because of the low interest rate which drives people to make more risky investments. But Flassbeck does not consider this bubble dangerous. The stock market alone is not so important that it can trigger a financial crisis like the one we experienced in 2008-2009.
What then about the idea of the Commission to empower the European Stability Mechanism in order to take over the function of the IMF? Flassbeck explains that Europe can easily solve its problems itself. It does not need the IMF. The initiative to introduce the IMF in the beginning of the crisis in 2010 mainly came from conservative German politicians aiming for very harsh austerity policies. Eventually, the troika produced the policy recommendations that were implemented by the Eurogroup. The troika consisted of the ECB, the IMF and the European Commission. When it became clear that the policy of the troika has been a complete failure in Greece and elsewhere, at least the IMF acknowledged that they were wrong – the same cannot be said about the others. As for the future, if the European Commission is moving away from the purely neoliberal approach that it had for a long time, we do not need the IMF.
Flassbeck then goes on to explain the European Stability Mechanism. If this would be as neoliberal and as neoclassical as the Eurogroup has been in the past it will be absolutely useless. But which direction it will take is an open question at the moment. Within the Commission and the ECB, some people have understood that the old approach was completely wrong. The problem is that it is still not understood in Germany.
You can watch the interview here.