Economics and politics - comment and analysis
17. June 2022 I Heiner Flassbeck I Economic Policy, Europe, General

Crisis meeting of the ECB: Fiasco with announcement

Those who make fundamental mistakes need not be surprised that they trigger fundamental irritations. The ECB has just decided that in order to fight “inflation” it will stop buying government bonds and raise interest rates, and already it is being overtaken by reality. On Wednesday, the ECB’s Governing Council was convened for an emergency meeting to discuss the situation on the government bond markets, because there the “spreads”, i.e. the gaps between German bonds and those of other countries, are widening significantly.

Of course, when interest rates rise in the euro zone, where the economy is tipping towards recession, some market participants wonder what this means for the Italian or Spanish state and its public finances. Countries that, unlike Germany and the Netherlands, do not have external surpluses have to use the state to stimulate the economy, because private companies have not been doing this job anywhere for a long time, despite zero interest rates.

If the economy collapses, interest rates are raised and the finance ministers of the surplus countries – above all Christian Lindner – threaten that additional borrowing by states is strictly forbidden in the next few years, then one can imagine the predicament the deficit countries can get into. No one can be blamed for not betting on falling prices for the government bonds of the affected countries in this situation.

Consequently, the evil is not primarily the markets, but Brussels and Berlin. Because no one in Berlin wants to understand and admit that the euro crisis is by no means over, but continues to exist in the form of the German (and Dutch) current account surpluses, which have been violating EU rules for years, they put their foot in every frying pan in the area. The biggest misstep was certainly made by the new president of the German Bundesbank, Joachim Nagel, who put pressure on the ECB. Lindner made the second, with a flat commitment to the debt ratio in the Eurozone.

Because there is no danger of inflation in Europe, the ECB’s decision last week was fundamentally wrong. Europe is infinitely far away from a wage-price spiral, which would be the only comprehensible reason for the ECB to fundamentally change the direction of monetary policy. The biggest German union, IG Metall, has just presented a demand of seven per cent for two years for the entire metal sector, which amounts to a deal very close to three per cent. The ECB’s forward-looking wage tracker, as shown in the previous article, also does not point to any acceleration in inflation. This gives the lie to all the inflation alarmists. Without rising wages, any attempt by the central bank to stall the economy with rising interest rates in order to ensure less rising wages and prices is idiotic from the outset.

This commentary of mine appeared with small modifications in the “Junge Welt”. I would like to make a brief comment here on the ECB statement that has been published after the crisis meeting:

In its press release, the ECB says that it wants to work in a flexible way to ensure that the European financial markets do not become fragmented, which means that it wants to prevent spreads from widening further. In principle, this is the right goal, but it is a completely inappropriate approach. However, it has to be admitted that the ECB’s sensible approach is made considerably more difficult by the Maastricht Treaties. Most German media representatives, such as Gerald Braunberger yesterday in the FAZ, are already rubbing their hands in glee because they hope that the ECB will manoeuvre itself in a direction where it can be proven to have done the prohibited state financing.

To prevent spreads from the outset, the ECB could simply announce to the markets that from now on it will no longer allow spreads within EMU. That would be absolutely consistent, because the ECB itself argues that the markets are overshooting speculatively and consequently producing false prices. The ECB would have to intervene very little if it made its intentions clear, because the markets would undoubtedly believe it once it had convincingly demonstrated its willingness to do “whatever it takes” a few times. However, the ECB would need clear political support for such a course, which has not existed so far. It is precisely the announcement of an interest rate hike at this point that has made it clear to every attentive market participant that the ECB is bowing to political pressure from Germany against its better judgement.

Linking the intervention in long-term interest rates to conditions (“conditionality”) for the countries with high interest rates, as was envisaged in the so-called OMT programme and is now being considered again, is in any case a step in the completely wrong direction. After all, this means nothing other than a repetition of the failed policy that was supposed to combat the euro crisis in 2011/2012. In view of the undeniable correlation between current account balances and government deficits, an objective crisis policy of the ECB would also have to take under its “control” those countries that have low interest rates.

Germany, the Netherlands and Austria only have low interest rates on government bonds because they have avoided the pressure of having to stimulate the economy with government deficits by running current account surpluses, which are not permitted under the treaties. With its conditionality, the ECB would have to explicitly take on the tasks that the EU Commission has been failing at for years. The conclusion is simple: if the countries of EMU cannot agree on a uniform and realistic picture of the functioning of the monetary system, which they created twenty years ago under the impression of a false picture, the euro has no future.