The ECB’s Triple Hole in the Water

draghiThe ECB is now reaping the grim deflationary harvest it sowed by dithering for so long in the face of shrinking credit and a diminishing money supply – all due, of course, to four years of universal austerity at a time of frantic de-leveraging by bankrupt banking sectors too cosily intertwined with fiscally stressed governments.

Yesterday’s triple-whammy of measures, by the ECB, sounded impressively radical. Alas, history will show that they were only meant as an excuse for not doing what might have worked, which is genuine quantitative easing, especially of the sort that I advocated here: buying en masse EIB (European Investment Bank) bonds in conjunction with a large, Pan-european investment-led recovery program. 

As for the announced measures: The reduction of the basic interest rate to 0.1% is irrelevant when so close to the zero bound and in view of falling or stagnant prices. The negative deposit rate is also bound to disappoint for reasons well exposed by Frances Coppola.  Lastly, George Magnus summed up why the €400 billion TLTRO is a water-pistol trained against the dearth of credit for SMEs.

In idiomatic Greek, the ECB’s triple-whammy will prove a triple hole in the water. Unfortunately…



Leave a Reply

Your email address will not be published. Required fields are marked *


  • What about the suspension of the SMP sterillization process, is this meaningfull? Is this the first step towards outright purchases of ABS since as Draghi put it “preparatory work has been intensified”?

    • SMP sterilisation is of minor importance and was only meant as a signal that the Bundesbank’s tough line on the money supply prevailed. As for purchasing ABSs, the problem Draghi has is that the ABS market in Europe has collapsed. First he needs to re-create it and then buy its wares. A tall and unnecessary order…

  • IMHO what Draghi is doing is re-engineering the bond yield convergence which existed prior to the 2008 crisis. In other words the difference between German and Spanish(as well as other euro peripheral country yields) is ever shrinking. In essence, Draghi is reversing the Merkel credo that each eurozone country – post 2008 – would be on its own and it’s his way of creating a quasi-eurobond absent a real eurobond issue.

    In my view every time we have an ECB policy flying in the face of Merkel it ought to be a good thing.

    As to the charge that the ECB’s policies created austerity it is plain wrong. Merkel’s rigidity created austerity and continues to do so and it takes an Italian (aka Drahui) to say: “Basta señora ” (let’s hope Matteo Renzi, another Italian, continues on the same tune).

    Did you just forget the value of solitary defiance? It sounds to me that Draghi is cracking Merkel’s pot and he ought to be congratulated for it.

    • Dean,

      The reaction of the euro up to 1.364 and the stock markets up up up shows that Draghi needs to do a lot more to 1. bring the euro down and 2. do it an a way that does not provoke a run in the markets.

      The value of the euro is the starting point if you want jobs to stay in Europe.

    • Kostantinos:

      It’s not Draghi’s job to bring the value of the euro down. That’s a Merkel concern since Germany profits the most from a lower euro value which maximizes German exports.

      As far as I am concerned we don’t have Draghi in the ECB to play the Merkel game. Quite the opposite.

      Draghi’s intent could be best explained below (see video) and it should have nothing to do with the euro. In my opinion the euro should be close to $2.00 which is its true unsubsidized value. Trying to lower the euro = 100% a German target.

      As we have explained here more than once you don’t play your enemy’s game. You play the game to hurt your enemy.

      Draghi’s objective is to increase liquidity because Europe has no capital markets. Europe has only banks as a conduit for liquidity. What happens to the euro as a result of
      TLTROs is of secondary importance.

      If you ask me I want to see the euro go sky high which is the only language Germany understands in reversing its damaging policies:

    • Konstantinos:

      Actually the surest way to bring the value of the euro down is to print more of them. As you know Berlin can’t allow it.

      Greece benefits very little from a weak euro, in fact it loses if such happens. The reason is that Greece has primarily a consumption, therefore an import driven, economy as the balance of trade graph here indicates.

      If the euro goes down in a significant way then Greece would be flooded by imports again ( a trend we are already witnessing even with a relatively strong euro).

      The benefits which Greece derives from a strong euro are:

      1. more investments flow in the periphery of Europe rather than the center. In other words a strong euro encourages investment in Greece for a variety of reasons not to mention the bargain aspect of 6 years of deflation.
      2. Most Greeks are asset rich but cash poor, therefore a strong euro maintains better the value of such assets despite their awful condition due to deflation.

      So we have to be very careful not to repeat generalizations about the euro value which mostly benefit other countries. A lower value euro is a tremendous gift to German exports. Even if there was a benefit to Greek exports using the logic of a lower euro, we have two major problems for Greece in this area:

      a. 40% of our exports are petroleum products and those countries which buy them (such as Turkey, Italy and Spain) would pay whatever the prevailing price is because they need them. And since Greece has to import crude in order to export petroleum products there is hardly any benefit there. The buyer would buy the same quantities of products but now Greece has to pay more to import raw material (crude oil) and perhaps receive less as prices decline and is not able to pass 100% of the cost increase to the buyer.

      b. Whatever boost the remaining 60% of Greek exports might receive from a cheaper euro such advantages will be dwarfed by the corresponding increase of all import categories.

      Bottom line: what is good for Berlin is not necessarily good for Athens and vice versa. In this case (value of euro) our national interests are the exact opposite of Berlin.
      So we have to be very careful on what we support and why, otherwise we are victimized by pursuing false objectives which might benefit others but not us.

    • Dean,

      We are in the opposite end on this one.

      To me the strong euro is what keeps Southern Europe in recession and unemployment.
      The Chinese and Indians are emptying the job tanks in Europe.

      Europeans have to be careful because they were fortunate to counter the loss of manufacturing and production jobs with a rise in service jobs related to IT and software. However the Chinese and Indians are catching up to this wave as well so Europe will have no place to go once it starts loosing knowledge jobs as well.

      The first enemy is not Germany. The first enemy is the strong euro. The strong euro signifies Germany’s stance in this whole crisis and it stands in contrast to the loose policies in the US. You have Germans promoting austerity, order, deflation and Americans throwing money at the problem from helicopters. Therefore you get an exchange of 1.36 – 1.40.

      Greece needs an exchange rate of 0.8, Germany can survive with a rate of 1.6 before it starts loosing competitiveness.

      Greece needs jobs which will come from stimulus and a lower euro.

      To me the Euro is the yardstick of the craziness of the European experiment. You go to Greece a country that is 27% unemployed that has prevailing wages that are below the poverty level for some western economies and you have a currency that is 35% more expensive than the USD.

      At the peak of the craziness with Trichet (no 1 incompetent) the euro was at 1.55.
      Soon after oil reached $150 and it all came crashing down.

      If you think of globalization Europe and the US are leaking jobs left and right. They are overtaxed and over-regulated. Europe has the added problem of the strong currency, it is not an issue in Germany with 5% unemployment but it sure kills the prospects of young people in other parts of Europe.

      If you are a software entrepreneur and you can hire workers in India or Romania or China at a fraction of the cost in Europe and have the added benefit to pay them in a weak currency why would you hire them in France, Spain or Greece.

      Simple, think of the Euro as a yardstick. At 1.2 -1.25 it means there is stimulus at 1.3-1.4 it means that Merkel is pushing austerity.

    • Kostantinos:

      The debate whether the euro is overvalued will continue for years to come and many pundits will argue for or against the proposition that the euro exchange rate is overvalued. In a truly free economy, the market is the only arbitrator whether a currency is worth the price asked for it.

      Draghi does not have the tools to bring the euro down unless he can print (which he can’t). That is why his decision to go negative on the interest rates had no effect on the euro.

      Plus you have to think along these lines: for the euro to go down, the dollar must go up. If the dollar goes up then the US economy and stock markets must take a substantial hit. It’s very absurd to suggest that the US and the rest of the world must take hits so that intransigent Berlin must be rescued again on the cheap. The Berlin “free loading” days are over and you can’t rely on rescue missions anymore so that Merkel looks “prudent” and the “good student of the class”.

      I suggest you change your stance on the overvalued euro because without knowing it you sound like a Merkel spokesperson on the matter. It’s kind of sad that after 6 years of misery, thinking Greeks should actually be promoting German positions which have only marginal effects on Greece but huge and tangible benefits for Germany. Very sad, And perhaps this is the essence of this crisis. Six years into it and people still don’t understand which is which. Clarity is undoubtedly missing.

    • Dean,

      Merkel wants a strong euro and no money printing.
      I want the exact opposite. I don’t see how my position is in support of Merkel.

      I assume that your position is for Greece to exit the euro. Is this what you suggest?

    • Kostantinos:

      No. Merkel wants a weak euro for exports and no printing. You have to be a bit more nuanced to understand that when she pretends to want a “strong” euro she addresses herself to German savers who would lose in case the euro goes down. Don’t pay attention to what she says. This is a game you have to play using pure intelligence. Don’t fall for the fake moves.

      No, I don’t want Greece out of the euro. I want maximum harm to Merkel which can be done either of two ways:

      1. Kick Germany out of the euro and let everybody else stay (EU27 stay, Germany out).
      2. Have everybody exit the euro at the same time and let Germany with the euro(aka its new German Mark).

      In case you understood that I advocate Greece to leave the euro unilaterally this is not correct. Under no circumstances Greece is allowed to make a unilateral move vis-a-vis the euro. Such is out of the question. Only group moves for Greece are allowed and by group moves, I mean major group moves (not groups of 3-4 countries) but the greater majority of the EU 28 (you would need at least 14 countries for Greece to move along with them in a coordinated action).

      So you ideal position is to be euro neutral(not care whether it goes up or down) but mostly stay where it is. The next major move for the euro would be if and when the Fed begins to tighten for certain. Such is not in the cards for now. The other part of your optimum position is to pursue actions causing Merkel real harm. When she yes, you say no. When she says high, you say low. That sort of thing.

    • Over valued, under valued… what di you expect from a one size fits none currency?

    • Hi Dean,

      I agree with you regarding Greece not leaving the euro on its own.
      Fairly straightforward.

      Regarding Germany you have to be more realistic.
      Germany feels strongly about the euro and does not want to go solo.
      They truly believe that everyone else that opts to stay in should balance the books and suffer the consequences of austerity.

      To Greece this is slow destruction. We are witnessing it now and it is only going to get worse.

      To me the only hope is for other Europeans to move to counter Merkel. The reason they hesitate is that the markets are looking at every move they make. And it might be convenient for them to be able to borrow at 2.5%-3% today.

      My other hope is that Draghi will take actions equivalent to printing money and reducing the value of the euro. My ultimate hope is that they will issue eurobonds.

      I still disagree with you on the value of the euro. I think a euro with an exchange of 1.2 would be OK for Greece. At 1.36-1.4 it is destructive for jobs and for exports as well.
      It also encourages imports.

      The problem in the Eurozone today is that only Germany is competitive in the global market. They are the only ones who can keep jobs at the current euro level.

      The deeper problem underpinning the currency wars that are going one and the more serious one, is that once a country looses expertise due to price competition, it is very hard to get it back.

      For example if your software engineers cannot find jobs in their field they will other
      migrate or find more menial work.

      So the value of the currency along with the unemployment rate are serious indicators of the health of an economy.

      It is working beautifully in Germany with 5% unemployed and in countries like Switzerland with 2% unemployed. Countries like Greece are left to pay the price for globalization with no chance to escape with a lower currency.

      It is a trap.

    • Kostantinos:

      The euro is a trap. No doubt about it. That’s why you have to go after the party which laid the trap i.e. Merkel and her cohorts.

      If you allow this co-existence with Germany at ever increasing heat the frog called Greece(to convey an image of utter economic ugliness) will die.

      Therefore it’s not a question of being reasonable with Germany. In fact the opposite is true. We have to be as unreasonable with her as it can be because it’s a matter of survival. Therefore the name of the game is to frustrate your enemy any chance you got.

      By the way, think about what you just said. A lower euro will certainly increase Greek imports. Being a consumption economy is a permanent and very unfortunate disease for Greece. Greeks exhibit a pronounced inferiority complex in keeping up with the Joneses and the way to prove that we are Europeans is through consumption lest someone considers us unworthy to be part of the European family.

      In my book the only way to stop the bleeding in Greece is an extra strong euro which will bring Greek consumption to zero level but most importantly would kill the German trade surplus. If I had a magic wand I would but the exchange rate of 1euro = $2.50. That would be the end of your enemy as we know it plus it would boost the value of real estate holdings which is the foundation of every Greek’s net worth. Keep it simple: benefit yourself, harm your enemy. In spades. Rinse and repeat.

  • Well Yanis, it seems that in our era prevails the idea that giving money to the banks, you achieve high stock market prices, making people around you feeling rich! (see Dow or Dax…). Of course is absolutely questionable how the average German or…Greek can be better of these policies, BUT it seems that Mr Drangi, Mrs Yellen or Mr Bernanke earlier believe 100% in “wealth effect” through record stock prices, hoping maybe that some of this (paper) money will be invested in real economy. Same policies 5 years now…It’s really interesting that, due to these policies, in USA unemployment fell from 10+% to 6.3% while in Europe the results were not the same (let alone Greece where unemployment was skyrocketing…)

    • There are around 6 million more full time workers in the USA from 2010.
      Part time workers number around the same
      Population has increase by around 8 million in the same period.

      It is highly questionable if the unemployment rate in the USA has actually declined in anything except government statistics.

    • USA followed an expansionary fiscal policy to recover from the recession.The so called stimulus package.It was not just QE.
      There’s no comparison between EU and USA.

    • The expansionary fiscal policy was timid and did not last long. Quantitative easing, on the other hand, was prolonged (it is still being practised) and massive.

    • Stamos,
      Yellen is way ahead of Draghi. What are you comparing? The euro is 1.36x the dollar
      way behind the curve with unemployment of 10% in major european economies while the US is nearing 6%.

    • @yanisv

      Agree.Yet I don’t understand how one would come to the conclusion that Europe and USA followed the same policies and ended up with different results.

      Yes the stimulus package was not big enough and did not last long enough, however it was just that: a stimulus package.And let’s not ignore that the US did not attempt to chop off its automatic stabilizers.While EU was/is imposing pro-cyclical measures the US simply raises the (obsolete) debt ceiling, having a sense of understanding on what’s really important.

      On the other hand QE has not existed yet in the Eurozone and LTRO or TLTRO can hardly be seen as QE.

      So we have hardly followed the same policies with the US.
      Yes what the US have done is not enough,looking at the results, but I’d pick their policies over ours,all day.

    • They will not be able to fix structural problems with their Money printing activities…

    • “Effectively, the U.S. stock market is hitting new highs not on growth prospects but rather on the belief that worldwide interest rates are not going much higher. The reason is the eurozone.

      Europeans – due to World War II – have a pre-occupation with preventing inflation almost built into their DNA. This concern about inflation is so great that one of the unstated goals in forming the European Union was to take monetary policy away from the European periphery countries. As a result of this obsession regarding inflation, the Europeans were reluctant following the ’08 crisis to loosen monetary policy for concerns of causing inflation.

      If you remember, the U.S. increased spending and engaged in monetary stimulus in response to the ’08 crisis. The Europeans for the most part preached austerity (cutting fiscal spending and raising taxes) and were slow to engage in monetary stimulus. Fast forward a few years and the U.S. is beginning to pull back its monetary stimulus so as not to stoke the flames of inflation. But European policy makers are now completely focused on deflation and show no signs of pulling back the monetary stimulus anytime soon. “

  • Will there be a run on cash in Greece if the Greek banks began to extract fees for deposits?

    With consumers struggling just to pay for their food and lodging giving new loans to small businesses who already have suffered from deflation looks like throwing matches in a fire.

  • Yanis, your idea of QE for real investment surely beats QE for speculation a la the US and UK.
    But your infrastructure-based proposal sounds like a copy of the Chinese path, and that has led to bubbles merely of a different kind.
    There can be no recovery in Europe OR the US OR China or wherever until first the rule of law is re-established (or just plain established in the case of China). When banks serve as gaming mechanisms for get-rich-and-get-out scams rather than as sources of real credit for real investment, everything else is pointless.
    It’s nice to wish we could guide these massive economies merely by pushing a few buttons, but what needs to be done would require a far lot more hard work, I’m afraid.

  • But now that “whatever it takes” has been done, the austerians in the EZ have another 6-12 months to continue with orchestrated deflation policies unopposed, while cheeringly encouraging us to “wait for these radical measures to take effect”, with “more coming if needed”.

    As for non-monetary policies: Samara’s statement—fully endorsed by Germany, I am sure—after the recent informal summit, showed the way for getting Europe out of its woes:
    “we need more competitiveness, job creation-which is our no.1 problem, and solidarity among all member-states”. If that sounds to you like “more austerity and more loans to the bankrupt”, good (!) you have mastered Euro-speak perfectly.

    And yet, according to Yanni (interview with A. Bianchi), we should not contemplate a “plan-B” until and unless “progressive forces [to be] in government” . Unfortunately, the forces on the rise across Europe are those who do not shy from contemplating a plan-B, and they look anything but progressive…

    • Vasili, there are forces on the rise as you say, and forces that have had unchecked dominance for the last 4 years – aka Troika and its masters. IMHO they are two faces of the same political phenomenon. At the moment they are opposed to each other, but for how long? I ask this because for a very long 15 months in Greece, from the 2012 election to late September 2013, one was the ‘street arm’ of the other –

      Those who don’t subscribe to either – the vast majority of European people – are trapped in between and bled dry. No Plan B will ever come from our present government and meanwhile – seeing where there still is butter for bread – the rats are jumping back on board. As for elections….let us hope they will be permitted when the time finally comes.

6 Trackbacks