The latest plan that will save everything uses the euphemism for Outright Monetary Program. See, by using the word “monetary” you make it really a plan to transmit monetary policy rather than the financing of governments prohibited by the ECB’s charter in Article 123. The dishonesty does not stop there.
Central planning is running amok in the Eurozone:
European Central Bank President Mario Draghi said policy makers agreed to an unlimited bond- purchase program to regain control of interest rates in the euro area and fight speculation of a currency breakup.
Interest rates have diverged in Europe because the risk of lending within each country has diverged. Draghi says that the program “will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro.” One man’s severe distortions are another man’s market forces.
Spain is in the midst of a severe economic depression, and Italy is in a recession. Due to these economic conditions, loans to companies within their borders are more risky and deserve a higher interest rate. When a central bank artificially lowers the interest rate by fiat, it does not lead to more lending as we have learned since 2008 (and since 1994 in Japan).
Banks are not getting compensated for the risk that they are undertaking due to the controlled rate, so they choose not to lend to the private sector; however, they have no problem using their capital to buy sovereign debt in this rigged game. With the Draghi put, there is virtually no risk in carrying short-term Spanish or Italian bonds.
This program will not solve the problems of an ill-fitting currency union; it will merely keep it afloat longer. Banks will continue to purchase sovereign bonds and will actually decrease their lending to the private sector to do so. One of the unintended consequences to this program will be reduced economic growth in the PIIGS.
Another problem with this plan is the seniority issues. For some reason, the mainstream media glides over this issue. Recall that when Greece needed a bailout, the ECB was not involved in the write-down. Nothing in the bond covenants, the ECB charter or any other European rule or regulation gave the ECB senior status.
Yet, there it was getting 100% of its money when the bailout was crammed down on the private sector. Now, the ECB is saying, “Don’t worry. We won’t act illegally again,” and this claim is merely repeated without any scrutiny in articles I read in the NYT, WSJ, Reuters and Bloomberg.
Why is the ECB being treated with kid gloves when it is in the midst of such a blatant power grab? The new program requires countries to apply for an official bailout with “conditions.”
Ask Greece about what conditions mean. Spain and Italy will be forced to sign memorandums of understanding pledging to enact certain reforms; I add that these reforms would never fly in Germany’s over-regulated economy.
These countries will also be subject to periodic inspections. The ECB board will be able to cut off funding if it feels that the conditions are not being honored. Applying for a bailout will be tantamount to a regime change. The people may stand for budget cutbacks, but I do not think that they wish to be humiliated at the hands of their so-called allies.
This plan must be placed in the context of the ongoing Eurozone recession. Once again, the mainstream media falls flat on its face and repeats the rosy forecasts of the ECB, which calls for economic growth next year while conditions continue to worsen.
Economic red flags are no longer confined to the PIIGS; the northern core countries have witnessed steadily deteriorating economic conditions and look poised to enter a recession. Remember, the PIIGS are Germany’s largest trading partners, and they are importing less due to the depression/recession.
No matter how the Eurocrisis is spun, the economic fundamentals point to a continuing malaise. Two years ago, serious reform combined with some short-term assistance by the ECB could have prevented the endgame. Now, I believe that a Eurozone breakup is inevitable, but the timing is indefinite.