The President of the European Central Bank, Mario Draghi, sent stock markets soaring on Thursday with his announcement that the ECB was prepared to buy unlimited quantities of government bonds of member nations if necessary to halt the crisis.
The senior German on Draghi's board, Jens Weidmann, head of the powerful Bundesbank, reacted with predicable horror, voting against the plan. The Bundesbank even put out a statement warning that the move was the equivalent of "financing governments by printing banknotes."
But what Draghi gave with one hand, he took away with the other. To qualify for ECB purchases of their bonds, nations like Spain and Italy, whose securities are under speculative attack, must submit to the austerity police.
Before the central bank will give them any help, these nations must apply for aid to Europe's still-to-be ratified bailout fund, the European Stability Mechanism. And applications for such aid trigger stringent austerity requirements of the sort visited upon Greece and Portugal -- whose main effect was to drive these suffering economies further into the ground.
Not surprisingly, Italian Prime Minister Mario Monti and his Spanish counterpart, Mariano Rajoy, were quick to say they wanted no part of this deal. All of which leaves the European crisis in just about the same state as before the ECB announcement.
So despite over a month's work gaining the support of his board for an aggressive bond buying program, Draghi ended up right back where he started in early August, when he recanted earlier remarks that he would do "whatever it takes" to save the euro.
Even German Chancellor Angela Merkel supported Draghi's latest plan -- a telltale sign that the ECB initiative changes just about nothing. Perverse austerity still reigns. It's not clear whether Merkel and her protégé Weidmann are doing a nice-cop/bad cop act, or whether there are subtle schisms in the German ruling elite. But it is clear that nothing fundamental has been changed.
What's interesting are the persistent differences between the ECB and its American counterpart, the Federal Reserve -- two major differences in particular.
Unlike the ECB, the Fed really is willing to buy as much of the U.S. Treasury debt as necessary, with no strings attached, to keep interest rates close to zero. This is, indeed, tantamount to printing money. But in a deflated economy printing money is just what's indicated.
The American deficit hawks have tried to enlist Bernanke as an ally, but Bernanke has pointedly refused to condition the Fed's monetary policy on fiscal austerity. On the contrary, as I reported last week, Bernanke in a high profile speech at Jackson Hole, Wyo., on Aug. 31 warned against too much budget belt tightening.
By contrast, Draghi has set conditions that make it almost impossible to deliver on his offer to buy unlimited amounts of government bonds. Far from giving Spain and Italy helpful offers they can't refuse, he has given them conditions they can't accept.
The reason is not that Bernanke is more heroic than Draghi. It's that the ECB is a prisoner of European fiscal politics led by the German government, in which no policy that might prove helpful can advance without beneficiary nations accepting offsetting austerity.
As long as this remains the case, measures like Draghi's latest will buy a little time while the bond market tries to decide whether he is serious. Interest rates on Spanish and Italian bonds will decline briefly, only to rise once more. And the European economy will continue to bump downwards.
The EU is now officially back in recession. Unemployment is rising in all of the nations that have submitted to austerity plans. Even the Germans, who benefit from the rest of Europe's pain because capital flight produces very low German interest rates, are headed for a recession later this year, according to the OECD.
Europe's economies are prisoners of Merkel's austerity demands on one side, and the speculative attacks of the bond market on the other. In principle, the ECB could extend unlimited support to government bonds, and take the profit out of speculation. Draghi's latest announcement seems to offer just that, but the austerity conditions render it next to useless.
Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is A Presidency in Peril.
Now they can say "We are all Germans".
But, American companies won't begin to hire as long as they can just squeeze more work out of their remaining work force. Fortunately productivity IS slowing, in the manufacturing sector productivity grew just 0.1 percent while unit labor costs increased 0.8 percent. That tells me that business' will be forced to hire soon, if the business owners and corporations want to continue reaping their record profits.
The austerity program imposed on bankrupt european nations, and as a condition of receiving bailout bond purchases from the ECB, assures a recession. They rightly require the cutting of gov't spending. But, to further close budget deficits, they wrongly require tax rate increases, instead of tax rate cuts.
This places additional economic pressure on the private sector to absorb gov't job losses, with decreased societal demand for products, while attempting to create jobs with the benefits thereof [profit] being increasingly absorbed by the gov't. Their static economic analysis, as used by American Democrats, will have the reverse effect of what is intended.
As proven in the U.S. under Reagan, Bush 1, and Bush 2, tax rate cuts increase prosperity without decreasing total direct revenue [total tax receipts] to gov't. So, if Europe wants Greece, Spain, and Italy to succeed in effort to repay debt, the austerity program imposed on them should require drastic tax rate cuts to spur on private sector growth.
That's patently untrue. It is austerity that is causing the problems.
There is also the history of each - the Fed has a long history of governance, whereas the ECB is still working out the details and the details change every time there's a new EU member.
Lastly, the Fed operates in an environment where there is a singular federal government that has a great deal of influence over laws and the economy. Think of it like the head coach of a team. The ECB is more like the water-boy at a pickup game.
‘Gimmick’ hardly encompassed a limitless monetary measure that defies the laws of physics. Although the term Dark Logic might do it.
"financing governments by printing banknotes."
For ‘banknotes’ read ‘Monopoly Money’.
“the austerity police.”
Middle ages here we come. Right back where we started from.
“the European crisis”
Reality has caught up with the rendition.
“he would do "whatever it takes" to save the euro.”
And to h*ll with Burgundy.
“Merkel supported Draghi's latest plan”
It beats, for the time being, admitting that you’ve blown it.
“nothing fundamental has been changed.”
Except that the cliff is nearer and more precipitous.
“Federal Reserve”
Aka, head central of the banking Hydra. Hardly likely to muzzle the other maws, when its part of the same animal.
“the German government”
Who still remember tales of the tribulations, wheelbarrow economics lead to.
“buy a little time while the bond market tries to decide whether he is serious.”
If they were serious they’d buy, and put out of business, the bond market. Currently it’s the equivalent of bleeding a patient to rectify their infirmity.
“the Germans, who benefit from the rest of Europe's pain”
should beware schadenfreude doesn’t mutate into gegenseitige kernschmelze.
“Draghi's latest announcement seems to”
explain exactly why there’s a problem. It’s a worldview with a great big black hole in it.
Inequality and trickle down economics, as espoused by Romney, but also still supported by the likes of Gietner and Bernanke, is the core of the problem.
There need to be a sensible transition to surplus and then balanced budgets. To get there those at the top of the financial pile must be made to pay appropriate levels of tax.
Little chance of that in the USA?
Certainly applies to me.
Maybe not so much to Progressives.
Mindless, at best.
We sold these fools on supply-side BS in the 90s and now the center-right in Europe can't wait to hang themselves with it.