So the ECB has finally made its move. Mario Draghi has “done what it takes”, writes By Kyran FitzGerald.
At least, that is what we all fervently hope. A larger programme than expected of quantitative easing gets under way shortly.
It will amount to around €1.14 trillion or €60bn a month between March 2015 and September 2016. The Germans have by and large reacted negatively to this long-delayed announcement.
The newspaper Frankfurter Allgemeine, Germany’s equivalent of the Financial Times, went as far as to accuse the ECB of “burying the principles of currency union”, warning that the QE boost was equivalent to the total annual turnover of Germany’s well-entrenched, family-run companies.
Sabine Lautenschlager, the German representative on the ECB board, expressed concern that the decision would encourage member states to run up more debts. However, it was also reported that the head of the Berlin based DIW Institute, economist Marcel Fratzscher, approved the programme of bond purchases on the basis that it would make the euro more stable, protect Germany’s foreign investments, and give a boost to exports.
Ironically, following a long period of relative stability, the euro has been very weak in recent weeks, a development which, along with a plummeting oil price, has given a real boost to Irish industry and to the country’s consumers.
The respected NUI Galway economics professor, Alan Ahearne, a former adviser to the late Brian Lenihan, has suggested that the country’s public finances could benefit to the tune of €300m-€500m a year from QE.
Note the wide range used by Prof Ahearne, a range which may reflect concern at what could amount to a clawback on benefits related to the overhaul of the Anglo Irish promissory notes repayment programme, an overhaul that has resulted in the lifting of a huge interest rate burden on the taxpayer. The benefit could, it seems, be curtailed at the behest of hawks within the ECB who have never forgiven the Irish authorities for a move taken without their approval, and without the formal sanction of the ECB. At the time of the deal, the governor, Mr Draghi, confined himself to a crisp comment that they had “taken note” of the development.
Now, the suggestion is that the scope for purchases available to the Irish Government may be reduced to €8bn to reflect the Anglo Irish promissory note move. The Government will certainly be seeking clarification and, should it turn out to be the case, it will do nothing for relations between the Government, here and Frankfurt , coming as it does in the wake of rather arrogant behaviour on the part of the former governor, Jean-Claude Trichet.
Mr Trichet, one of the authors of our post-2008 misery, has declined to appear in Dublin for questioning by Cork South Central TD Ciaran Lynch’s committee set up to examine the handling of the financial crisis by our then leaders, top officials, and bankers. Mr Trichet may show up in Brussels to have a few polite points lobbed at him by an intermediary. He is, perhaps understandably, reluctant to play a central part in a Leinster House drama circus.
The origins of this reluctance nevertheless lie with a kind of entrenched mindset that is particularly apparent at the ECB head office in Frankfurt, but is also to be spotted in Brussels and in Berlin. There has never been an acceptance in these quarters that actually, the euro project was poorly designed and even more poorly implemented. Europe-wide financial regulations were lacking. The bank in Frankfurt, which obsesses over tiny movements in consumer prices, lost complete control over developments in the area of asset prices, paving the way for the subsequent bust. Bank lending practices may have been appalling in places like Ireland, but they were also shoddy enough in Germany. The blushes of German bankers have been largely spared.
What is particularly galling is that senior European officials now accept they would have done things differently back in 2008 in the wake of the Lehman Brothers collapse when all the emphasis was on forcing the Irish authorities to protect bank creditors, including certain, rather opportunistic bondholders.
This was done in order to protect the wider European financial system, but there has been an absolute refusal to contemplate some form of decent reimbursement to the Irish. The economist Colm McCarthy goes as far as to advise the Government here to consider a legal challenge to the European Court of Justice aimed at forcing the authorities to come up with compensation. It’s surely worth a try, though it is worth adding that the court has a long record of not rocking the boat when it comes to decisions of this kind. Certainly, in the court of informed European opinion, the Irish case looks strong enough.
The latest mega move by the ECB might have been less large had it come several months ago before deflation really started to become entrenched in parts of the zone. Even before the oil price fell out of bed, inflation was well below the target rate of less than 2% set by the treaty. Even in these parlous times, we have been dancing macroeconomically to a German/Finnish/Dutch tune.
Ironically, should a sharp rebound in the oil price follow, this, combined with further falls in the euro, could just possibly spark the sort of move to inflationary territory that Berlin and Frankfurt dreads. Dare one say it, but would a 3% rate of inflation in the eurozone over a limited period really be such a terrible thing, given the mountains of debt which so many are having to climb?
The Berlin/Bundesbank position is that maintenance of monetary and fiscal rigour is vital if the zone’s laggard economies are to recover. They certainly have a point in this regard; witness the sheer scale of tax evasion across the Mediterranean, not to mention the continuing military expenditures of otherwise hard-pressed Greece.
Obduracy at the heart of the ‘northern European’ government and monetary establishment has, if anything, produced a counter reaction among the populations of countries such as Greece, Portugal, and Spain, leading to the prospect of confrontation in the months ahead. The Devil is stirring the pot. We have yet to start tasting its contents.
The quantitative easing programme announced by the ECB last week has not been universally welcomed, writes Kyran FitzGerald
The Government has been told to consider a legal challenge to the European Court of Justice
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