by Nomi Prins
Historically, the Bundesbank was an important tool Germany used to maintain its conservative economic position.167 Germany believed that to combat sweeping issues of debt, countries should take on massive austerity measures while cutting wages. The theory was that such moves would reduce foreign imports and draw down demand for external financing. In 1999, when the euro was launched, the power of setting rates was transferred to the ECB, but Germany still tried to influence ECB decisions.
According to the Financial Times, Draghi understood the need to placate the Bundesbank to successfully implement his policies. So, at the end of 2011 he eliminated the government bond purchase program and instead formed a plan of unlimited three-year loan offers, which was basically the same thing in a different form. Draghi, for as much criticism as the German media leveled upon him, was a man who could be the nation’s greatest ally or its most dangerous threat.
Antonis Samaras was appointed Greece’s prime minister on June 20, 2012. He pledged to honor bailout commitments. (Two months later, in the fifth year of the Greek recession, two hundred thousand citizens marched in the streets of Athens against austerity.)168
On July 5, 2012, the ECB cut rates by 0.25 percent, placing the deposit rate at 0 percent.169 Draghi was asked why the Eurozone was not pumping more money into the market with some countries still in a credit crunch. He noted impatiently that “there are at least three sets of reasons why banks may not lend. One is risk aversion, another is a lack of capital, and the third is a lack of funding. We have removed only the third, not the other two.”170
As the ECB cut rates, the BOE and PBOC did, too. Yet, Draghi denied any coordination “beyond the normal exchange of views on the state of the business cycle, on the state of the economy and on the state of global demand.” He went on, “In a normally functioning euro area when a bank is short of funding, they simply borrow from other banks. But in a highly fragmented situation, when a bank is short of funding, they only can go to the ECB. And if the bank is solvent, the ECB stands ready to provide all the liquidity they need.”171
On July 20, Spain declared the recession was expanding and that it would need help from the central government.172 As a result, the euro hit its lowest value against the yen since November 2000 and a two-year low against the dollar.
Six days later, at the Global Investment Conference in London, Draghi issued one of his most legacy-establishment statements yet: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro.” Spain was nearing full-fledged crisis mode. If the floodgates were to open in Spain, high waters could quickly inundate the rest of Europe.
Members of the German government were tired of bailout protocol.173 “It’s a bottomless pit,” said Free-Democrat spokesman Frank Schäffler. Even twenty-two members of Merkel’s own coalition voted against the Spanish package. Whereas electoral shake-ups in Europe were common, Germany was at the controls. Discontent among its leadership party mattered.
In its yearly report on the Eurozone, the IMF warned that the deepening crisis raised concerns about the “viability of the monetary union itself.”174 The Olympics started the very next day in London, but European bankers had already won gold and never even stood on a podium. Draghi characterized the summit as a real success because “for the first time in many years, all the leaders of the 27 countries of Europe, including UK etc., said that the only way out of this present crisis is to have more Europe, not less Europe.”175
Every move was about money crafting and the illusion of confidence. On September 6, 2012, the ECB announced it would buy Eurozone countries’ short-term bonds to curtail “distortions in financial markets.”176 The ECB, under certain conditions, would buy unlimited amounts of short-term government bonds in the secondary market to help those countries at risk of experiencing high long-term interest rates. Draghi was implying the ECB could deploy more firepower to save the euro or, really, do whatever it believed it needed to do. It was a statement, not a supposition.177
Draghi’s bond purchase program sharpened the divide between him and German policymakers. Several German MPs lambasted the decision, claiming that it was a back door to unlimited funding. Alexander Dobrindt, a right-wing Eurosceptic Bavarian MP, labeled Draghi a “counterfeiter.”178 Jens Weidmann, the president of the German Bundesbank, said the measure was “close to state financing via the printing press” and meant that the ECB was assuming a political role.179 This wasn’t about liquidity or monetary policy; it was a tug-of-war over power.
Despite his critics, Draghi received support from other German leaders. On a political talk show, Martin Schulz, German president of the European parliament, declared Draghi was doing the right thing.180 Even Angela Merkel publicly supported the ECB policy, though she struggled with her own party behind closed doors over the credibility of the ECB’s moves and the legality of Draghi’s programs.181
Draghi’s detractors were vehement. Volker Kauder, leader of the Christian Democrats (Merkel’s party), called the ECB plan “very close to the edge” regarding its permissibility. But Germany was the wind behind the EU’s sails. Although egos might clash, the ECB needed Germany and Germany needed the ECB. For the EU to remain intact, Draghi had to win German support and take his place as the ultimate central bank craftsman.
Markus Soeder, Bavarian finance minister, said the ECB’s plans went “well beyond” its mandate and that the bank was becoming a “super-authority.” Jens Weidmann considered Draghi’s program to be a serious violation of the “No Bailout Clause” of the Maastricht Treaty, which established the European Monetary Union. If the ECB was buying national government securities, that veered close to mixing monetary with fiscal policy.
The real concern of German politicians was that the ECB was behaving independently. But this independence was suspect to begin with. The fact that its headquarters was situated in Frankfurt was no coincidence. When it came to matters of North versus South, the ECB and Germany were more often than not a unified front.
None of that hampered the Fed, itself unencumbered by any laws restricting it from buying US Treasury bonds or mortgage-backed securities. On September 13, the Fed announced the third round of quantitative easing, or QE3. It would purchase $40 billion in mortgage-backed securities per month. Short-term interest rates would remain at “exceptionally low levels” until 2015—a date three years in the future.182 The prior forecast had set late 2014 as an end date.
The world was worried. Emergent countries saw US policy as irresponsible, fostering financial instability and volatility. The Republican Party seized upon the new round of QE to criticize Bernanke and the Fed’s policies that autumn into the US presidential election.
By mid-November 2012, the euro’s pressures stemming from Greece’s fiscal problems and the slow growth across Europe nabbed the Fed’s attention.183 While speaking at the Economic Club of New York, Bernanke used Europe’s woes to excuse his own ineffectiveness: “A prominent risk at present—and a major source of financial headwinds over the past couple of years—is the fiscal and financial situation in Europe. This situation, of course, was not anticipated when the US recovery began in 2009.”184
A month later, the Fed, ECB, Bank of Canada, Bank of England, and Swiss National Bank announced an extension to February 2014 of the US dollar liquidity swap arrangements, which were due to expire in February 2013.185 They had already been extended in November 2011 to provide liquidity to European banks as the Eurozone sovereign debt crisis intensified.
In mid-December, the Fed announced it would buy $45 billion in Treasuries and would keep buying $40 billion in mortgage-backed securities each month.186 At this point, even the BIS was growing exasperated with all the money conjuring. “Central banks cannot solve structural problems in the economy,” said Stephen Cecchetti, who ran the BIS monetary department. “We’ve been saying this for years, and it’s getting tiresome.”187
His frustration stopped nothing. It had ceased to matter whether the central banks could conjure economic
stability, let alone prosperity, for general populations. They would still find ways to lavish the private banking system and capital markets with cheap money. These actions would stoke bubbles in the bond market (and thus historic levels of debt) and the stock market (the hottest cheap-money game in town).
6
EUROPE PART II: The Draghi Money Machine
I want to emphasize that basically the ECB will be in the market for a long time.
—Mario Draghi, president of the European Central Bank, London, June 8, 2017
Even with deposit rates slashed to zero percent, strong concerns about the Eurozone’s ability to restore growth, service debt, and increase levels of employment lingered. Because of that uncertainty, Draghi faced mounting German opposition.
The press dubbed Draghi “Mr. Somewhere Else,” given his propensity to seemingly occupy two places at once geographically and politically.1 He knew a thing or two about big banks’ need for easy money. He was also a trustee at the Brookings Institution in Washington, DC.2 Brookings had hosted a select event on November 2, 2011, to commemorate the ECB’s shift from the “Trichet-era” to the “Draghi-era” with “the euro crisis in firm bloom.”3
Draghi, though thoroughly European, was very familiar with the United States. He had worked as an executive director at the World Bank in Washington for six years in the 1980s and ran the Italian Treasury in the early 1990s. According to the New York Times, Draghi earned his moniker “Super Mario” in the 1990s when he convinced foreign investors that the Italian economy, sunk in an abyss, was worthy of their confidence and capital. He pushed major European privatization deals and helped Italy join the European Monetary Union.4 From there, he moved to the private sector at Goldman Sachs International, where his Italian connections came in handy for getting deals done. He governed the Bank of Italy from 2006 through October 2011 and then beat out a German for the ECB directorship, which in European politics was noteworthy (even though the other candidate, Bundesbank president Axel Weber, did not have a personal Rolodex of international relationships as Draghi did).
Germany, with its comparatively robust economy and trade surplus with the other sixteen countries in the Eurozone,5 favored a strong euro. Draghi and other core European leaders worried that appreciation of the euro could harm trade in other parts of the Eurozone that could not afford an economic squeeze. Maintaining low rates meant that foreign capital would be less interested in investing in Europe and therefore would theoretically limit the value of the euro. That dovetailed nicely with his easy-money policy.
The very possibility of euro volatility incited significant anxiety. On February 5, 2013, French president François Hollande declared that the Eurozone should develop an exchange rate policy to protect the euro from “irrational movements.”6 He was motivated by the euro’s fourteen-month high of around 1.35 per dollar, which could harm French exporters and economic growth. In his first speech before the European parliament in Strasbourg, Hollande warned that competitiveness reforms taken by Eurozone governments might be undermined by a strong euro. Yet the entire EU system challenged the notion of unified currency or monetary policy, for it hinged on unequal economies, governments, and power. The needs and economic prospects of the core European countries were different from those of the peripheral states, and at the core, Germany stood supreme.
Though Hollande defended ECB independence, he supported the idea of reforming the international monetary system so that countries could better protect their own economic interests. This position of criticism was legion in French history. Charles de Gaulle and his finance minister had been staunch critics of the dollar’s “exorbitant privilege.” Like his predecessors, Hollande called attention to surplus countries, such as Germany and the Nordic nations. He went on to say they should stimulate internal demand to rebalance the economic situation in the EU.
This sentiment echoed the major shifts occurring among non-EU developing nations in response to the five-year monetary policy projections the G7 central banks had crafted. They sought alternatives to the dollar, and by extension to the Fed and US government hegemony. On March 27, 2013, during a meeting in Durban, South Africa, BRICS leaders approved a $100 billion fund to collectively fight currency crises, even though they fell short of reaching an agreement on financing a new development bank. Russian finance minister Anton Siluanov said China would likely provide the largest amount of money for the fund.7
Discussions about this development bank had begun a year earlier, when India proposed it as an alternative to the World Bank and IMF. If the BRICS could establish such an entity, it would be more committed to the economic needs of developing countries. Though the BRICS leaders did not agree in full then, the issue had moved forward. After all, the IMF and World Bank were Bretton Woods organizations and instruments of the “old world order.” If the BRICS were to rise in prominence, the world of central banking could become a battleground whose lines were drawn along distinct regional monetary policies, with winners and losers. The developing economies were learning from the downturn. Fashioning their own development bank would usher in a “fair world order” and eventually a monetary system to match.
While speaking at a banking conference in Dresden on April 25, 2013, before the German Savings Banks Association, Merkel said, “The ECB is in a difficult position. For Germany it would actually have to raise rates slightly at the moment, but for other countries it would have to do even more for more liquidity to be made available. If we want to arrive at tolerable interest rates again, we have to overcome the divisions of the European currency area.”8
The dichotomous shift in monetary policy that would benefit Germany, however, was to break up the EU, something Merkel was against. This was one of the first times she admitted publicly that Germany operated on a grander scale than its neighbors. France grew increasingly irritated with Merkel’s hard line on austerity as well. As Reuters reported the day after Merkel’s speech: “France’s ruling Socialist Party is pressing President François Hollande to toughen his stance towards a German counterpart it describes as ‘self-centered’ arguing that chancellor Angela Merkel’s pro-austerity policies are hurting Europe.”9
The Financial Times observed, “The German chancellor’s highly unusual intervention on Thursday, a week before many economists expect the independent European Central Bank to cut its main interest rate, highlights how the economies of the prosperous north and austerity-hit south remain far apart.” The paper added, “Wolfgang Schäuble, the German finance minister, has also broken the taboo, saying in a recent interview that the ECB should ‘drain liquidity’ from the system.”10
Yet, the G7 central banks kept doing the only thing they knew how to do, creatively ease monetary policy by any means. On May 2, 2013, at a press conference in Bratislava, Slovakia, Draghi and ECB vice president Vítor Constâncio announced the ECB would cut rates on the main refinancing operations by another 0.25 percent to 0.5 percent and on the marginal lending facility by 0.5 percent to 1 percent.11 The deposit facility rate remained at 0 percent. It was the first cut in borrowing costs since July 2012. The ECB was still intervening to supposedly spur growth, not least because shares of the big European banks were trading comparatively lower than their US counterparts, at a share-price-to-book-value ratio last seen in the early 1980s.12 This, despite their heavy dose of ECB support. They could always use more.
The public certainly wasn’t feeling any love toward the banks. A May 2013 Gallup poll reported “European Countries Lead World in Distrust of Banks.” The disconnect between the population and the financial system and markets was vast. Money was cheap for banks. Debt was escalating for governments. Economic stability for the masses was beyond reach.
In May 2013, a Pew Research Center report stated the obvious: “Most Europeans are profoundly concerned about the state of their economies. Just 1 percent of the Greeks, 3 percent of the Italians, 4 percent of the Spanish and 9 percent of the French think economic conditions are good. Only the Germans (75 pe
rcent) are pleased with their economy.”13 More than three-quarters of the pan-European responders believed their economic system favored the wealthy. The Pew report also claimed, “Except in Germany, overwhelming majorities in many countries say unemployment, the public debt, rising prices and the gap between the rich and the poor are very important problems.” The results were in. Cheap-money policy had strengthened Germany at the expense of the rest of the EU. Germany was now against it, and yet, cheap money wasn’t actively helping the populations of the rest of Europe either. Many were left to wonder what was the point.
Perhaps, deep in the recesses of his psyche, Draghi wondered that as well, or at least realized that conjuring money wasn’t the golden ticket to economic prosperity for all. That month, he set his sights on fiscal policy. Draghi urged euro policymakers to gear their actions toward austerity measures and deficit reductions “to bring debt ratios back on a downward path… and where needed, to take legislative action or otherwise promptly implement structural reforms, in such a way as to mutually reinforce fiscal sustainability and economic growth potential.”14
During that press conference in Bratislava, one reporter had asked Draghi, “Chancellor Angela Merkel recently said that if you speak about Germany, you would have to raise interest rates. What do you make out of these comments and is she correct?”
His response indicated he was not moved by Merkel’s thinly veiled swipe at his money-conjuring ways: “ECB independence is dear to all, and especially, I would say, to German citizens,” he said. “We have 17 countries and the business cycles of these 17 countries are not exactly the same… the monetary policy measures which can benefit some countries may not benefit others. Given the weakness that also extends to the core economies, we think it does benefit everybody.”
