by Nomi Prins
Policymakers worried about the dual threats of a stronger dollar, which might decelerate inflation target progress, and a global slowdown triggered by an increase in US rates. By conjuring money, the Fed had begun something it couldn’t stop. Certain Fed members appeared more worried about looming hikes, with the dollar already strengthening relative to the euro and other currencies. Others didn’t seem to care.
In Washington, at another rarified gathering of central bankers at the IMF on October 10, Draghi denied any deliberate ECB action to manipulate the euro. It was not his job to undertake “policies directly targeted to the exchange rate.”56 He explained the euro’s fall by divergences in international monetary policy. He could have equally blamed it on the weather. Currencies were becoming impossible to control, as they were battered about by speculators keen on interpreting the head-and tailwinds of every central bank action.57 But that didn’t stop him from trying.
German opposition to the ECB’s methods remained strong.58 When Draghi met with German federal minister of finance Wolfgang Schäuble at the IMF annual meeting in Washington, he was not optimistic about the chances for finding common ground.
On October 20, the ECB started buying more covered bonds (backed by loans, such as residential mortgages). Draghi said the program would return the ECB’s total assets to 2012 levels, pushing its balance sheet from €2 trillion to €3 trillion.59 The hope swirling around the central bank universe was that banks would sell bonds to the ECB and use the money they got in return to lend to businesses. But banks didn’t want to lend, not when they could speculate with such cheaply acquired money instead.
Six days later, twenty-five (or about one in five) European banks failed the ECB stress tests that checked their health should another financial crisis emerge.60 Nine of them were in Italy, three in Greece, and three in Cyprus.
On October 29, the Fed ended the largest monetary stimulus program in US history by finishing its third round of QE.61 Yet the global policy of quantitative easing remained very much intact. The American population continued to resent the fact that banks were the biggest beneficiaries of Fed generosity.
For bank profits and CEO bonuses had ballooned, whereas ordinary Americans’ wages had not. Two weeks later, on November 13, at a Macroeconomics and Finance conference hosted by the Fed, Yellen said the Fed should watch developments overseas and their impact on the US economy to evaluate the moment to raise rates.62
A week before another G20 meeting, this one in Brisbane, Lew accused “national authorities and European bodies” of failing to restore growth. He claimed the lack of a plan risked a huge period of stagnation. As if Europe was acting out of simple defiance, he chastised, “The world cannot afford a European lost decade.”63
Lew stressed the role of the US economy in leading a global recovery but remarked this restoration could not be successful by relying on the United States as the importer of first and last resort. He went further, saying others should not count on the United States to compensate for the low growth in the major economies of the world.
If the United States would not save Europe, Draghi would use the opportunity to raise his voice and offer reassurance. He was not about to sit and watch passively from the sidelines. He vowed, “We must raise inflation and inflation expectations as fast as possible.”64 Ironically, as long as inflation remained low, his power remained high because it provided him a reason to continue to levy his money-conjuring strategies.
Later that month, Draghi promised an audience of bankers at the Frankfurt European Banking Congress that if raising inflation “didn’t work… we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases.”65 On December 4, he said the ECB could follow its path without German support: “We don’t need to have unanimity.”66 That dispute carried on.
Yet, politically, Draghi did need Germany’s support before the January 22, 2015, ECB governing council meeting. His challenge was to outflank the German central bank without promoting a national impasse inside Germany regarding support for the euro. Nowhere in any of this did the plight of ordinary citizens meaningfully feature in the discussion.
RISING TENSIONS IN EUROPE
On January 5, 2015, Draghi told the German newspaper Handelsblatt that the ECB would likely start buying government bonds following the US and UK central banks’ policies: “We are making technical preparations to alter the size, pace and composition of our measures in early 2015.”67 As a response, the euro hit its lowest level since March 2006 against the dollar.
According to Albert Einstein, the definition of insanity is to keep repeating the same action and expecting different results. Draghi initiated another round of QE on January 22, to reach his so far unattainable inflation target of 2 percent. The deposit rate was cut deeper into negative territory.
Also on January 22, Draghi announced another twist of euro QE. The ECB executive board proposed spending €50 billion a month on asset purchases through September 2016. As Draghi commented, “We would believe that the measures taken today will be effective, will raise inflation, medium-term inflation expectations, and basically will address the economic situation in the euro area.”68
But he expressed fresh caution about the impact of monetary policy absent appropriate fiscal policies. Central bankers were beginning to cover themselves, shifting blame onto governments for their inability to attain its promised goals. The problem was that publicly identifying blame was dangerous, and countries that took on the highest debt burdens were often cast in a very negative light because of politics rather than economics.
Greek political turmoil also influenced the euro’s fall. Just ahead of the Greek general elections on January 25, speculators feared a Syriza victory would end austerity policies in the country and perhaps even induce an exit from the Eurozone. Elite euro policymakers wanted to hold tight to their power base, which meant pulling ranks against any perceived threat.
Angela Merkel claimed there was no change in German policy toward Greece. She pressed for Greece to adapt to troika bailout obligations. On the other hand, French president François Hollande said the decision was “up to the Greeks” and warned that “Europe cannot continue to be identified by austerity.”69
In his op-ed in the Guardian on February 5, 2015, historian Jochen Hung attempted to ward off any public castigation of Germany for not doing its part to help its weaker brethren countries in the EU. “Blaming an evil German empire can be a convenient excuse for democratically elected southern European governments who don’t want to take the flak for unpopular decisions at home.”70
The reality was that QE hadn’t helped any of the periphery countries, where growth remained slow and wages low. Like Bernanke and Yellen, Draghi ignored the risk of asset bubbles and their popping into future crises: “So far we don’t see bubbles. There may be some local episodes of certain specific markets where prices are going up fast. But to have a bubble, besides having that, one should also identify, detect an increase, dramatic increase in leverage or in bank credit, and we don’t see that now.”71
His QE decision provoked more diverging opinions in Europe. Jean-Claude Trichet, former ECB president, declared support for Draghi’s initiative on CNBC while arguing on behalf of his successor’s’ predicament: “To think the ECB has a magic wand and will change all the situation in Europe by its magic wand, in my opinion is not the appropriate reasoning.”72
In contrast, Bundesbank president Jens Weidmann and executive board member Sabine Lautenschläger said that QE was unnecessary and could negatively affect the incentive of governments to promote structural reforms. It was a damned if you do, damned if you don’t euro stalemate. QE had been ineffective at hitting the goals the ECB wanted. And the German contingent wanted more reform. This meant a push for more austerity, which translated to more pain for a wider swath of Southern and increasingly other parts of Europe. Citizens were caught in a vortex between two u
npopular and ineffective policies. Governments seemed to forget they existed, while central bankers did not even pretend to be concerned.
The ECB exhibited political favoritism through its QE program by picking and choosing which countries’ bonds it would buy, and thus giving those countries higher prices for their debt by virtue of that extra demand. In January 2015, Greek bonds had been determined not eligible for purchase by the ECB’s QE program.73 When the left-wing, anti-austerity Syriza party won, breaking more than forty years of two-party rule, incoming Greek prime minister Alexis Tsipras promised a renegotiation of bailout terms, debt cancelation, and public sector spending.74
Germany insisted Greece should stay in the Eurozone, despite news reports claiming Berlin was ready to see Athens leave if Syriza won the snap election and reneged on the country’s reform program.75 Greece did indeed remain in the EU.
On March 9, 2015, Draghi introduced yet another QE program, the Expanded Asset Purchase Programme (EAPP). This one would buy public sector securities, too. The program consisted of a third covered bond purchase program (CBPP3), an asset-backed securities purchase program (ABSPP), and a public sector purchase program (PSPP). It could have equally decided to buy scones and jam or croissants and butter—that would have spread money more directly into the real economy, at least as far as backers and dairy and fruit farms were concerned. These purchases of public-and private-sector securities would run €60 billion per month. They were supposed to continue through March 2017 or until Draghi’s governing council deemed inflation was hitting close to 2 percent, or, as it was with conjured money, until they felt like stopping it.76
Five weeks later, during an IMF conference in Washington, DC, in mid-April, Draghi dismissed speculation that Greece would be forced to leave the Eurozone and reassured the crowd of central bankers that the single currency “cannot be reversed.”77 He was a Europhile through and through, even down to believing one size QE fits all.
Yet concerns about a “Grexit,” or Greece leaving the EU, rose as a result of fears the new leftist Syriza government would shun austerity and force the issue, which could create a domino effect through the rest of Southern Europe that could irrevocably fracture the EU. Asked how the ECB would react to a Greek default, Draghi replied, “I don’t want even to contemplate it.” He added, “The answer is in the hands of the Greek government.”78
Other finance authorities were less optimistic. At the same IMF meeting, Jack Lew warned of the unpredictable effects of a larger Greek crisis: “I do not think that anyone can predict how markets will respond to dramatic changes in circumstances.”79 Christine Lagarde said recent talks with new Greek finance minister Yanis Varoufakis were less productive than expected and that she had urged him to present a detailed bailout proposal. “The job of the finance minister… is to go deep in the analysis, pull out the numbers, assessing the efforts undertaken, making a few hypotheticals about what it will deliver in terms of growth, in terms of fiscal revenues, or spending, and then move on,” she said.80
Varoufakis was not of the banking elites. He hailed from academia, which meant he couldn’t leverage decades of establishment connections to get across that the bailout was bogus. As he wrote in his book And the Weak Suffer What They Must?, “Terrible earthquakes drive snakes out in the open, causing them to slither in a daze until the tectonic plates have settled again.”81
During the ECB press conference on June 3, Draghi was asked about movements in the prices of German bonds, which were suddenly at the front lines of a global bond market sell-off. He declared that Europe “should get used to periods of higher volatility” because of the “very low levels of interest rates” but that it would not lead to an alteration in ECB policies.82 He touted his power even as he warned it might not bear fruit.
The Greek government missed its €1.6 billion (US$1.7 billion) payment to the IMF on June 30, 2015, the first developed country to effectively default to the fund.83 Negotiations between the government and its official creditors had fallen apart days earlier when Tsipras proposed a referendum on the EU proposals. To stem capital flight, he announced emergency capital controls, limiting bank withdrawals to €60 per day, and calling a bank holiday after the ECB capped its support. The war between the south and elite north raged on, and the ECB was in the thick of it. And now, a war on cash was brewing.
Still, the ECB governing council refused Greece’s central bank the right to increase its Emergency Liquidity Assistance (ELA) facility, effectively closing down Greece’s commercial banks at enormous cost to Greek businesses, citizens, and the nation’s image. It was a clear (financial) attack against the newly elected Greek government, designed to pressure the negotiations and the people of Greece before the referendum. The closed banks were a strong reminder of the ECB’s power, a force greater than that of any new Greek government. It was the equivalent to harnessing fear, and a body that could bring a population to its knees with a lack of funds, money, and confidence in the monetary system and its geopolitics.
However, Tsipras soon bent to European creditors and the troika. He pressed his parliament to approve more austerity, despite a July 5 referendum in which Greeks overwhelmingly voted against it.84 His agreement followed a weekend of talks in which a Greek Eurozone exit was barely averted and that opened the way to a possible third bailout of up to €86 billion (US$94 billion).
The ECB resumed some support for Greek banks, but not without harsh words for the nation, from Draghi, who said, on July 16, 2015, “We have today accommodated the Bank of Greece request, though scaled to one week. We want to see how the situation will evolve.” The compromise split the ruling Syriza party and set the stage for new elections.
Varoufakis refused to accept the third bailout deal, eight days after the population voted to reject it in a referendum. In disgust and defiance, Varoufakis quit his post as Greek finance minister on July 6, 2015. In an August 2, 2015, interview with Spanish newspaper El País, he chastised the troika in general and, in particular, German finance minister Wolfgang Schäuble’s political attitude regarding the European credit crisis. He said, “Schäuble’s plan is to put the troika everywhere, in Madrid too, but especially in… Paris.… Paris is the larger prize. It’s the final destination of the troika. ‘Grexit’ is used to create the fear necessary to force Paris, Rome and Madrid to acquiesce.”85
Conditions were rough everywhere. Italy’s youth unemployment hit a record high of 44.2 percent. As for Spain, even with the economy stirring (in a minor way), loan volumes were stagnant or falling, and youth unemployment was at 47.8 percent that October.86 Greece’s was 53.2 percent.87
In the midst of that chaos, Lagarde cautioned the Fed against raising rates until the world economy was more secure. Her warning was cast against a summer of global market turmoil triggered by jitters over China’s deteriorating economy and prospects of higher borrowing costs in the United States.88
Nothing the central bankers could concoct was working. Their policies were hurting rather than helping economic stability and increasing inequality within and between countries. Second-quarter European GDP rose by just 0.3 percent compared to 1.6 percent during the same quarter the prior year.89 Even Germany saw its sharpest decline in exports in six years, as carmaker Volkswagen was embroiled in a scandal concerning diesel emission tests.
On October 22, speaking at the Governing Council Policy meeting in Malta, Draghi blamed this slowdown on weak emerging markets and slower growth in China. He looked at it as a reason to extend his monetary policy—and reason enough not to blame his own efforts for the current economic malaise. But, at this point, there was major dissention in the EU ranks.
Two weeks later, speaking at the Federation of German Industries (BDI) lobby in Berlin, British chancellor George Osborne said Britain would only support a treaty to save the euro from collapse if its own renegotiation demands were accepted. The project to strengthen the Eurozone through a fresh fiscal arrangement was aimed at avoiding a repeat of crises. It was supporte
d by Germany, France, and European Commission president Jean-Claude Juncker. The idea was to prevent debt crises from attacking the common currency.90
The chancellor said the price to be paid for Britain’s support would be the guarantee that it would never have to participate in Eurozone bailouts and that a new voting mechanism would prevent coalitions against the United Kingdom’s interests. It was the beginning of a potentially irrevocable fracture between the United Kingdom and the European Union. A similar project of Eurozone strengthening had already been vetoed by prime minister David Cameron in 2011, but this one seemed to have more legs.
“There is a deal to be done and we can work together,” Osborne said. “You get a Eurozone that works better. We get a guarantee that the Eurozone’s decisions and costs are not imposed on us.” And further, “You get a stronger Euro. We make sure the voice of the pound is heard where it should be.”91
Merkel agreed the United Kingdom should remain a member of the EU. “But,” she said in Berlin before the Osborne speech, “the decision isn’t up to us. It is up to the British.” She did allow that “where there are justified concerns—whether competitiveness or better functioning of the EU, the British concerns are our concerns.”92
Another EU central bank leader was on edge: Mark Carney. Carney had been governor of the Bank of England since July 2013 after having served in the same role at the Bank of Canada from 2008 to 2013. A Canadian economist who attended Harvard and later earned his PhD from Oxford, he also understood the needs of the international banking community elite. He had worked for thirteen years at Goldman Sachs in its London, Tokyo, New York, and Toronto offices. London’s Evening Standard called the hockey-playing Canadian “the biggest babe in banking” and went on to describe him as having “George Clooney good looks.”93
