By Ferdi De Ville
On the Wall Street Journal on Friday February 24, European Central Bank President Mario Draghi made no secret about his ideas on the future of the European social model: finito! It is already dead, as it should be, according to the ECB boss. Thereby he admits what many for some time were anticipating, fearing and warning against: that the ECB, its allies in the European Commission (dubbed the Brussels-Frankfurt consensus) and in some Member States, are using the crisis to finally push through their neoliberal programme of deregulation and flexibilisation of European welfare states and labour markets.
This should be revealing to those who did not yet quite understand why the ECB is refusing to lend money to solvent but illiquid countries as Italy and Spain while it is at the same time showering banks with unlimited and almost free money. Fear of inflation could not explain this different approach, of course. The argument against providing liquidity directly to governments is that it might slacken the pace of their fiscal and structural reforms, which is what the Frankfurt-Brussels consensus is so eagerly waiting for. Maybe, after they have carried out enough deregulation and liberalisation efforts, and have introduced a debt break into their constituencies (and thus effectively dismantled the social contract already declared dead by Draghi), might the ECB finally provide European Member States in problems with the breathing space to start to smell the odour of a budget surplus (including interest charges) again. Wait and see…
Meanwhile, the ECB has introduced its second long-term refinancing operations (LTRO) programme, which provides European banks with an unlimited amount of liquidity against a 1% interest rate. Here, there are no prior demands, while I was thinking there is also little time to waste for a big restructuring of European banks. Neither does the ECB appear afraid of ‘moral hazard’ risks. It seems that the ECB has more confidence in the reliability of bankers than politicians. Yup, that is what the past couple of years have taught us. Some argue that the LTRO might have a positive side-effect in that the banks will lend the money through to peripheral governments and provide them some respite in that way. Actually, why should they not lend the money they get from the ECB for 1% to governments against interest charges of more than 5%? How generous! Where can I get a bank licence?
Another question Draghi’s interview brings to the surface is on the central bank’s independence. Clearly this only runs in one direction. While the ECB and its defenders always take a harsh line when it comes to the bank’s independence, to the point that most European politicians have internalized this sacrosanctity, its President does not seem to see anything wrong in lecturing politicians. In this, he is actually only following in his predecessor Trichet’s footsteps. It is another extremist sign of the arrogance of the European technocratic class that is undermining the European Union’s legitimacy.
Meanwhile, in Greece…
I have argued in a previous blog that I expect – maybe hope is a more honest expression – this to end soon. Maybe this destructive path could get a (small) adjustment in the right direction after the French elections. But a more abrupt upheaval is also possible, starting in the streets or polling booths in Greece. While last week Greece’s second rescue programme has ultimately been approved, everybody knows this does not get the country out of the woods at all. It does little to improve Greece’s competitiveness, while the negative internal demand effects may lead to a government debt ratio in 2020 as high as today (160%), even after the private sector haircut. It seems ever more likely that Greece will have to default on all its foreign debt. This can be done inside or outside the euro. In the first -and best – case, all sides would recognise that Greece was insolvent from the beginning of the crisis and all the rescue packages actually only served as disguised transfers from northern taxpayers to northern banks, and so now the moment has come to really rescue the Greek people with investment in green and productivity-enhancing projects that will benefit Greece but also the rest of Europe in the long term. Or a new blame-game will start whereby northern politicians will castigate the irresponsible, unreliable and disloyal Greeks even harder than before and Greece will leave the eurozone (and possibly the European Union) resentfully. Because of the new, fiercely devalued drachme, Greece will become more price-competitive and balance its current account (although for the greatest part due to the reduction of imports). But it will be left behind with an inadequate economic structure, a still defunct state, feelings of having been let down by its formers European partners and probably full of revenge, and with the regained political sovereignty to act on those feelings… Meanwhile, for the rest of the eurozone the exit of Greece alone does not solve any of its problems.
These are decisive times. We all have to do more than hope for the best.
In a next blog, I will try to be less cynical and write about the politics of the euro crisis that might explain some of the absurdities we are witnessing.
Ferdi De Ville is assistant professor at the Centre for EU Studies, Department of Political Science, Ghent University where he teaches and writes on economic and monetary union and the euro crisis.