Open letter to my German friends about the ECB policy

Guillaume Duval argues that Germany can see the end of ECB quantitative easing—if only it stops imposing austerity on the eurozone.

Dear neighbours and friends,

On September 12th, the president of the European Central Bank, Mario Draghi, ending his mandate, announced a relaunch of quantitative easing, the policy to inject liquidity into the European economy to support activity. This caused uproar in your country. The daily newspaper Bild even went so far as to run a headline—with photo-montage in support—‘Count Draghila’, portraying Draghi as sucking the savings accounts of Germans like a vampire.

First of all, I would like to say that, although many of you are obviously doing too much of it—as in the case of Bild Zeitung—in many ways you are justified in severely criticising the monetary policy of the ECB.

It is true that it is very inegalitarian. It penalises the savings of the working and middle classes, which are only remunerated at very low rates—usually lower than inflation—while at the same time it boosts the prices of assets, equities and property. But it is the richest, in Germany as elsewhere, who hold the bulk of the wealth: the inequalities in this arena are everywhere much more marked than for incomes.

More than comfortable

The policy of the ECB allows these very rich to cash in very large capital gains when they sell assets. And the rise in property prices which it brings complicates access to home-ownership for those who lack wealth, despite low interest rates. It also pushes up rents, cutting the purchasing power of tenants. And speculators and intermediaries in the financial markets—the very ones who led us into the wall in 2008-09!—are banking more than comfortable incomes and commissions.

At the same time, the working and middle classes bear the brunt of the effects of fiscal-austerity policies, which reduce their purchasing power via the tax increases they cause and reduce their standard of living by limiting the public services to which they have access.

It is also true that the ECB’s policy is, in the long run, quite ineffective—probably more and more so. Although it has injected €2.4 trillion into the eurozone economy since 2014, the recovery has been only very temporary. The central bank has not achieved its goal of bringing inflation closer to 2 per cent, to avoid the risk of lasting deflation.

It has also made possible, by making credit cheaper than ever, the survival of many ‘zombie companies’—firms whose business is not profitable because they are not sufficiently innovative and effective. This has slowed down the modernisation of the economic fabric. It also hinders the ecological transition by facilitating the indiscriminate pursuit of any and all activities, damaging our environment.

In short, dear friends and neighbours in Germany, in many respects you have reason to severely criticise the monetary policy of the ECB and to want to change it.

But the problem is that it is mostly you who, in reality, prevent it from being modified. It is the attitude of successive German governments towards economic policy in Europe (with the broad support of German public opinion) which makes it impossible at the moment to abandon quantitative easing.

Generalised austerity

Germany’s insistence on a rapid return to generalised fiscal austerity in 2010 was reflected in the signing in 2011 of the Treaty on Stability, Co-ordination and Governance (TSCG). At the same time, the German authorities urged their neighbours, and particularly the most crisis-ridden countries, to adopt drastic measures to reduce the cost of labour and ‘liberalise’ the labour market, on the model of reforms in the early 2000s under the then chancellor, Gerhard Schröder. This terribly toxic cocktail caused the eurozone to fall back into deflation and recession, arresting the recovery which began in 2010.

To get out of this trap the ECB was required, in effect because of you, to begin in 2012 the quantitative-easing policy you denounce. From 2017, the bank sought to normalise its monetary policy and stop injecting liquidity into the European economy. But at the same time pressure was being maintained, particularly from the German government and public opinion, for restrictive fiscal and deflationary labor-market policies in the euro area.

The predictable outcome, accentuated by increasing geopolitical uncertainties, has occurred: the European economy has fallen back into stagnation—forcing Frankfurt to relaunch quantitative easing.

You do not want QE any more? Very good. It is up to you to stop idolising the schwarze Null (‘black zero’), the search for a perfect budgetary balance between expenditure and budget revenue at home and as regards your neighbours. It is also up to you to stop believing, and seeking to make your neighbours believe, that a social race to the bottom would be the alpha and omega of a competitive economy—German industry being living proof of the exact opposite.

In short, stop (finally) imposing deflationary policies on the eurozone and the ECB will be able to adopt a more reasonable monetary policy, more in line with your wishes!