Sunday, November 13, 2011

What Will the ECB Do?

Many observers believe that the only way out for the Eurozone is for the European Central Bank to become a lender of last resort. Jean Quatremer quotes Marco Kranjec of Slovenia, a member of the ECB Board of Governors, saying that bank is "flexible" and will go "as far as necessary." He does not, however, quote Bundesbank president Jens Weidmann, also a member of the BoG of the ECB, who warns that the bank absolutely must not become a lender of last resort: it's not only wrong, it's illegal, Weidmann says. And Mario Draghi, the new head of the ECB, says that the LOLR role is "not the bank's job."So we have an impasse, with time running out.

For those who like their doom and gloom leavened with math, here are some numbers.

1 comment:

Mitch Guthman said...

Jens Weidmann must be either blind or insane. If Weidmann’s view prevails then time has already run out for the Eurozone and there is nothing more to be done. The Euro cannot survive without a fully functional central bank. All the countries of the Eurozone, except Germany and France, have now been reduced to third-world status but they are ultimately in no less danger of economic collapse than is the rest of Europe.

Once it becomes clear that the ECB won't perform as a normal central bank, then the runs will be on and all the countries of the Eurozone will be squeezed hard. I believe there is a very high likelihood of defaults by many countries including Greece and Italy in the near future because they have debt to roll over soon. Spain and Ireland will soon follow. France will be in danger, too, but somewhat less because its debt is somewhat longer term (But, in the end, the fact that France has borrowed in a foreign currency will probably doom it in the long run unless it can find a way to exit the Euro and soon).

In the intermediate term, Germany, the engine of the European economy, will also be in danger. Austerity in Eurozone markets (which are big consumers of German goods) means drastically reduced German exports and it is highly unlikely that China will be able or willing to take up the slack. The natural response for Germany will be austerity. The reduction in export demand due to austerity measures elsewhere in Europe will combine with the reduction in domestic German demand. This downward economic spiral will result in severe pressure on German debt because it is denominated is what is essentially a foreign currency. I think it’s a real possibility that there will be a total economic collapse in Germany within a decade.

I believe that the downward economic spiral of the austerity “death cult” guarantees that there will be little (or even negative) economic growth in Europe for several years at a minimum or perhaps even decades. And that’s if we’re lucky.

The fact that all of Europe has chosen to adopt a currency over which it has ceded all control to a handful of bankers who are obsessively focused on keeping inflation below 2% will certainly magnify the problems of Europe's weak economies (just as austerity is likely to put them into a sort of death spiral). Something akin to the Great Depression is now a real possibility. If the ECB does not act, and soon, then Europe is totally screwed.