Tuesday, May 31, 2022

...And What About The ECB?

 I have been harping about the Fed's atrocious monetary policy for very long - so, how about the ECB? Are they any better?  Most definitely, not.  If anything, they are even further behind in normalizing monetary conditions for the Eurozone.

To begin with, the ECB expanded its balance sheet (QE = "printing money") by buying euro area government bonds just as much and just as fast as the Fed - see chart below.  

Central Bank Assets For Euro Area

Unlike the Fed, the ECB hasn't even started raising interest rates;  they are "guiding" towards a couple of quarter point increases, starting - maybe - sometime in July.  Meanwhile, inflation is soaring to historic highs, producing negative real interest rates only seen back in Weimar days.  Right now, eurozone inflation is 8.1% while ECB's  main refi rate stands at 0.05% - see chart below.

Eurozone Inflation And ECB Refi Rate

That's certainly not a rational monetary policy, at least not in the face of it.  Does the ECB know something the rest of us do not? Do they fear something even worse than massive inflation?  Or, are they just hoping and praying that inflation will just go away all by itself?

I believe that the ECB is hemmed in by a trio of concurrent problems: 
  1. Several euro nations have still not truly recovered from the 2008 Debt Crisis. Italy, Greece - even France - carry enormous Debt/GDP burdens and will simply go belly up if their borrowing costs were to rise to "normal" levels.
  2. The pandemic wreaked havoc to the European economy, particularly the tourism sector that is so vital to the same countries as #1.
  3. The war in Ukraine sent energy an food prices soaring, crimping real household income available for discretionary spending, vital for the EU economy.
The ECB is, thus, paralyzed.  While some of its stronger nation-members could weather higher interest rates, its weak links would break under the strain. And a chain is only as strong as its weakest link(s).

1 comment:

  1. you know... I am thinking... the U.S.... and Europe... and Japan... and China (corporate) debts are so bad that there is no way they are going to be paid without inflation.... the central banks can't say it... but I think they are aiming for 10% inflation a year... =)