Article published by José Alberto León Alonso in El Día on 03/20/16.
On March 10, the Governor of the European Central Bank (ECB), Mario Draghi, once again surprised the markets with six measures that the most prudent analysts describe as “artillery” in the “war” against the economic crisis in Europe.
Some of these measures, such as reducing the reference rate for weekly auctions to 0%, as well as the marginal credit facility (the rate at which money is lent overnight) to 0.25%, are still symbolic measures, although we economists are astonished at an official money rate of 0%, something that, theoretically, our eyes were never going to see. That it is now a fact speaks of the exceptional nature of the current crisis.
Other measures, such as the new long-term financing auctions for banks, and the expansion of debt purchases up to 80,000 million per month, are just more of the same. More liquidity for the markets, trying to drown a crisis of excess debt with monetary measures, that is, issuing more currency and saturating the market with it. As an additional measure, banks are penalized with the money they leave unused for the liquidity they deposit in the ECB, in a futile attempt to make them use that liquidity to provide more credit to companies and individuals.
But two other measures may have more impact. On the one hand, with a complex but original method, banks that provide more credit to economic agents will be remunerated. Entities will have to increase their credits by at least 2.5% in a year and a half to benefit from an extra 0.4% of remuneration from the ECB. Banks that grant more loans than now but do not reach that minimum figure will be financed at 0%. Finally, those entities whose credit balance is negative must compensate the ECB 0.4% for the financing it has granted them. On the other hand, the ECB will buy bonds from non-financial companies with investment grade, that is, with a certain solvency, which in practice will allow the central bank to directly finance large European companies abundantly and cheaply, trying to ensure that the liquidity it injects into the system reaches the real economy. These two measures will be the ones that have the most impact, although this will probably be limited in time. In the long term, anything other than solving the underlying problem, the bubble of excess debt, I fear will not be successful.
After this display of artillery, the stock market, and especially banking securities, have experienced a considerable rise, but the underlying concern among analysts is what more can the ECB do from now on? Draghi has called for reforms and coordination and it is not the first time he has done so. If there is money left over, the solution cannot be to print more. If there is no demand for credit, the solution cannot be to force banks to grant them. But European leaders turn a deaf ear, and the ECB cannot face the crisis alone. You have already flouted all the rules that limit your activity as a direct lender and there is little else you can do.
Bit? Draghi himself claimed that he still has more of the same ammunition: “There is a long list of measures and each of them is very important,” he said. He has few weapons left to try, but I can think of three that he has not yet used, and I am sure that the ECB authorities, imaginative as they are proving to be, will have some more in their arsenal. The problem is that conventional measures have an increasingly limited impact, but there are more extreme ones that could have more effect. Continuing with the war simile, it would be about using nuclear weapons, which it has.
The first nuclear weapon is to use the existing liquidity to directly finance a joint European public investment program: the Juncker Plan, which is vegetating in the offices. Instead of allocating a trillion euros a year to buy debt from states and companies, that money could be used for states or the EU itself to build already selected European technological and transport infrastructures, which have a great impact on the productivity and cohesion of the continent. Public spending in its purest form. Its impact on the economy would be immediate and lasting. Inflation would rise, but now the problem is more the opposite (deflation) than the uncontrolled increase in prices. And if there is one thing central banks have experience with, it is controlling prices if they rise. If it is not implemented it is because of the stubbornness of the northern countries.
The second is the well-known “helicopter” (the image is “throwing” money randomly around the cities from a helicopter), that is, giving money directly to citizens. How about 2,000 euros per inhabitant per year deposited directly into the current account? I don't know anyone who dislikes the idea. It would stimulate spending and revive the economy. And yes, also inflation, like the previous one. It is a measure that theorists have proposed since the Great Depression of the 1930s, but that has never been put into practice. As I said, nuclear weapons. Unknown territory.
The third is more discriminatory: a debt jubilee. Sumerians, Babylonians, Assyrians and Jews applied it in ancient times. Every four or six years all personal debts were canceled and they started again from scratch. In this case, the ECB's money would be used to pay off the principal of personal loans (or, for that matter, that of companies), reducing the debt bubble. The drawback is that the irresponsible behavior of those who borrow beyond their means is encouraged, and those who have been prudent are penalized. Anyone who has not gone into debt looks like an idiot.
That is to say, weapons, like the meigas, there are some, another thing is that they do not want to use them, but we are reaching a point where only nuclear weapons remain.
