Germany's dangerous ideas
After finally persuading the Germans to overcome their irrational fear of inflation, can Draghi also convince them not to force Greece into default?
“The short-term danger of contagion [from a Greek exit] is difficult to assess, but we have enough buffers in place. And even though they were designed for different circumstances, they are sufficient. But we are entering uncharted waters.”
That was European Central Bank president Mario Draghi, trying his best to make sense at the IMF's spring meetings in Washington.
I can't be sure but I think this is what he means:
'We don't know what will happen if Greece exits the Eurozone. But whatever does happen, no one should worry because we have the tools – which weren't designed to address what we don't know will happen – but we do know they'll work. Probably.'
We shouldn't be surprised at the confusion and anti-logic in Draghi's remarks. He is, after all, dealing with the Bundesbank, which has steadfastly resisted the lessons of history, preferring the hyperinflation of the Weimar Republic to determine, well, just about everything.
As The Guardian's Larry Elliot put it, the battle is between 'Draghi, a man who thinks macro-economic policy matters, and the Bundesbank, a central bank that thinks economic history ended in 1929.'
Economic experiments are rare in real life, ensuring the one running over the past six years will be studied for decades, except perhaps in Frankfurt.
After the GFC, the US and UK rolled the printing presses, desperate to avoid a Japan-style lost decade. The Bundesbank, through its ECB sock puppet, obsessed instead about prices rising rather than falling.
The results of the experiment are now in. The US and UK avoided deflation and these economies are now returning to growth. Meanwhile, in the Eurozone prices fell 0.6% last year. GDP growth stood at 0.3% for the last quarter, largely down to Germany, the world's third biggest exporter and a huge beneficiary of a low Euro.
Draghi clearly twisted a few arms. The Eurozone's quantitative easing program began in March, six years after the US hit the 'print' button. It may be too late, and it may yet be scuppered by more German obstinacy over Greece's dire circumstances.
The country faces two important meetings over the next few weeks. The first is in Riga on Thursday, about which German finance minister Wolfgang Schauble has said 'nobody expects there will be a solution'. The next, on May 11, is 'decisive' according to European Commissioner Pierre Moscovici.
Eurozone finance ministers want Greece to submit a list of 'reforms' it will undertake – selling off state-owned enterprises and the like – before releasing a further €7.2bn in loans. The list will be deeply unpopular with Greek voters, who expect their new Government to run a tough line but stay in the Euro. That might be tricky.
The fixation that led the Eurozone into deflation stems from the same place as the German idea that debtors must be punished and money always repaid, regardless of the circumstances. This is primitive economic thinking for which Europe could pay a heavy price.
Draghi helped the Germans overcome their irrational fear of inflation and finally act to address the real issue of deflation. But it took six years for the Bundesbank to get a grip on its obsession.
What chance does Draghi have of convincing it that forcing Greece into default might not be the best thing for the Eurozone right now, in less than three weeks?
Draghi was right. We are in unchartered waters.
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