Forbes: The Eurozone Can't Have The Needed QE Because Draghi Can't Convince The Germans

12/09/2014

By Tim Worstall

Over the past few days we’ve had increasing evidence of the basic problem facing the eurozone. They need to have quantitative easing over there: Scott Sumner is right, low rates do not prove the existence of easy money. But given that the eurozone needs to have that QE then why aren’t they doing it? Simply, because no one, not even Mario Draghi, can convince the Germans that it is both right and necessary to have QE. We can call this a number of things, German folk memories of inflation, a German exceptionalism to standard monetary theory or certain Germans simply not having a clue. But it is still a fact. The eurozone needs QE and it’s not going to get it while various German central bankers insist that it shouldn’t happen.

As I say, there’s various pieces of news filtering out that show that this is the case:

''The head of Germany’s Bundesbank warned the European Central Bank on Friday against copying the money printing used in the United States and Japan, saying that it would not have the same impact in Europe.

Speaking a day after ECB President Mario Draghi signalled further action to shore up the euro zone economy as soon as early next year, Jens Weidmann cautioned that so-called quantitative easing may not work in Europe.

“You cannot simply apply the same formula in Europe that has enjoyed success in the U.S.  or in Japan,” Weidmann told a conference in Frankfurt, commenting on the prospect of further money printing to buy assets such as state bonds.

“In the USA, there is a central state that issues bonds that are very safe and secure. We don’t have that central state here,” said Weidmann, who also cautioned that making it too cheap for countries to borrow could discourage them from reforming.

Or the same point being made a couple of days later:

''European Central Bank policymaker Jens Weidmann said on Friday that the ECB’s monetary policy for the euro zone was rightly expansionary, though he said it was too loose for Germany, Europe’s largest economy.

“We have a monetary policy that is too expansive for Germany,” he said at an event hosted by German newspaper Die Zeit in Frankfurt.

He also said extremely low interest rates caused countries’ willingness to implement structural reforms to tail off.

Which brings us back to Scott Sumner’s point. We do have low nominal rates but allied with the looming deflation this can still mean high real rates. And that in turn means that, as we’re at that zero lower bound, we do not have an expansionary monetary policy, we have a contractionary one. Further, being at that zero lower bound means that the only way we can have an expansionary monetary policy is through QE. and as Ambrose Evans Pritchard points out:

''The European Central Bank has dashed hopes for quantitative easing this year and acknowledged for the first time that the institution’s elite board is split on plans for a €1 trillion liquidity blitz.

We’re not going to get that QE, are we?

What makes this all so frustrating is that the rest of the economics profession, including even the normally staid and conservative central bankers, have got with the program. It’s taken nearly 50 years (I did say that central bankers are normally rather staid and conservative) since Milton Friedman and Anna Schwartz published “Monetary History of the United States” but their basic analysis of what caused the Great Depression in the US is now accepted as being true. It wasn’t the Wall Street Crash, that was just the trigger. And it wasn’t whatever Hoover did or didn’t do, nor was it the New Deal that rescued the country. It was the Federal Reserve that turned a recession into a depression by having tight money and thus allowing the money supply to fall. So, the answer is not to do that again.

As Ben Bernanke pointed out when he said that Friedman was right and that the Fed wasn’t going to do that again. And this time around, just as last time around, those countries that have fluffed up their money supplies have come out of the recent recession more quickly and in better shape than those that have not. This time around it was through QE in the US and the UK, last time around it was usually by leaving the gold standard. 18 months after a country did leave the gold standard and thus had an expansionary monetary policy then recovery started to take place.

And thus our problem in the eurozone. Sure, there’s all sorts of economic problems all over the place. France, Greece, Italy, Spain, all have grossly inflexible economies which doesn’t help. The euro itself is a horribly designed political project with dire economic effects. Many governments have borrowed too much and are facing a debt spiral. But all of these things are as nothing against the fact that we need to have an expansionary monetary policy in the eurozone. And we can’t have one because the Germans won’t sanction one.

Welcome to the new Europe, eh?

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