Even the Germans realise that they are in a dead end street and their austerity and black zero dogma are a farce.
Stuart Medina Miltimore is an economist. He is a founder of the Spanish Association Red MMT and has contributed to the dissemination of Modern Money Theory in Spain by publishing two books, La Moneda del Pueblo and El Leviatán desencadenado. Siete propuestas para el pleno empleo y la estabilidad de precios. Veintiuna razones para salir del euro.
Last Tuesday an unexpected event happened proving that Modern Monetary Theory (MMT) can no longer be ignored by the mainstream: Mario Draghi, President of the European Central Bank (ECB), mentioned MMT at an appearance before the European Parliament. The comment was made in response to a question from a member of the European Parliament, Philippe Lamberts, about the futile efforts of the ECB to flood European banks with liquidity. In his response Draghi acknowledged that, if what is intended is to reduce inequality or combat climate change effectively, monetary policy would probably not be useful. He added that some ideas about “monetary policy,” such as the MMT or a recent work by Prof. Fisher, suggest new ways of channeling money into the economy. He clarified his comment by saying that there are new ideas that have not been tested.
If you are interested you can watch the 1 minute comment in this link.
Let us put aside that Mr. Draghi probably does not understand MMT perfectly if at all. Stating that MMT recommends new “monetary policies” would suggest he doesn’t. What MMT economists propose is to stop using monetary policy to stimulate the economy, and to use fiscal policy instead, which they consider a much more effective tool to address, not only large-scale projects such as a Green New Deal, but also to meet the inflation target that politicians have assigned to an ECB that lacks the tools to achieve it.
What we find curious is that he makes such a comment at the end of his mandate at the helm of the European Central Bank. One possibility is that, being close to retirement, Draghi can afford to make comments that he would not have dared to make at another time in his career. In general, what we observe is the predominance of group think among the top echelons of European institutions. Questioning current dogmas is a good way to quickly conclude a promising career.
The other possibility is that this comment fits into the mood of growing frustration that we perceive among central bankers. Draghi himself has repeatedly hinted that the ECB was running out of ammunition. The Bank of Spain has also asked European countries with financial capacites to spend to develop a more expansionary fiscal policy. It goes without saying that the Spanish Central Bank does not contemplate the Spanish government doing likewise; this would be too much to ask from an institution that still abides to fiscally conservative convictions.
We do not know if Lagarde will adopt this new position of Draghi’s or if the ECB will continue with its extravagant monetary policies. But, while the main indicators of the Eurozone economy are slowing down and inflation is nowhere to be seen, it seems likely that European governments will continue to wait for the long hoped for miracle that monetary policy will lead us out of deflation.
The ECB has reopened its asset purchase programme (the APP program) by allocating € 20 billion last month to public debt purchases. It has also lowered the interest rate on the deposit instrument to -0.5% (from 0.4%) although it has offset it with a 0% tranche for the amounts deposited in the reserve accounts that do not exceed 6 times the amount of mandatory reserves. It has also reactivated the loan program for banks that meet a credit creation objective (Targeted Longer-Term Refinancing Operations or TLTROs). All these measures only reflect despair in the face of an impending recession that is returning home when the harm caused by the global financial crisis has not yet been repaired.
The ECB may continue to flood banks with liquidity but, if expectations of business men and women remain weak, neither enterprises will approach banks to borrow nor will banks be encouraged to lend to enterprises. Taking our imagination to the extreme of absurdity we can imagine the ECB buying all the public debt in circulation, all the debt issued by corporations and even all the shares of all listed companies. The abundant reservoir of reserves will sit there, burdening bank balance sheets and still not reaching the real economy. By the way, it should be clarified that reserves cannot be lent to agents other than participating members of the central bank system. What banks can do is leverage them by expanding their credit portfolio and creating new bank money. The problem is that neither banks nor their customers are willing to start this wheel turning.
It is nigh time for fiscal policy. The problem is that the Eurozone states have decided to play Houdini, the magician of the early twentieth century who amazed the public by locking himself in chains and shackles and then being shut into places that seemed impossible to escape from. Germany, Italy and Spain have enshrined in their constitutions spending rules and financial stability principles that reinforce the already arbitrary and foolish limits established by the treaties of the European Union and the Stability and Growth Pact. Economists are already forecasting the next recession and they will be right, just like the proverbial stopped clock capable of giving the correct time twice a day. When it shows up monetary policy will prove to be wet gunpowder.
But couldn’t central banks then finance governments’ expansive fiscal policies directly or indirectly?
Let’s ignore European Treaty prohibition of direct central bank funding of governments. We do not know how the states will escape the shackles they imposed on themselves. Public deficits are no longer constitutional and there is not enough time nor political consensus to change these golden rules in the Parliaments. It is clearly not legally possible to address a change in economic policies in the Eurozone. As soon as a budget encompassing a deficit beyond the constitutional limits has been approved it will most certainly be appealed before a constitutional court and Brussels will open an excessive deficit procedure threatening to impose sanctions. There are reports that Germany will try to get around the rules by preparing expenditures outside of its budget, employing, for example, of its public investment bank KfW. For Spain, which does not have such a powerful public bank, the thing is more complicated. It is perhaps possible that Spaniards are less skilled at playing Houdini than Germans.