By: Andrea Terzi
One claimed objective of the single currency area in Europe is (or should I say was?) to create a large single market for producers. But now the ECB is pressing national governments to gear their policies to enhance competitiveness so that they can “count on external demand” and increase their net exports! Mario Draghi, President of the ECB, and a key figure in the team now managing the European crisis, made this statement while responding to an Italian journalist, in the Q&A session of the ECB press conference of 8 December 2011.
Earlier, Draghi had described the ECB’s view of the 3-pillar recipe to end the euro crisis as follows:
First, European nations need budget policies geared to stability, growth, and competition (Note: he first said “stability, growth, and jobs”, but he immediately changed it into “stability, growth, and competition. And thus, jobs”).
Second, countries need common fiscal rules (the so-called “fiscal compact” of the euro zone approved this past week). The first two pillars are aimed at ending what Draghi calls a “confidence problem” with euro nations’ debt. So, again, for the ECB, it is all about “fiscal discipline”.
Third, the euro needs a “stabilization mechanism” led by the EFSF, with the ECB acting as its agent (and no involvement of the ECB’s balance sheet). In this respect, Draghi stressed that the ECB does not discuss its mandate: it simply complies with it.
Then, Alessandro Merli (from Il Sole24ore) asked Draghi if he wasn’t worried that budgets cuts in Europe would further intensify the recession.
Draghi’s answer was quite indicative of the conceptual framework of the ECB and of the economic scenario that the ECB expects will unfold as Europe continues with fiscal adjustments.
The ECB President admitted that budgets cuts and tax increases are contractionary—“in the short term” he added—but there are two ways to lessen their negative impact on growth:
One is the confidence-enhancing effect that will follow the new “fiscal compact”.
Now, does Draghi really believe that deficit and debt ratios will look any “better” after implementing the deficit cuts (which will, as he admits, deepen the recession in Europe)? And even assuming modest “improvements” of debt ratios, will this be enough to see markets suddenly rush for Italian and Spanish debt? Does he have a good explanation of why markets love debt issued by a non-euro country like the UK, whose deficit-gdp ratio is higher than Italy and Spain?
The other way of easing the impact of fiscal restrictions is, for Draghi, that “if you enhance the competitiveness, you can actually count on your external demand, on your net exports” (ECB press conference from 35’40” to 36’20”).
Does he really intend to make European growth depending on (or should I say at the mercy of) high levels of aggregate demand abroad? Does he not see that this means that Europeans will net export their standard of living by giving away goods and services in exchange for credits abroad? It is of course a matter of accounting logic that nations that net export will find it easier to keep their fiscal deficit lower, so perhaps Draghi is telling us that the myth of a balanced budget should rule all European policies, and Europe will do anything it takes to achieve “fiscal discipline”? Even if this means stagnation?
Or perhaps Draghi is a true genius, and he is subliminally trying to show us how absurd are the consequences of the current mandate of the ECB and of fiscal rules?