The chief of Europe’s central bank, Trichet, needs an economics class or a psychiatrist

Good economists have been calling for the European Central Bank (ECB), chaired by Jean Claude Trichet, to lower interest rates in the EU quickly. Nouriel Roubini, for example: “The ECB has to reverse this week its biggest mistake ever, the rate hike that sharply worsened the EZ crisis.”

Trichet is having none of it. He announced on Sept. 8 that the ECB would leave interest rates unchanged at 1.5%. When someone pointed out to him that Europe’s economies seem to all be falling into the sea, Trichet lost it:

“We have delivered price stability over the first 12 years and 13 years of the euro impeccably, impeccably,” Trichet emphasized. “I would like very much to hear the congratulations for an institution which has delivered price stability in Germany” at a level which is “better than what has ever been obtained in this country over the last 50 years.”

Yes indeed. The ECB has kicked the hell out of inflation. But it seems to have overlooked the other half of the trade-off it is charged with watching: the pace of economic growth. In the process of obsessing over inflation, while caring little about what fiscal austerity has been doing to economic growth rates throughout the continent, Trichet seems to be ensuring the break up of the EU. Krugman explains:

[Trichet’s “impeccable” performance] as a guardian of price stability . . . [is] why the euro is now at risk of collapse. … At this point countries in crisis account for about a third of the euro area’s G.D.P., so the common European currency itself is under existential threat. …

Listen to many European leaders — especially, but by no means only, the Germans — and you’d think that their continent’s troubles are a simple morality tale of debt and punishment: Governments borrowed too much, now they’re paying the price, and fiscal austerity is the only answer.

Yet this story applies, if at all, to Greece and nobody else. Spain in particular had a budget surplus and low debt before the 2008 financial crisis; its fiscal record, one might say, was impeccable. …

So why is Spain — along with Italy, which has higher debt but smaller deficits — in so much trouble? The answer is that these countries are facing something very much like a bank run, except that the run is on their governments rather than, or more accurately as well as, their financial institutions. …

Now, a country with its own currency, like Britain, can short-circuit this process:… the Bank of England can step in to buy government debt with newly created money. This might lead to inflation (although even that is doubtful when the economy is depressed); but inflation poses a much smaller threat to investors than outright default. Spain and Italy, however, have adopted the euro and no longer have their own currencies. …

What Mr. Trichet and his colleagues should be doing right now is buying up Spanish and Italian debt — that is, doing what these countries would be doing for themselves if they still had their own currencies. …

We’re not talking about a crisis that will unfold over a year or two; this thing could come apart in a matter of days. And if it does, the whole world will suffer. So will the E.C.B. do what needs to be done — lend freely and cut rates? Or will European leaders remain too focused on punishing debtors to save themselves? The whole world is watching.


About Guy N. Texas

Guy N. Texas is the pen name of a lawyer living in Dallas, who is now a liberal. He was once conservative, but this word has so morphed in meaning that he can no longer call himself that in good conscience. Guy has no political aspirations. He speaks only for himself.
This entry was posted in Economics, Europe, Finance, Financial markets, Inflation, News. Bookmark the permalink.

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