Frankfurt’s skyline as viewed from the top floor of the new European Central Bank headquarters.
Ralph Orlowski | Getty Images
Widely publicized attacks on the euro area monetary policy by German and Dutch central banks have nothing to do with economics. It’s just an old intra-European score-settling game.
But that ever-lasting enmity is shrinking the European markets for U.S. businesses, and is presenting serious trans-Atlantic security issues by deepening the continent’s unbridgeable north-south political divide.
That divide was most dramatically exemplified in the mid-1990s by the fight for leadership of the European Central Bank. It was a near-pugilistic event, where the French President Jacques Chirac and the German Chancellor Helmut Kohl had to be physically separated while hurling abuse at each other.
Chirac was infuriated by the German-Dutch plot to take the presidency of the ECB by spurning the candidacy of the French central banker Jean-Claude Trichet. Chirac won, conceding a short-term transition role by the Dutch candidate, but paving the way for Trichet’s two-term tenure at the head of the European monetary authority.
Going Dutch is Un-European
This time, the German and the Dutch central bankers are on a special mission, where attacks on the ECB, and its excellent President Mario Draghi, are pretexts for deflecting pressures that those two economies — accounting for more than a third of the euro area GDP — should be stimulating their domestic demand.
The Germans and the Dutch don’t want to do that, in spite of their large budget and trade surpluses. They want to continue to live off their European — and American — trade partners instead of helping Europe and the rest of the world, to stop, and reverse, the ongoing slowdown of global economic growth and employment creation.
Hence the virulent attack on the ECB, because the monetary policy is doing what the Germans and the Dutch should be doing. They are also meanly furious that the ECB could help the struggling French, Italian, Spanish and Portuguese economies, representing one-half of the monetary union’s GDP.
Now, having partly cleared up that political background, let’s go back to economics.
The ECB’s decision last week to raise its monetary stimulus was guided by an inflation rate well below its medium-term target of 2 percent.
The question is: how can the euro area inflation be accelerated?
That can only be done by increasing capacity pressures in labor and product markets. And easy credit conditions can help to produce such demand-supply tensions in three-quarters of the euro area GDP, consisting of household consumption, residential investments and business capital spending.
Unfortunately, easy credit alone cannot do that quickly enough.
Hit the Germans with car import tariffs
Jobs, incomes and expected business sales are additional variables that determine housing demand, purchases of consumer durable goods (aka big-ticket items), and decisions to expand factory floors and enhance production technologies.
So, to raise demand pressures that would lead to increasing costs and prices, we need a coordinated action of monetary as well as fiscal policies.
Tax cuts and increased public spending, supported by accommodative monetary policies, are necessary to accelerate aggregate demand to relatively quickly lead to upward pressures on costs and prices.
In other words, stronger public sector spending is needed to prop up weak private sector demand. The corollary is that rising budget deficits are allowed to lift the economy out of stagnation and recession. But budget deficits have to be brought back under control during periods of cyclical upturn.
Now, that simple policy rule is an old political minefield used by people opposed to any government intervention in economic management. Leave the economy alone, they say — keep the money supply growing at a certain (presumably noninflationary) rate and wait until the proverbial “invisible hand” brings the economy back to life. Never mind wasting human and physical capital resources through rising poverty, unemployment and idling production facilities.
That sounds like a caricature, but opposing government’s economic activism essentially means a frozen fiscal policy — minimal public spending, if at all, and no public debt.
The German-run European Union did that as Berlin set out to teach the lesson by imposing austerity policies on sinking economies with soaring unemployment, social unrest and shameful soup kitchens in supposedly post-modern European democracies.
Who rescued that Europe and helped to keep the Europeans off each other’s throats?
The answer is: the ECB. Yes, under Draghi’s leadership, the ECB kept soldiering on despite unsuccessful German lawsuits at the country’s highest court and the European Court of Justice that the bank was violating its policy mandate.
Behind all that — then and now — stood a mean German idea that the ECB was helping countries like France, Italy, Spain and Portugal to ride out the horrendous fiscal adjustment. Those four countries are still going through a period of social and political turmoil, and some of them — Spain and Italy — continue to search for stable and viable governments.
France, in particular, is struggling with crippling strikes and violent “yellow vest” demonstrations. Last Saturday, the “yellow vests” marked a 44th week of violence, with thousands of people rioting in six major French cities, with tear gas, water cannons, and rubber bullets.
That’s what France got for trying to impress the Germans with excessive austerity and unnecessarily harsh labor market reforms. Paris is now backpedaling on all that, but it has no solution for social unrest, and its economic growth forecast for next year has been cut last Friday to the pitiful 1.3 percent.
Investment thoughts
Looking for stronger economic growth during an election year, Washington should prevent Germany from shrinking the European markets that take a quarter of American exports.
To do that, the White House should offer a vigorous support to ECB’s easy monetary policy and pressure Germany to immediately stimulate its recessionary economy under threat of raising the U.S. import tariff on German cars. The trap of an apparently standing invitation for Trump’s state visit to Germany should also be refused.
Washington’s support to ECB would make the Fed more willing to ease to avoid upward pressures on the dollar. At the same time, forcing Germany to stimulate could add some appeal to European asset markets and pull the euro up.
On a geopolitical plane, the U.S. pressure on Germany would help the French, who want to be helpful to Washington on an entire range of security issues. That’s a sharp contrast to U.S. hostile statements by the German Chancellor Angela Merkel running to Beijing to drum up export business in anticipation of a difficult trans-Atlantic trade round.
Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.
