Monday, 21 March 2016

Dr. Oliver Hartwich: "The ECB has exhausted all its conventional and unconventional policy options"

We have not heard so much recently about the euro crisis, but that does not mean that it has disappeared. On the contrary, it has become chronic and could turn acute anytime, as the eminent analyst, Dr. Oliver Hartwich points out:

The euro crisis has become chronic — but that does not mean that it cannot become acute anytime. Quite the contrary, the state of the eurozone is so bad now that even outrageous ideas for future monetary policy can no longer shock us.
Last week’s ECB media conference was a case in point. When ECB President Mario Draghi was asked what he made of “helicopter money”, he did not dismiss it out of hand. Instead he effectively told journalists that the idea of just crediting people with newly created central bank money had to be watched.
In central banking speak, this basically means that it is the next logical step.
But it is also an admission: The ECB has exhausted all its conventional and unconventional policy options. What remains in their toolkit are those policies that are plainly untested, untried and unworkable.
How bad must the state of an economy be when even zero interest and negative deposit rates do not trigger any inflation response? How bad when not even quantitative easing can revive economic activity? And indeed how bad when the very survival of the banking system depends on such trickery?
Let there be no doubt about it: Europe has manoeuvred itself into a dead end. Or more to the point: the ECB has.
The problem with the ECB’s policies is not so much that they may be technically illegal and certainly run counter to the spirit of the treaties under which the Bank was set up. The problem is that they entrench the eurozone’s reliance on ECB support to the point that it can no longer be withdrawn without causing widespread damage.
Let’s put it this way: If the ECB decided tomorrow, next year or in 10 years’ time that now was the time to return to more normal monetary circumstances, it could no longer do so. That is because it has already administered so much of its monetary medicines that withdrawal symptoms could well kill the patient.

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