The Ship of Fools – in Foucault’s book Madness and Civilisation – set sail from Basel in the 14th Century. Today the European Central Bank is launching its own Ship of Fools with quantitative easing, argues Ian Crowther.
Basel is home to a museum of alchemy and micro prudential banking regulation. It was also where the Ship of Fools set sail from, with a cargo of madmen that society no longer knew what to do with. The ship’s quarterdeck had no Captain, the ship was leaderless. Those aboard had no idea where they were going. The voyage feels very much like the one the Eurozone is now embarked upon through quantitative easing (QE).
Today’s Ship of Fools contains not just Mario Draghi, President of the European Central Bank. Alongside him are the EU’s elite technocratic politicians who support this unconventional monetary policy. They should perhaps all be cast off together onto a political sea for the economically challenged.
The conceptual, unproven, nature of QE and its potential ramiﬁcations raise serious questions as to whether this form of unconventional monetary policy will be successful. QE poses a high degree of uncertainty, particularly in the Eurozone which remains structurally, ﬁscally, politically, socially and culturally imbalanced.
There are also concerns about domestic protectionism amongst Europe’s core elitist technocrats. This coupled with a politically motivated ‘groupthink’ among the powerful core countries makes a mockery of Merkel’s declaration that “the independence of the ECB must be respected”.
There is a history in the use of QE — Japan and the US are prime examples. Yet in the post-crisis world, our elite Eurozone and international technocrats lack political, technical and theoretical exit strategies from QE.
€1.1 trillion will be injected into the EU economy over a 19 month period – without any idea of how it will be repaid, or indeed whether it will revitalise the economy. As Michael Hudson said, “debt that cannot be repaid, will not be repaid”. Is this type of large scale ﬁscal experimentation playing with ﬁre? Actually, this is a form of economic neurosis.
Eurozone members – even the core economic powerhouses – are beginning to see potential long term solvency, deﬂation and structural problems within their own economies. This translates into domestic political problems – the electorate in Germany insists that Merkel remedies the crisis.
In practice, the domestic politics lead to changes in fiscal policy, with European Central Bank policy changing in its wake. Core countries’ domestic political and ﬁscal policies are clearly at odds with both ECB policy and the interests of periphery countries. This is being played out at present in the conflict between Greece and Germany (and Finland).
Does Draghi seriously suggest that injecting stimulus into such an imbalanced environment is a good idea prior to addressing the necessary political and ﬁnancial reforms?
Can injecting stimulus into the Eurozone economy arrest the current deﬂationary tail spin and develop growth? Critics suggest that attempting to drive growth via QE whilst contemporaneously attempting to save the Eurozone from its battle with Greece is nothing but misplaced idealism.
Greece’s new finance minister Yanis Varoufakis was pictured with George Osborne in Downing Street. Along with his visits to France and Germany, this demonstrated that Varoufakis means business. He will not blink ﬁrst regarding the potential Greek default at the end of February. Germany and France are clearly concerned. Will major banking institutions across Europe want to borrow cheap QE liquidity knowing this albatross hangs around the neck of Draghi? Will borrowers want debt knowing the uncertain political risks surrounding Europe?
Perhaps Merkel is right in suggesting that this type of Keynesian central banking policy intervention prevents ﬁnancial reform across the Eurozone. Failing to address political and ﬁscal imbalances is a root cause of today’s political fracas.
QE is likely to inspire speculative markets, animal spirits and the herd mentality. Stock indices and real estate markets are likely to see gains versus the real economy and middle class-based consumption.
But it is disingenuous of Merkel to discuss ﬁnancial reform when Germany has benefited from signiﬁcant budgetary surpluses post-crisis stemming from structural imbalances. This has given Germany control of the resulting bail-out debt and the demands for austerity measures in periphery countries. Germany took advantage of low interest rates, whilst periphery countries where overheating, much to the detriment of the PIIGS (Portugal, Italy, Ireland, Greece and Spain).
Meanwhile, this positioned Germany as the number one European export-led economy by suppressing its labour costs relative to the periphery countries. This type of behaviour is far from what we expect to see of a major power within a ‘union’ based environment – but nobody is surprised as it is not a union of equals.
Varoufakis should not accept attempts to re-schedule debt at zero interest rates for perhaps 40 to 50 year tenor. Moreover, he should establish alliances with other periphery countries and developing tactics for serious structural Eurozone reform – and then deal with the debt.
Whilst Eurozone politics and its associated political and ﬁscal structural imbalances remain present, issuing QE into the Eurozone economy creates new levels of uncertainty, problem and complexity. All aboard the Central Bank Ship of Fools!