Coronavirus, Helicopter Money, Adair Turner and the end of the Euro

The Germans are averse to bold monetary policies. And they have some allies in Europe: the present Dutch and Austrian governments, for instance.

They do not forget their bad experience with printing money, a century ago. And since they can block the decisions of the European Central Bank (ECB), the other countries can do very little, even if they are in the majority.

The post-2008 years can tell us a lot about what may happen in the next months and years, in Europe, in the aftermath of the coronavirus pandemic.

Let’s take a brief retrospective.

Jean Claude Trichet – the ECB governor at the time of the crisis of 2008-9 – has followed the German script to the letter. Under his rule, the ECB rejected Quantitative Easing, including any purchase of the debt of the southern European countries. He supported strict austerity measures for years, refused any significant reduction in interest rates, and forced indebted countries to resort to the IMF.

The consequences were disastrous to the most crisis-stricken parts of Europe. Europe became the epicenter of the economic crisis for years, while the US (the first and main center of the crisis) and other countries succeeded in minimizing its effects in a relatively short period of time.

Mario Draghi, the successor of Trichet, was also slow to act. Maybe he didn’t have enough strength, at first.

But we must recognize it: Draghi ended up by breaking the German dictate. His QE policies (mostly purchases of public debt) saved the most indebted countries from further pains and bankruptcy. The expansion of credit was also critical.

But Mario Draghi hasn’t gone as far as some economists would like him to go. He has rejected the monetization of swaths of the public debt proposed by economists like Adair Turner (chair of the Financial Services Authority of the Bank of England).

That would have been a kind of helicopter money policy, based in three types of measures: 1) the purchasing, by the ECB, of part of the debt in countries like Greece, Portugal, Ireland or Italy; 2) the payment – by the ECB – of the interest service of the debt; 3) and finally, the disburse of the owners of the bonds (by the ECB), without any renewal, at the expiry date.

The goal was to wipe out the “unpayable” parts of the public debt of those countries. A few hundred billion Euros could have solved the debt crisis in Southern Europe.

A stupid proposal?

Not really. The amounts in question were significant, but not so high as to cause a serious spike in inflation. And it could have prevented many sacrifices and debt problems – still mostly unsolved.

But to Mario Draghi – or perhaps to the Germans, the Dutch and other allies – that was infeasible, and a moral hazard problem.

According to them, the debts of southern countries are the result of public mismanagement (which was in part the case of Greece) coupled with economic misdeeds and vices.

They do not recognize the asymmetric effects of the Euro, or the historic dynamics that have led to the clustering of wealth and key industries in some parts of Europe.

And they remain blind to the causes of the credit bubble in southern Europe: including the speculation led by northern European banks in the real estate of Southern Europe.

And now the coronavirus crisis appears, and Europe is again at the epicenter of the economic crisis brought by the pandemic.

And the ancient indebted countries continue to be indebted. And some of them are among those suffering most with the coronavirus crisis, and the ones least apt to withstand its shocks and the economic downturn.

And the script is now unfolding again, with the same characters.

The northern countries oppose to mutualize the Union debt associated with the pandemic (not to mention other riskier policies like debt monetization and helicopter money).

New wounds and old grudges are accumulating. The end of Europe as we know is in the charts. Brexit may have been just the beginning.

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