Friday, 23 January 2015

Euro QE decision underscores trouble ahead

The European Central Bank (ECB) announced this morning it would begin an expected programme of injecting money into the ailing economic union.

However, the expected timeline, sheer size and aggression of the bond buying programme has surprised many.

The markets had “priced in” a potential quantitative easing (QE) programme of between 500 and 600 billion euros, but ECB president Mario Draghi says the plan will involve buying 60 billion euros of debt per month until September 2016.

This brings the expected injection of new money closer to 1.1 trillion euros by the time the programme will end, almost doubling what the market planned to accommodate.

As a result, the markets have reacted appreciably with a weakening of the Euro dropping to $1.15 to the US dollar for the first time since 2003.

The New Zealand dollar also slipped to below US75c for the first time since 2011 after the news was announced.

Far from fixing the economy however, the decision to go ahead with the QE plan represents a worrying step in the direction of disintegration for the troubled European Union.

Essentially, this particular ECB decision - and the all-important details - was made to accommodate significant German pressure leveraged against the programme.

As the European Union’s largest economy, Germany has been concerned for a while that a bond-buying plan of this size would shoulder it with too much of the crippling sovereign debt accumulated by the weaker peripheral states of Italy, Spain and teetering Greece – among others.

The deal, carved out by Mr Draghi, pushed most of the responsibility of buying the bonds back on individual European national banks, rather than the ECB itself. He says the central bank will only purchase 8% of the bonds, while national banks will have to front the remaining 92%.

While this pleases the Germans, allowing them to continue exporting more than 50% of German-produced goods into the Eurozone (a requirement at the bedrock of Germany’s reasons to remain inside the EU), the deal opens whole new series of questions.

Rather than being about the economic status of the union, these more sinister questions are about the EU’s far more dangerous political and social crisis simmering under the surface.

From the inside, Mr Draghi’s decision to stimulate the EU economy is seen as necessary. Whether it will work, as New Zealand Initiative director Oliver Hartwich believes it will not, is another question.

But from the outside, the fact that the central bank in cooperation with the European Court of Justice can decide on and enact a programme that treats the European Union as a group of individual states, rather than as a coherent whole, will have long term repercussions.

Not all of those repercussions will be positive. The reason the EU was created in the first place was to avoid repeating the cataclysms of the 20th century. Europe’s problems during the last century were complex, but one historic thread suggests they were exacerbated by a refusal of the people on the peninsula to see themselves as truly “European”.

Instead, the various people-groups preferred the identities of arbitrary heritage over common geography. The rhetoric emanating from Europe since the crisis has gradually increased the preference to identify once again as “French” or “German” or “Greek”, rather than simply European.

Today’s ECB and the recent ECJ decisions to allow the system to treat the individual countries as in control of their own finances might be legal and follow the rules and technicalities to the letter. But the real message will undermine the fundamental ideology and reason for existence of the union.

If the sovereign debt can be farmed out to individual states, then the ability to make their own decisions regarding seemingly smaller problems cannot be ruled out in the future.

For instance, the issue of immigration in the EU is a huge political thorn. The treaty allowing full freedom of travel inside the union is often used responsibly by members, but it can be leveraged by asylum seekers.

Should the Romanian parliament decide that it doesn’t want immigrants coming into its country just to gain access to jobs in France, and opts out of the treaty, what would Hungary’s resultant decision likely be? Would they stay in, or opt out too?

And should it prove painless to change small rules such as this, how simple might it be for Greece or Italy to begin a process of blocking cheap German goods from being exported into those countries?

At some point, and with this morning’s decision reinforcing the viewpoint, the European Union moved from being a coherent idea to only a useful temporary solution with laws and treaties being increasingly subject to alteration.

The future may not be nearly as dire as all this, but it is worth keeping in mind how fragile the union truly is and that the pain – both economic and political – has not ended with an injected trillion euros.

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