The Euro Zone Needs More Than 'One-Sided Savings Orgies'

European Central Bank headquarters in Frankfurt on March 5 Photograph by Ralph Orlowski/Bloomberg

Yesterday the Frankfurter Allegemeine ran a long think piece by Jürgen Stark, once chief economist of the European Central Bank and a member of its governing board. Stark left the bank in 2011 to protest the purchasing of government bonds. At the time, his resignation created a classic European problem: A German had left because the bank was not acting German enough, and a German would need to replace him.

Predictably, Stark is not in favor of the ECB’s decision to lower its deposit rate to -0.1 percent. In his public speeches when he was still with the bank, he said what you’d expect from the Germanest board member: The problem on the European periphery was not lack of demand but high wages and inefficient labor practices.

In his article, though, he makes an interesting point, and one we heard in the U.S. for five years from Ben Bernanke. A central bank, no matter what it does, can’t fix everyone’s problems. From his piece (translation mine):

“But this is not the job of a central bank, to promote a specific financial instrument or market segment, and through that to subsidize credit for a specific group of companies in just a few [of the euro zone's] economies. If this is really a serious political and economic problem, then it’s up to the countries to do something about it.”

Monetary policy is a supplement to fiscal policy, not a substitute for it. In the U.S., Congress is unable to pass anything because, well, you probably already have your own theory. Within the euro zone, there’s no real mechanism for fiscal policy.

The European Union has structural funds to build roads and bridges in new states, but the euro zone doesn’t have a common purse, other than the ECB’s facility for buying government bonds in a crisis. There are no automatic stabilizers within the euro zone, where taxes paid in Finland help pay unemployment benefits or nutrition assistance in Portugal. There is, in fact, the opposite: strict rules on deficits that every state must follow.

Stark is right. If the states of Europe see an economic problem, they should get together and fix it, with common stabilizers or even pensions. This will also never happen.

When Mario Draghi, head of the European Central Bank, made his announcement Thursday, he said the vote on the ECB’s governing board had been unanimous. That means Jens Weidmann, a board member and also head of Germany’s Bundesbank, said yes. Weidmann is normally a reliable voice against looser monetary policy in the euro zone, but after signaling for several weeks that he would accede to a move in interest rates, he was quiet.

German Chancellor Angela Merkel said only that she will “deal with” the decision. A finance spokesman for her party did warn Draghi that price stabilization aimed at specific countries is outside the ECB’s mandate. But for the most part, since the ECB’s decision, the German government and the German Bundesbank have left the complaining to others.

An editorial in the Frankfurter Allgemeine, the country’s leading business newspaper, referred to the move as a strafzins—punishment interest—for Germany’s savers. A spokesman for the country’s consumer savings banks said the move had “unsettled savers all over Europe, and destroyed assets.” Loose money, he said, “pours from every hole, looking for ever-riskier investments.” Another industry spokesman said the problem in Europe was not hesitant banks but bad risks, and he worried about unintended consequences.

Merkel was content to give in, quietly, reluctantly, to negative interest on ECB deposits because it is a very small thing for Germany to allow to happen. It is unlikely to carry over to the country’s savers. And it prevents, for now, any discussion of the actual country-to-country transfers of actual money that would actually do something.

Die Zeit, a super-thinky weekly out of Hamburg, on Thursday quoted Sven Giegold, a Green in the European Parliament. Monetary politics is cutting deals, he said, while “fiscal politics achieves nothing, other than one-sided orgies of savings.” Merkel and her coalition are content for now to let that bacchanal continue.