IN THE RADICAL PRESS / MEMOIRE DES LUTTES
By Jacques Sapir
Measures taken by the European Central Bank (ECB) on 6 September favourably influenced markets. But this enthusiasm will be short lived. Far from alleviating the euro zone in the long term, they may, at best, bring it a very temporary respite. The crisis of competitiveness and the forces of recession and depression will continue to grow and their effect will be felt very quickly.
The President of the ECB, Mario Draghi, has announced the introduction of an intervention on the secondary market for sovereign debt, known as Outright Monetary Transactions (OMT). This device provides the possibility for the ECB to buy an “unlimited” amount of securities with a maturity of 1 year to 3 years, but with the following conditions:
1. The country that would like to benefit from the OMT would have to make an application and accept the conditions attached to the fiscal adjustment and budgetary programmes of the European Financial Stability Fund (EFSF) and its successor, the European Stability Mechanism (ESM). Or it would have to accept a similar “precautionary” programme named the Enhanced Credit Line Conditions, which allows for the possibility of intervention by the EFSF / ESM but also their supervision. In other words, any country seeking to benefit from the OMT should expect to lose a significant part of its budgetary and fiscal sovereignty.
2. Transactions within the framework of the OMT must not lead to increased liquidity in the market. They will be accompanied by operations to sterilize liquidity. This means that the ECB agrees to sell corporate bonds in an amount equal to the purchase of government bonds, which it would deliver within the OMT.
These measures appear to be limited and restrictive. They are limited because they are aimed at the secondary market, and only securities with maturities not exceeding three years. From this perspective, it should be noted that there is a danger of the debt of eurozone countries becoming short term if these countries are to have any hope of benefitting from OMT operations.
They are also restrictive because they are not only accompanied by the conditionality of strict fiscal adjustment and budget policies, but the liquidity would need to be constant. However, due to the Eurozone recession, banks, but also companies, will increasingly need to finance themselves using bonds. Under the sterilization rules, it is therefore expected that interest rates will stabilize for sovereign debt, but increase significantly for corporate debt. This will have very negative consequences for growth and lead to an acceleration of the current recession.
Despite his bluster, Mario Draghi was forced to concede two important points highlighted in recent days by the leaders of the Bundesbank.
On the one hand, he has agreed to link the actions of the ECB to oversight of fiscal and budgetary policies, on which the Bundesbank focused from the outset. This means the deepening of adjustment policies already underway in Greece, Portugal, Ireland, Spain and Italy, with the disastrous results that we have already seen, both in these countries and the across the entire euro area. These policies have proven their ineffectiveness and harmfulness: they are unable to significantly reduce the budget deficit and they cause an economic depression accompanied by a social crisis that has taken a tragic turn in countries where these policies have been applied.
On the other hand, accepting that the interventions of the ECB are at constant liquidity (principle of sterilization), Mario Draghi has yielded to the monetarist Bundesbank’s most dogmatic leaders, who have won a clear victory.
Once the satisfaction of having seen the ECB take action has dissipated, the following facts will have to be accepted:
1. The crisis of internal competitiveness of the euro area – which is actually the ‘mother’ of the debt crisis – is not affected in any way by these measures. Worse, by raising the cost of money and leading to an increasing tax burden, they will make it more difficult to find a solution of this crisis for countries with serious competitiveness problems.
2. These measures will aggravate adjustment policies and the euro zone further into recession, or even depression, ultimately making it impossible to achieve the adjustment sought.
3. In the coming weeks, the markets will understand that these measures do not solve anything. Investors will withdraw from the debt market in the euro area, having concluded, not without reason, that the question of the solvency of companies and countries has by no means been dealt with. In fact, the ECB will be forced to buy ever greater quantities of sovereign debt that nobody wants to hold. To respect the principle of sterilization, it will take more liquidity from the corporate bond market, causing a massive crisis in funding for companies. This will strengthen significantly the recessive pressure and depression in many economies.
The measures put forward by Mario Draghi perpetuate the fundamental error in analysis of the crisis in the euro area. Focusing on the issue of liquidity – an emphasis driven by the positions of the Bundesbank – we ‘forget’ the solvency crisis. This omission is indicative of a fundamental question: blindness about the crisis in relative competitiveness that we are seeing in the euro area. By addressing the symptoms and not the cause of the crisis, the ECB contributes to deepening it. It prepares us for the coming months of economic and social collapse that will quickly undermine the dogma of ‘the irreversibility of the euro.’
Jacques Sapir is director of studies at Ecole des Hautes Etudes en Sciences Sociales in Paris and head of the Centre d’Etude des Modes d’Industrialisation
Translation by Revolting Europe