Now that the QE Dream Has Come True, What Next?

The ECB is to be congratulated on finally defying its German masters, who have long kept the euro’s guardian of stability in captivity. For a number of years, Germany’s unholy triangle of power over the land of the euro – Berlin, Frankfurt, Karlsruhe – has enforced a diktat that undermined both the euro economy and democracy, causing a deep socioeconomic crisis, the rise of nationalism, and anti-EU sentiments across the continent. At last, the ECB has liberated itself from the scourge of hyperinflation scaremongering that is the self-serving conviction – and declaration of intellectual bankruptcy – of the Germany political elite. It is fitting that the chance for a revival of democratic values and European solidarity is knocking on Athens’ door this weekend.

In the markets’ perception, Mario Draghi over-delivered yesterday on his famous “whatever-it-takes” promise made at the height of the euro crisis in the summer of 2012. The euro and bond yields are down, stocks are up, party time is here. Things are going according to plan and everyone financial is in high spirits.

The question is what Mario’s QE bazooka will really do beyond the markets – for the real economy, that is. The markets are not worried about that issue at this point. Or perhaps some are thinking ahead like this: if growth stays weak, there will be even more QE coming, so all is good in any case. In case you didn’t follow the Q&A carefully yesterday, there was another important course change – or return to hardcore German dogma – on exhibit in what Mario Draghi had to say.

Remember the enlightened Mario Draghi from Jackson Hole in August last year? He talked about the need to make more effective use of available fiscal space (without explicitly mentioning Germany as the country that gets paid for borrowing but still prefers to see its infrastructure rot). Around that time he also showed understanding of the fact that it is impossible to avoid deflation if the country vis-à-vis which everyone else has to restore their competitiveness is close to deflation itself (without explicitly mentioning Germany as the force that is dragging the euro currency union into deflation).

Bad news here. All that is forgotten. Challenging the German belief system by way of QE seems to leave no more room for honest and thought-provoking ideas which the German political elite will see as plainly provocative, it seems. In yesterday’s Q&A session, Draghi revealed how recovery is to be fostered in the euro area these days and the supporting role played by QE:

“What monetary policy can do is to create the basis for growth, but for growth to pick up, you need investment. For investment you need confidence, and for confidence you need structural reforms. The ECB has taken a further, very expansionary measure today, but it’s now up to the governments to implement these structural reforms, and the more they do, the more effective will be our monetary policy. That’s absolutely essential, as well as the fiscal consolidation side. So structural reforms is one thing, budget and fiscal consolidation is a different issue. It’s very important to have in place a so-called growth-friendly fiscal consolidation for confidence strengthening” (Draghi at ECB press conference, 21 January 2015).

As Mrs. Merkel has explained, the idea of structural reform is that everyone improves their competitiveness together – the German dream of the euro area as a “competitiveness union.” Never mind that competitiveness is a relative concept and that you would expect a physics professor to get the point that it’s not possible for everyone to improve their relative position at the same time – other than relative to the rest of the world of course. And the depreciating euro is already delivering quite successfully on that front. Add to the deflationary structural reform agenda the joint endeavor of “growth friendly” fiscal consolidation, and you stare the unchanged euro reality straight into the eyes: more of the same! So it all boils down to how much oomph the plunging euro can steal away from global growth, itself slowing, without triggering more global conflict about currency warfare.

The markets may be excited for a while. I don’t see much reason for anyone else to get overly excited at this point. The Germans will be even more adamant, if that is possible, in forcing the futile competitiveness-cum-austerity wisdom upon their fellow Europeans. But perhaps Athens will enlighten us … Perhaps the Germans are celebrating the prospect of stealing away some of the Swiss’s gigantic external surplus and further boost their own. They may want to think about the Swiss example a little more carefully before it’s too late.