The New World Ordoliberalism Part 6: The QE Taper Caper and the Portuguese Squeeze

In this chap­ter of our explo­ration of what’s wrong with the euro­zone we’re going to take a look at the evolv­ing nature of the Euro­pean Cen­tral Bank’s (ECB’s) quan­ti­ta­tive eas­ing (QE) pro­gram. Specif­i­cal­ly, how the QE pro­gram was fac­ing a set of obsta­cles that was going to require some tweak­ing to the pro­gram and how the solu­tion to the obsta­cle was to basi­cal­ly choose the tweaks that harmed the weak, in par­tic­u­lar Por­tu­gal. In favor of Ger­many, of course. Keep in mind that Por­tu­gal recent­ly formed a left-wing anti-aus­ter­i­ty gov­ern­ment and has done rel­a­tive­ly eco­nom­i­cal­ly well since com­ing into pow­er . Also keep in mind that Por­tu­gal is one of the few euro­zone nations not fac­ing a ris­ing far-right “pop­ulist” move­ment as a response to its harsh aus­ter­i­ty pro­gram. So you might say the tim­ing is “right” for some pref­er­en­tial treat­ment of Por­tu­gal. Pref­er­en­tial­ly bad treat­ment.

Krugmenistan vs the Permahawks

Lift Off! That was the announce­ment by the Fed­er­al Reserve this week when the world’s biggest and most influ­en­tial cen­tral bank start­ed the long await­ed rais­ing of its bench­mark short-term rate a quar­ter point from near-zero lev­els, mark­ing the first time the Fed has raised rates since 2006. It was big news, except this rate hike was telegraphed for quite a while now and vir­tu­al­ly every­one was expect­ing the Fed to do exact­ly what it did, so it’s not as big as it could have been. If the Fed had decid­ed not to raise rates, despite all the telegraph­ing, that prob­a­bly would have been a big­ger sto­ry. But would it have been a bad sto­ry if the Fed decid­ed to keep rates at their cur­rent near-zero lev­els? There’s a big debate in the eco­nom­ic com­mu­ni­ty over that. And it’s a debate that pits pru­dent econ­o­mists with excel­lent track-records like Paul Krug­man, some­one who opposed the Fed’s Decem­ber “lift off” deci­sion, against the broad array of “per­ma­hawks”. But it’s not just the ques­tion with respect to Fed. The Euro­pean Cen­tral Bank made a pol­i­cy announce­ment this month too regard­ing its stim­u­lus mea­sure and it was indeed rather sur­pris­ing. And as we’re also going to see in this post, it was sur­pris­ing in the way that just might have done seri­ous dam­age to not just the cred­i­bil­i­ty of ECB Pres­i­dent Mario Draghi but the ECB itself. Or at least cred­i­bil­i­ty in the ECB’s com­mit­ment to its sin­gle man­date of keep­ing infla­tion hov­er­ing around 2 per­cent.

To pla­cate per­ma­hawks (to main­tain cred­i­bil­i­ty) or not pla­cate the per­ma­hawks (to main­tain cred­i­bil­i­ty)? That is the ques­tion. Or at least one of the ques­tions cen­tral banks face. Unfor­tu­nate­ly.

The New World Ordoliberalism Part 5: The TLTRO and Waiting for Godot. And Sanity.

With Euro­pean Union con­tin­u­ing its slow steady fall into defla­tion, the ques­tion of “what’s to be done?” has becom­ing a per­ma­nent fix­ture for Euro­pean pol­i­cy-mak­ers. But for the euro­zone, with it’s shared mon­e­tary sys­tem, the ques­tion is a much more com­pli­cat­ed “what should we all be doing togeth­er?”. The answer to that lat­ter ques­tion, unfor­tu­nate­ly, has con­sis­tent­ly been “not enough”, despite pri­or promis­es.

Still, the ECB has­n’t giv­en up entire­ly in its attempts to reflate the euro­zone. Back in June, the ECB decid­ed to inject anoth­er 400 bil­lion euros into the euro­zone bank­ing sys­tem in a two-phase loan pro­gram. And as we’ll see below, in both phas­es the euro­zone banks want­ed far less than what was offered while con­tin­u­ing to pay back their pre­vi­ous loans. In oth­er words, while the ECB has been try­ing the expand the mon­e­tary base in the euro­zone’s finan­cial mar­kets that mon­e­tary base has con­tin­ued to shrink. As the excerpt below puts it, it’s like ‘Wait­ing for Godot’. And as we’ll see at the end, it real­ly IS like Wait­ing for Godot, the­atrics and all.

The New World Ordoliberalism Part 4: Meet the New Plan. Same as the Old Plan. Deregulated.

There have been quite a few devel­op­ments in the euro­zone recent­ly with major pos­si­ble pol­i­cy changes announced in recent weeks. Things like buy­ing bonds to shore up mar­kets and stim­u­late the econ­o­my (“quan­ti­ta­tive eas­ing”) are now on the table. Quan­ti­ta­tive eas­ing is nor­mal cen­tral bank stuff that has been effec­tive­ly shoved off the table of ECB pol­i­cy options by the Bun­des­bank’s unortho­dox eco­nom­ic the­o­ries until now. Unfor­tu­nate­ly, it’s look­ing like the quan­ti­ta­tive eas­ing is going to be unortho­dox too. No ‘eas­ing’ for the gov­ern­ments. Much ‘eas­ing’ for the banks. And the aus­ter­i­ty con­tin­ues.