We have spoken for longer than we care to remember about the inept European Central Bank (ECB) policy which continues to see a stimulus program, otherwise known as QE coupled with ZIRP, which as we stated many times before wrecks economies if it is implemented for more than a few months.
The fact that there is a genuine belief that the ECB is unlikely to change its policies over the next few years and that the ECB believes that its stimulus program will drive an expansion in salaries and consumer spending growth beggars belief, given that they started it in March 2015, which has not had the desired effect and they are already tapering monthly purchases.
The spectre of the ECB balance sheet, which stands at nearly 4.4 trillion euros, looms large. The growth in EU economies is questionable given that they are essentially built entirely on a gigantic ever-expanding debt mountain. Whilst stock markets ride high, economic reality is beginning to bite, driven in part by lower wages in a notionally low inflation economy and entire generations becoming unable to afford to buy homes.
Quite how Draghi expects to see higher salaries in the near term due to negative and zero interest rates policies beggars belief. It appears to be a convenient excuse not to raise interest rates precisely because the economies in the euro zone are weak and once you have adopted QE and ZIRP for more than a few months you quite simply can’t raise interest rates because you will wreck the economy. However, this is a double-edged sword because if you maintain negative or low interest rates you also wreck economies as we are witnessing now.
The economic reality in the Euro zone is that despite projections that euro zone growth is on track to hit its highest level in a decade this year, ECB monetary policy has created an economy which is now in the Intensive Care Unit (ICU). Jobs and wages are being supported by central bank QE policy and the availability of cheap credit, buoyed by the very fact that the ECB sees a key facet of the recovery being based on favourable financing conditions for businesses and households. This does not imply solid economic growth but a debt fuelled binge designed to create illusionary growth.
What the ECB fails to appreciate is that current unrealistic wage increase demands are fuelled in part by the real inflation in essential items and low interest rates for savers which is seeing people becoming increasingly worse off precisely due to the very policies the ECB wishes to continue to implement.
The euro zone is now effectively critically ill in the ICU and the fact that the euro zone economies are still reliant on QE and ZIRP proves that such economics are an utter train wreck. Whilst the EU focuses on the Brexit debacle, Rome and every other euro zone capital city is burning and soon enough their thoughts will turn to the implosion of the euro zone itself because of their crass ineptitude to manage euro zone economies with prudent monetary policy decisions. The fact that they will then feign surprise is precisely why articles such as this need to be written.