The negative effects of the European Central Bank’s last-ditch efforts to save the eurozone from crisis in 2012 are becoming “overwhelming,” according to Deutsche Bank’s chief German economist.
The ECB, which has pumped more than €1 trillion into government bonds and kept interest rates at ultra-low levels, may have to take its share of the blame for the region’s stagnant economy, according to economist Stefan Schneider and Stuart Kirk, Deutsche Bank’s head of thematic research.
“By some measures, indeed, the situation is worse than during the great depression,” the analysts said in a note to clients published on Wednesday.
“Unemployment in France and the periphery is around 13 per cent, higher than the ten per cent French average from 1930 to 1938. And without a buoyant German economy the numbers would be much worse. Given the aggressiveness and unconventionality of monetary policy since 2012, it seems fair to ask whether the ECB’s approach bears some of the blame for Europe’s woes,” Schneider and Kirk said.
The asset purchases are running into the trillions. Here’s the chart from Deutsche Bank:
Deutsche Bank identified five consequences of the ECB’s unprecedented market interventions that reveal the “dark side” of this sort of policy.
Here they are:
1: Debt-laden European governments were saved without having to reform their economies.
“Up until July 2012, high interest rates and refinancing threats forced governments to be serious about reforms. Indeed, pre-2012, more than half the growth initiatives recommended by the OECD were being implemented across the eurozone. But last year just 20% were.”
2: The prices of sovereign bonds now tell investors nothing about the underlying economies.
“Since investors began to anticipate sovereign purchases by the central bank in late 2014, intra-eurozone government bond spreads have been locked together. In turn, misrepresentative sovereign yields distort the whole fixed income universe that is priced off government debt.”
3. The ECB has opened its balance sheet up to losses, the cost of which will be borne by European citizens.
“In the event of a debt restructuring of a eurozone member, the liabilities of the national central bank are likely to be borne by the taxpayers of the other eurozone member states, even if losses are spread over a long period. Fundamentally, however, the debt will have been socialised.”
4. Savers have suffered, and inflation is set to rise.
“Today, rising energy prices, the shortage of high coupons and ultimately mean-reversion are likely to take their toll.”
5. By giving borrowers a respite, the ECB has kept zombie companies alive and boosted asset prices with no benefit to the real economy.
“Increased lending has gone mostly to low quality existing borrowers while obviating troubled banks from the need to write down loans. Without creative destruction in ailing industries, investors in high-saving countries have simply bid-up the price of healthy assets.”