The ECB shouldn't rush to end stimulus — no matter what Germany says

Germany has remained a staunch critic of an extraordinarily easy monetary policy conducted by the European Central Bank.
There are two main aspects to that criticism. Appealing to the domestic audience, the ECB is taken to task for the alleged damage it causes to German savers with negative nominal interest rates on short-term deposits, government bonds of up to five-year maturities, and a negative real interest rate of 1.12 percent on ten-year bunds.
Jock Fistick | Bloomberg via Getty Images
That is followed by a wider, and a more principled, message of German financial and monetary authorities to euro zone members with whom they share the same legal tender. With its ultra-easy money, the Germans say, the ECB is killing the incentive of heavily indebted, slow growing and unemployment-overwhelmed euro zone governments to reform and modernize their public policies. Such changes could stem the growth of debts and deficits and raise productivity gains by increasing the efficiency of their labor and product markets.
Try to argue with that.
Even the ECB seems in agreement with the German call on euro zone governments dragging their feet on budget deficits. The euro zone public opinion is also frowning on abuses and mismanagement of otherwise humane welfare provisions and cases where the social safety nets are savaged while unpopular presidents pay their barbers and beauticians monthly salaries equivalent to $11,800.

Who can replicate schwarze Null?

It requires a deep breath to take all that in. I won't even try, but I shall say something about the German guerrilla warfare with the ECB.
First, there is a question of the euro zone's balanced policy mix. At a time when there is an enormous pressure to square the monetary union's public finances — pursuing the German schwarze Null (black zero) goal of no deficit — it is entirely justified that a fiscal restraint should be offset by an appropriate monetary easing to keep the economic recovery alive.
Here are some numbers to illustrate the point. Between 2014 and 2016, the euro zone budget deficit was cut to 1.8 percent of GDP from 2.6 percent of GDP. By the end of this year, that budget gap is expected to narrow further to 1.5 percent of GDP.
Now, Spain, France and Italy (about half of the euro area GDP), with their budget deficits ranging from 2.4 percent (Italy) to 4.5 percent of GDP (Spain), have to make a huge effort to catch up with Germany's balanced books. Italy, in particular, has a lot of cutting to do to stop the growth of its unsustainably high public debt of 132.6 percent of GDP.
Second, Germany has theoretically and politically devalued its message by its wrong and calamitous imposition of fiscal austerity on sinking and heavily-indebted euro zone economies. Arguably, that was the key reason why these recession-induced budget deficits (and public debt) went as high as they did — and why they are now so difficult to bring down to German levels.
Germany, therefore, should tone down the criticism of its hard-pressed euro zone members — and especially of the ECB's current policy stance.
That, however, does not mean that Germany should renounce its constant, principled and heroic advocacy of a monetary policy aiming at clearly defined objectives of price stability.
The political aspect of the German fiscal austerity debacle is more interesting. Indeed, one might ask now why the Germans imposed those policies when they knew, or should have known, they would devastate some of the largest euro zone economies.

Walk the solidarity talk

A deceptively easy answer might be to quote the statement of the German Chancellor Angela Merkel that "fiscal miscreants (Greece, Portugal, France and Italy) and those who failed to supervise their banks (Spain) have to be taught a lesson."
You can also add there her refusal to heed the appeal of former President Barack Obama to ease up on austerity and give some oxygen to suffocating euro zone economies. At the time of those apparently repeated phone calls (late 2011), Obama was running for reelection, and he was worrying about the one-fifth of U.S. exports going to Europe.
The true reason, in my view, is that Chancellor Merkel, facing her own reelection in September 2012, was playing up to her domestic audience, insisting to reassure German voters that their wallets were safe and well on her mind. Ignoring the EU's ballyhooed "solidarity," she wanted to let the Germans know their money won't be used to bail out the "spendthrift southerners."
What do you call that? Could this remind you of Tip O'Neill's maxim that "all politics is local?"
If it were not for the sad and painful period in German history, you could also call that a "Germany First" election slogan elevated to a public policy platform.
Anything wrong with that? Yes, if you read the speech the German President Frank-Walter Steinmeier gave in Estonia earlier this month. This is, inter alia, what he said: "The European Union was created as an alternative to war and unrestrained nationalism. With the European Union we got a new community."
Germany is again in the middle of an election campaign where 46 percent of recently polled people have yet to make up their minds how they will vote on September 24, 2017. But regardless of the election outcome, the country will have to decide how the EU — and especially the euro zone — will be run as a community sharing the same economic, social and political destiny.

Investment thoughts

Whether you agree with the German distaste for cheap money or not, the truth is that the expansionary monetary policy has been the only support to American economy ever since the advent of the acute phase of the financial crisis in late 2008 (don't ask who caused the crisis).
And that includes the entirely accommodated (or monetized, if you prefer) fiscal stimulus to bail out America's heavily damaged financial system.
The Fed's easy policy stance is unlikely to change in the foreseeable future. As in the past, the central bank will have to bear the whole burden of stabilizing an economy with weak fundamentals (real disposable personal incomes growing 1.1 percent, actual unemployment rate of 8.6 percent and 37 percent of the active civilian population out of the labor force) and intractable uncertainties concerning fiscal, structural and trade policies.
If you have doubts about that, think of this: How likely is it that we shall soon see a meaningful fiscal stimulus, large-scale infrastructure spending, declining trade deficits, or a sudden revival of manufacturing activity that would push up the capacity utilization rates now more than 3 percentage points below their long-term average?
The ECB is in a similar position. Acting against a considerable fiscal restraint, the ECB has set in train a sustained euro zone recovery. That is still work in progress, though.
The declining growth of bank lending to the non-financial business sector indicates that corporations are not stepping up their investments because they can meet the actual and expected sales from existing production capacities. Bank lending to households is a bit stronger, but its modest and stabilizing growth rate of 2.6 percent is not suggesting a major rebound of private consumption outlays.
It, therefore, does not seem that the ECB should rush to start withdrawing the monetary stimulus.
But make no mistake: The German warning about cheap money elixirs stands. Monetary policy from governments that are unwilling, or incapable, of conceiving and implementing appropriate fiscal, structural and trade policies has a bad track record.
The ECB shouldn't rush to end stimulus — no matter what Germany says The ECB shouldn't rush to end stimulus — no matter what Germany says Reviewed by Alexander Von Stern on 23:42:00 Rating: 5