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September 9, 2014updated 11 Jan 2016 1:05pm

Mario Draghi looking less super as euro-deflation looms

By Spear's

The one-size-fits-all euro isn’t working – just ask Mario Draghi at the ECB. The Germans and their Bundesbank are screaming in his right ear for him to raise interest rates to 2 per cent; everywhere else is telling him in his left ear to ward off gathering deflation by resorting to quantitative easing.

QE is complete anathema to Germany, with the Weimar inflation seared into its psychological memory. So what did Mario do – the splits? Well, he performed an economic version of that by doing what he could, which wasn’t much: the lending rate down to 0.05 per cent and the deposit rate down to minus 0.02 per cent.

Not a lot of wriggle room left in that direction, Mario. So, the negative deposit rate was meant to make banks use their deposits to lend money to businesses, but they are suffering from increasing lack of demand.

Not only that, the banks are still deleveraging as their feet are stuck in a frozen lake of property loans. So, Mario decided he had to buy asset-backed securities, ABSs, from the banks, but it is banned from buying sovereign debt, which the banks are also in up to their necks.

None of this is going to solve the deflation threat to the eurozone: it is far too little, too late. Whereas the US and UK bailed out and recapitalised their banks and launched QE five years ago, and are now back into almost normal growth, the ECB is still finalising its report on bank capital, to be delivered next month! And EU growth is non-existent as a result. Because the EU has no political structure, its single currency can never work, nor in a timely manner too.

The only hope for euro-salvation for Mario is for the euro to decline by 10 to 20 per cent, or even more. The FX markets will soon pass their own judgment on the ill-fated euro – and the ultimate humiliation for a flawed Maastricht Treaty’s EMU experiment.
As a rough rule of thumb, for every €100 billion added to the ECB’s balance sheet, the euro loses about 1 per cent of its value: so something like €2.0 trillion needs to go on Mario’s books, which will make the Germans go apoplectic.

And some other euro-shibboleths are being exposed. Top of this list is that with austerity restructuring, other countries’ productivity would do catch-up with Germany. Where on earth did this notion originate, that Germany’s productivity would mark time for twenty years, or longer?

The second myth is that the common market would develop the EU’s whole growth potential, with increased trade. And thirdly, the Maastricht Treaty allowed a thirteenth nation into the EU, a nation that has cost the EU dear, namely the Bureaucratic State.

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Where does the EU go from here? Angela Merkel, the de facto leader of the EU, apes Lady Macbeth and calls for more EU as the answer, which means more power to Berlin and Frankfurt. This was definitely not the aim of the EU’s founding fathers; in fact, it was quite the reverse. The idea of France licking Germany’s economic boots is unthinkable.

The logical outcome is for the EU to explode back into a confederacy of sovereign nation states around the Customs Union and expel the EU Bureaucratic State. Maybe Greece will be the trigger.

And even France is now in a zero growth/deflationary situation. Their only light relief is the ridiculous antics of President Flanby. In October, the G7 GDP data will look up to 3 per cent better, as they will include R&D spend, tourism and the sex trade for the first time.
But Flanby’s first act as president was to ban prostitution from the land of Madame Claude! He just can’t get anything right.

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