The European Bank’s Ideological Zealots

by DEAN BAKER

The European Central Bank (ECB) has been working hard to convince the world that it is not competent to act as central bank. One of the main responsibilities of a central bank is to act as the lender of last resort in a crisis. The ECB is insisting that it will not fill this role. It is arguing instead that it would sooner see the eurozone collapse than risk inflation exceeding its 2.0 percent target.

It would be bad enough if the ECB’s incompetence just put Europe’s economy at risk. After all, there are tens of millions of people who stand to see their lives ruined because the bureaucrats at the ECB don’t understand introductory economics. But the consequences of a euro meltdown do well beyond the eurozone.

At the very least, the chaos following the collapse of the euro will mean a second dip to the U.S. recession. The loss of the European export market, and the likely surge in the dollar that will result from a worldwide flight to safety, would be enough to turn a weak positive growth number into a negative.

However, it is also likely that the financial panic following the collapse of the euro will lead to the same sort of financial freeze-up that we saw following the collapse of Lehman. In this case, we won’t be seeing unemployment just edge up by a percentage point or two, we will be seeing unemployment possibly rising into a 14-15 percent range. This would be a really serious disaster.

Fortunately, the Fed has the tools needed to prevent this sort of meltdown. It can simply take the steps that the ECB has failed to do. First and most importantly it has to guarantee the sovereign debt of eurozone countries. The Fed simply has to commit to keep the interest rate yields on debt from rising above levels where it risks creates a self-perpetuating spiral of higher debt leading to higher interest rates, which in turn raises the deficit and debt.

This doesn’t mean giving the eurozone countries a blank check. The Fed can adjust the interest rate at which it guarantees debt depending on the extent to which countries reform their fiscal systems. For example, if Greece and Italy crack down on tax evasion, this can be a basis for allowing a lower interest rate. If they allow their wealthy to freely evade taxes, then this can be a basis for raising interest rates. The difference between a 2.0 percent interest rate and 7.0 percent interest would be a powerful incentive to eliminate corruption and waste.

The idea that a foreign central bank would intervene to affect a country’s monetary policy should not be alien to people in the United States. The Chinese central bank did the same sort of intervention in the United States back in the years 2004-2006.

This was Alan Greenspan’s famous “conundrum” episode. He claimed that he could not understand why long-term rates in the United States stayed flat or even fell as he raised the overnight rate from 1.0 percent in 2004 to 5.25 percent in 2006.

This pattern is easily understandable if we recognize that China’s central bank was engaged in large-scale quantitative easing at the time. It was buying up hundreds of billions of dollars a year of long-term U.S. government bonds. The impact of China’s central bank buying up large amounts of long-term U.S. government debt is the same as the Fed buying up large amounts of long-term U.S. government debt; it pushes down long-term interest rates. The only mystery in this story is that Greenspan somehow didn’t recognize this fact.

In this case the Fed would be intervening in the European economy for the same reason as China – to sustain our domestic economy. If the eurozone collapses, there are no easy tools in the Fed’s bag of tricks that will allow it to quickly offset the negative impact on the U.S. economy. It would make far more sense to act pre-emptively to prevent this disaster from happening. This can be seen as an essential part of its legal mandate to maintain full employment.

Of course this sort of intervention will look horrible from the standpoint of the eurozone countries. It will appear as though they cannot be trusted to manage their own central bank and deal with their own economic affairs.

Unfortunately, this is the case. They have entrusted the continent’s most important economic institution to a group of ideological zealots who are infatuated by the sight of low inflation rates even as whole economies collapse in ruins and tens of millions of people needlessly go unemployed.

Perhaps the Europeans will respond to this affront by putting some serious people in charge of the ECB who are committed to maintaining a functioning economy in the eurozone.  If that is the outcome, it will be a win-win for all involved. But if they can’t rise to the task, we should not allow the ECB ideologues to wreak havoc on the lives of tens of millions of innocent people in Europe, the developing world and here in the United States.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of False Profits: Recovering from the Bubble Economy . He also has a blog, ” Beat the Press ,” where he discusses the media’s coverage of economic issues.

Like What You’ve Read? Support CounterPunch
August 04, 2015
Vincent J. Roscigno
University Bureaucracy as Organized Crime
Paul Street
Bernie Sanders’ Top Five Race Problems: the Whiteness of Nominal Socialism
Herbert Dyer, Jr.
Is White Supremacy a Mental Disorder?
Ramzy Baroud
The Palestinian Bubble and the Burning of Toddler, Ali Dawabsha
Pepe Escobar
Reshuffling Eurasia’s Energy Deck — Iran, China and Pipelineistan
L. Michael Hager
The Battle Over BDS
Eric Draitser
Puerto Rico: Troubled Commonwealth or Debt Colony?
Colin Todhunter
Hypnotic Trance in Delhi: Monsanto, GMOs and the Looting of India’s Agriculture
Benjamin Willis
The New Cubanologos: What’s in a Word?
Matt Peppe
60 Minutes Provides Platform for US Military
Binoy Kampmark
The Turkish Mission: Reining in the Kurds
Eoin Higgins
Teaching Lessons of White Supremacy in Prime-Time: Blackrifice in the Post-Apocalyptic World of the CW’s The 100
Gary Corseri
Gaza: Our Child’s Shattered Face in the Mirror
Robert Dodge
The Nuclear World at 70
Paula Bach
Exit the Euro? Polemic with Greek Economist Costas Lapavitsas
August 03, 2015
Jack Dresser
The Case of Alison Weir: Two Palestinian Solidarity Organizations Borrow from Joe McCarthy’s Playbook
Joseph Mangano – Janette D. Sherman
The Atomic Era Turns 70, as Nuclear Hazards Endure
Nelson Valdes
An Internet Legend: the Pope, Fidel and the Black President
Robert Hunziker
The Perfectly Nasty Ocean Storm
Ahmad Moussa
Incinerating Palestinian Children
Greg Felton
Greece Succumbs to Imperialist Banksterism
Binoy Kampmark
Stalling the Trans-Pacific Partnership: the Failure of the Hawai’i Talks
Ted Rall
My Letter to Nick Goldberg of the LA Times
Mark Weisbrot
New Greek Bailout Increases the Possibility of Grexit
Jose Martinez
Black/Hispanic/Women: a Leadership Crisis
Victor Grossman
German Know-Nothings Today
Patrick Walker
We’re Not Sandernistas: Reinventing the Wheels of Bernie’s Bandwagon
Norman Pollack
Moral Consequences of War: America’s Hegemonic Thirst
Ralph Nader
Republicans Support Massive Tax Evasion by Starving IRS Budget
Alexander Reid Ross
Colonial Pride and the Killing of Cecil the Lion
Suhayb Ahmed
What’s Happening in Britain: Jeremy Corbyn and the Future of the Labour Party
Weekend Edition
July 31-33, 2015
Jeffrey St. Clair
Bernie and the Sandernistas: Into the Void
John Pilger
Julian Assange: the Untold Story of an Epic Struggle for Justice
Roberto J. González – David Price
Remaking the Human Terrain: The US Military’s Continuing Quest to Commandeer Culture
Lawrence Ware
Bernie Sanders’ Race Problem
Andrew Levine
The Logic of Illlogic: Narrow Self-Interest Keeps Israel’s “Existential Threats” Alive
ANDRE VLTCHEK
Kos, Bodrum, Desperate Refugees and a Dying Child
Paul Street
“That’s Politics”: the Sandernistas on the Master’s Schedule
Ted Rall
How the LAPD Conspired to Get Me Fired from the LA Times
Mike Whitney
Power-Mad Erdogan Launches War in Attempt to Become Turkey’s Supreme Leader
Ellen Brown
The Greek Coup: Liquidity as a Weapon of Coercion
Stephen Lendman
Russia Challenges America’s Orwellian NED
Will Parrish
The Politics of California’s Water System
John Wight
The Murder of Ali Saad Dawabsha, a Palestinian Infant Burned Alive by Israeli Terrorists
Jeffrey Blankfort
Leading Bibi’s Army in the War for Washington