FacebookTwitterRedditEmail

No Party For Europe

Jean Claude Trichet will be retiring as head of the European Central Bank at the end of the month. He will step into retirement having wreaked the sort of destruction on the European economy that hostile powers can only dream about. Tens of millions of people across the eurozone countries are unemployed or underemployed because of his mismanagement of Europe’s economy. Meanwhile the world teeters on the brink of another financial crisis because of the ECB’s failure, along with the IMF, to effectively address the sovereign debt crisis. Most incredible of all, Trichet probably thinks he has done a good job.

This last point really is central because the ECB, like much of the economics profession, continues to be controlled by a bizarre clique that believes that the most important, and possibly only, goal that a central bank should pursue is a 2 percent inflation target. By this measure, the ECB has done reasonably well, even the as the euzo zone economy has crumbled around it. After all, inflation in the eurozone economies rarely exceeded 3 percent and averaged well under the 2 percent target over the last decade.

However, the low and stable eurozone inflation rate is not going to provide much help to the 21.2 percent of the Spanish work force that is unemployed or the 14.6 percent of the Irish workforce, nor the millions more elsewhere in the eurozone who have lost their jobs as a result of the collapsed of the housing bubbles that the ECB let grow unchecked.

If Trichet and his colleagues at the ECB had been awake, they would have noticed that real house prices in Spain had more than doubled between 1998 and 2006. The same was true in Ireland. There was no remotely comparable increase in rents, strongly indicating that this run-up was not being driven by the fundamentals of the housing market.

And in both countries, the massive run-up in house prices was having the predictable effect on the economy. Both countries had huge building booms and surging consumption, as homeowners spent based on their bubble-generated housing wealth. In both cases, this led to extraordinary balance of trade deficits that were clearly unsustainable for advanced economies.

How could Trichet and his colleagues have failed to have noticed these housing bubble and the economic distortions that they were creating? Or, insofar as they did notice them, did they have a theory whereby economies can seamlessly replace the 10 percentage points of GDP worth of demand, or thereabout, that was being generated by the housing bubbles in these countries?

It didn’t help that much of the rest of the eurozone also had bubbles in their housing markets (Germany was the big exception); although they were not creating quite as large distortions as in Spain and Ireland. Nor did it help matters that important non-eurozone countries, like the United States and the United Kingdom, also had bubbles in their housing market and that the whole process was being driven by over-leveraged banks.

It is very difficult to see how a central banker in the eurozone could have looked at the economic situation in 2004, 2005, or 2006 and not be concerned about the impending disaster that eventually overtook these economies. The warning signs were all over the place and flashing bright red everywhere, but rather than taking the regulatory and monetary actions necessary to deflate these bubbles – including giving clear and persistent warnings – Trichet and his colleagues focused on their 2 percent inflation target.

Remarkably, even after the collapse of the bubbles, with the eurozone economies smoldering in the wreckage, the ECB continues to be obsessed with its 2 percent inflation target. While the Federal Reserve Board lowered its overnight money rate to zero and has had several rounds of quantitative easing to try to reduce longer terms rates, the ECB never lowered its short-term rate below 1.0 percent. It actually raised it to 1.5 percent last spring in order to stem inflationary risks.

More recently, along with its troika partners the European Commission and the IMF, the ECB has had the whole euro zone financial system, and indeed the world financial system, teetering on the brink of disaster as it tries to squeeze additional concessions out of Greece and other debt-burdened economies.  While the betting is that a resolution to the debt crisis will be reached before the whole system explodes, the ECB and its partners are imposing enormous risks on everyone else for concessions that are of questionable value, at best.

It would be tragic if Mr. Trichet is allowed to go into retirement thinking that he has done a good job. In terms of public service, Trichet’s performance ranks a notch or two below Michael Brown watching New Orleans drown when he was head of the Federal Emergency Management Agency.

Humiliating Trichet is not just a question of justice or morality; although is painful to see someone who caused so much harm escape with impunity. More importantly, it is an issue of incentives. The people given responsibility for economic policy should be held accountable for their performance. If Trichet is toasted into retirement, we have no reason to expect any better performance from his successor. That would be a real disaster.

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.

A  version of this article was published by The Guardian.

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

bernie-the-sandernistas-cover-344x550

April 23, 2019
Peter Belmont
The Monroe Doctrine is Back, and as the Latest US Attack on Cuba Shows, Its Purpose is to Serve the Neoliberal Order
David Schultz
The Mueller Report: Trump Too Inept to Obstruct Justice
Geoff Beckman
Crazy Uncle Joe and the Can’t We All Just Get Along Democrats
Medea Benjamin
Activists Protect DC Venezuelan Embassy from US-supported Coup
Patrick Cockburn
What Revolutionaries in the Middle East Have Learned Since the Arab Spring
Jim Goodman
Don’t Fall for the Hype of Free Trade Agreements
Lance Olsen
Climate and Forests: Land Managers Must Adapt, and Conservationists, Too
William Minter
The Coming Ebola Epidemic
Tony McKenna
Stephen King’s IT: a 2019 Retrospective
David Swanson
Pentagon Claims 1,100 High Schools Bar Recruiters; Peace Activists Offer $1,000 Award If Any Such School Can Be Found
Gary Olson
A Few Comments on the recent PBS Series: Reconstruction: America After the Civil War
April 22, 2019
Melvin Goodman
The NYTs Tries to Rehabilitate Bloody Gina Haspel
Robert Fisk
After ISIS, a Divided Iraq, Wounded and Grief-Stricken
Binoy Kampmark
Julian Assange as Neuroses
John Laforge
Chernobyl’s Deadly Effects Estimates Vary
Kenneth Surin
Mueller Time? Not for Now
Cesar Chelala
Yemen: The Triumph of Barbarism
Kerron Ó Luain
What the “White Irish Slaves” Meme Tells Us About Identity Politics
Andy Piascik
Grocery Store Workers Take on Billion Dollar Multinational
Seiji Yamada – Gregory G. Maskarinec
Health as a Human Right: No Migrants Need Apply
Howard Lisnoff
Loose Bullets and Loose Cannons
Ricardo Alarcón de Quesada
Dreaming in Miami
Graham Peebles
Consuming Stuff: The Polluting World of Fashion
Robert Dodge
Earth Day: Our Planet in Peril
Weekend Edition
April 19, 2019
Friday - Sunday
Andrew Levine
What Will It Take For Trump to Get His Due?
Roy Eidelson
Is the American Psychological Association Addicted to Militarism and War?
Jeffrey St. Clair
Roaming Charges: Time is Blind, Man is Stupid
Joshua Frank
Top 20 Mueller Report “Findings”
Rob Urie
Why Russiagate Will Never Go Away
Paul Street
Stephen Moore Gets Something Right: It’s Capitalism vs. Democracy
Russell Mokhiber
Why Boeing and Its Executives Should be Prosecuted for Manslaughter
T.J. Coles
The Battle for Latin America: How the U.S. Helped Destroy the “Pink Tide”
Ron Jacobs
Ho Chi Minh City: Nguyen Thai Binh Street
Dean Baker
Fun Fictions in Economics
David Rosen
Trump’s One-Dimensional Gender Identity
Kenn Orphan
Notre Dame: We Have Always Belonged to Her
Robert Hunziker
The Blue Ocean Event and Collapsing Ecosystems
Theodore C. Van Alst, Jr.
Paddy Wagon
Brett Wilkins
Jimmy Carter: US ‘Most Warlike Nation in History of the World’
John W. Whitehead
From Jesus Christ to Julian Assange: When Dissidents Become Enemies of the State
Nick Pemberton
To Never Forget or Never Remember
Stephen Cooper
My Unforgettable College Stabbings
Louis Proyect
A Leftist Rejoinder to the “Capitalist Miracle”
Louisa Willcox
Aldo Leopold’s Land Ethic and the Need for a New Approach to Managing Wildlife
Brian Cloughley
Britain Shakes a Futile Fist and Germany Behaves Sensibly
FacebookTwitterRedditEmail