FacebookTwitterGoogle+RedditEmail

No Party For Europe

by DEAN BAKER

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 a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

June 29, 2017
Dave Lindorff
Sy Hersh, Exposer of My Lai and Abu Ghraib, Strikes Again, Exposing US Lies About Alleged Assad Sarin ‘Attack’
Chuck Collins
What Happened to America’s Wealth? The Rich Hid It
Rev. William Alberts
When the Bible is the Root of Evil
Jeff Mackler
Trumps ‘No Fly Zone’ Escalates U.S. War Against Syria
Bill Willers
The Next World War Won’t Just Be “Over There” 
Ellen Brown
Sovereign Debt Jubilee, Japanese-Style
Jack Laun
Will There Finally be Peace With Justice in Colombia?
Binoy Kampmark
Holding the Police to Account in the UK
David Swanson
Against Ignoring the KKK
Rima Najjar
Israel’s Illegitimate Tactics Against Palestinian Armed Resistance vs. Legitimate Global Security Concerns
Mel Gurtov
Advise, Assist, Arm: The United States at War
David Welsh
Berkeley Capitulates to Police Militarization and Spying
Marion Andrew
Not Being Considerate of One’s Audience: US Television’s Coverage of Olympic and International Sports
June 28, 2017
Diana Johnstone
Macron’s Mission: Save the European Union From Itself
Jordon Kraemer
The Cultural Anxiety of the White Middle Class
Vijay Prashad
Modi and Trump: When the Titans of Hate Politics Meet
Jonathan Cook
Israel’s Efforts to Hide Palestinians From View No Longer Fools Young American Jews
Ron Jacobs
Gonna’ Have to Face It, You’re Addicted to War
Jim Lobe – Giulia McDonnell Nieto Del Rio
Is Trump Blundering Into the Next Middle East War?
Radical Washtenaw
David Ware, Killed By Police: a Vindication
John W. Whitehead
The Age of No Privacy: the Surveillance State Shifts into High Gear
Robert Mejia, Kay Beckermann and Curtis Sullivan
The Racial Politics of the Left’s Political Nostalgia
Tom H. Hastings
Courting Each Other
Winslow Myers
“A Decent Respect for the Opinions of Mankind”
Leonard Peltier
The Struggle is Never for Nothing
Jonathan Latham
Illegal GE Bacteria Detected in an Animal Feed Supplement
Deborah James
State of Play in the WTO: Toward the 11th Ministerial in Argentina
Andrew Stewart
Health Care for All: Why I Occupied Sen. Sheldon Whitehouse’s Office
Binoy Kampmark
The European Commission, Google and Anti-Competition
Jesse Jackson
A Savage Health Care Bill
Jimmy Centeno
Cats and Meows in L.A.
June 27, 2017
Jim Kavanagh
California Scheming: Democrats Betray Single-Payer Again
Jonathan Cook
Hersh’s New Syria Revelations Buried From View
Edward Hunt
Excessive and Avoidable Harm in Yemen
Howard Lisnoff
The Death of Democracy Both Here and Abroad and All Those Colorful Sneakers
Gary Leupp
Immanuel Kant on Electoral Interference
Kenneth Surin
Theresa May and the Tories are in Freefall
Slavoj Zizek
Get the Left
Robert Fisk
Saudi Arabia Wants to Reduce Qatar to a Vassal State
Ralph Nader
Driverless Cars: Hype, Hubris and Distractions
Rima Najjar
Palestinians Are Seeking Justice in Jerusalem – Not an Abusive Life-Long Mate
Norman Solomon
Is ‘Russiagate’ Collapsing as a Political Strategy?
Binoy Kampmark
In the Twitter Building: Tech Incubators and Altering Perceptions
Dean Baker
Uber’s Repudiation is the Moment for the U.S. to Finally Start Regulating the So-called Sharing Economy
Rob Seimetz
What I Saw From The Law
FacebookTwitterGoogle+RedditEmail