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23 Ιουνίου 2012
RICHARD KOO: The Entire Crisis In Europe Started With A Big ECB Bailout Of Germany
Joe Weisenthal
Great note from Nomura’s Richard Koo,
looking at the so-called “competitiveness
looking at the so-called “competitiveness
problem” of the Southern European
nations.
nations.
Rather than some inherent problem found
there, Koo says that what happened is that
there, Koo says that what happened is that
after the 2000 tech bubble collapsed (a
bubble which Germany shared heavily in) the
bubble which Germany shared heavily in) the
ECB used exceptionally loose monetary
policy to stimulate the economy, so that
policy to stimulate the economy, so that
Germany wouldn’t have to revive its
economy via fiscal policy.
economy via fiscal policy.
This didn’t do much domestically in
Germany (which was suffering from a balance
sheet recession) but did really rev up the
bubbles in the periphery, causing the boom in
bubbles in the periphery, causing the boom in
imports from Germany, thus putting the
periphery in debt, and boosting Germany’s
periphery in debt, and boosting Germany’s
export sector, rescuing it from the
post-tech-bubble funk.
post-tech-bubble funk.
Says Koo:
The countries of southern Europe, which
had not participated in the IT bubble, enjoyed
had not participated in the IT bubble, enjoyed
strong economies and robust private-
sector demand for funds at the time. The ECB’s
sector demand for funds at the time. The ECB’s
2% policy rate therefore led to sharp
growth in the money supply, which in turn fueled
growth in the money supply, which in turn fueled
economic expansions and housing bubbles.
Wages and prices increased… leaving
those countries less competitive relative to
those countries less competitive relative to
Germany.
In short, the ECB’s ultra-low policy rate
had little impact in Germany, which was
had little impact in Germany, which was
suffering from a balance sheet recession,
but it was too low for other countries in the
but it was too low for other countries in the
eurozone, resulting in widely divergent
rates of inflation.
rates of inflation.
As Germany became increasingly competitive
relative to the strong economies of
relative to the strong economies of
southern Europe, exports grew sharply and
pulled the nation out of recession.
pulled the nation out of recession.
Germany’s trade surplus quickly overtook
those of Japan and China to become the
those of Japan and China to become the
world’s largest, with much of the growth
fueled by exports to other European markets.
fueled by exports to other European markets.
ECB, not southern Europe, responsible for
competitiveness gap
competitiveness gap
In 2005, I told a senior ECB official that
it was unfair to force other countries to rescue
it was unfair to force other countries to rescue
Germany by boosting their economies with
loose monetary policy without requiring
loose monetary policy without requiring
Germany to administer fiscal stimulus,
when it was Germany that had become so
when it was Germany that had become so
deeply overextended in the bubble. The
official responded that that is what a unified
official responded that that is what a unified
currency means: because Germany could not
be granted an exception on fiscal stimulus,
be granted an exception on fiscal stimulus,
the only option was to lift the entire
region with monetary policy.
region with monetary policy.
In other words, there would have been no
need for such dramatic easing by the ECB—
need for such dramatic easing by the ECB—
and hence no reason for the
competitiveness gap with the rest of the eurozone to widen
competitiveness gap with the rest of the eurozone to widen
to current levels—if Germany had used
fiscal stimulus to address its balance sheet
fiscal stimulus to address its balance sheet
recession.
The creators of the Maastricht Treaty made
no provision for balance sheet recessions
no provision for balance sheet recessions
when drawing up the document, and today’s
“competitiveness problem” is solely
“competitiveness problem” is solely
attributable to the Treaty’s 3% cap on
fiscal deficits, which placed unreasonable
fiscal deficits, which placed unreasonable
demands on ECB monetary policy during this
type of recessions. The countries of
type of recessions. The countries of
southern Europe are not to blame.
Nailed it.
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