By Paolo von Schirach
January 20, 2013
WASHINGTON – I am really worried about too much praise for European Central Bank President Mario Draghi. He is described as Europe’s savior, as a genius because last Summer he bluntly said that he would do whatever is necessary to defend the Euro.
Since the bond markets did not test this bold proposition, in essence believing that Draghi would be able to follow through with adequate liquidity aimed at supporting bonds under pressure, he won the battle. There is no more downward pressure against the Club Med countries bonds. Europe’s financial markets are back to “normal”. So, this is it? Just one brave statement of intentions by the head of the monetary authority fixed everything?
This is patently absurd. There is a huge difference between the end of an emergency and return to normalcy. Mario Draghi deserves a lot of credit for boldy asserting his intention to fight for the integrity of the monetary union.
But this is after all his job. And by the way this would have never worked had Draghi failed to enlist the German government as key supporter for his plan. Imagine if Chancellor Merkel had said publicly that Draghi’s strategy couldn’t work because key Eurozone members would not provide the liquidity to rescue Club Med. That would have been a disaster.
Still, some praise is deserved. In an environment where timidity and half measures are the best that mediocre leaders can come up with, Draghi’s blunt words were like a lion’s roar.
Meltdown avoided, picture this bleak
That said, it should be crystal clear to all observers that the President of the ECB cannot turn Europe around all by himself. The idea that since monetary meltdown has been avoided now all is well is plain stupid. Sure, the patient (Club Med) did not die, and he may be soon out of intensive care. But the prognosis is that there will never be a full recovery. The ailment is so severe that it created permanent damage.
Weak Club Med economies
Let’s look at the picture. The Eurozone is in a recession. Unemployment is at 11%. If this is bad, look at Spain where it is at 27%. Yes, that is 27%. Youth unemployment in the Club Med countries is around 50%. Austerity measures, while necessary to cut spending and restore some confidence in highly indebted countries, are recessionary. They have sucked oxygen out of the room. Tied to the Euro, the Club Med countries cannot hope in an export led recovery aided by a devalued currency. More broadly, they still lack macroeconomic policies that would strongly encourage domestic and foreign investors.
Greece will never come back
Just look at Greece. After the latest bailout, Greece will have received 255 billion Euro. This is an astounding figure for a small country. The IMF now warns that it may need an extra 9 billion Euro. And, despite all the massive interventions, the economy is in free fall. Sure enough, the Greek 10 year bond is now “down” to 11%. This is a huge success if we consider that it was at 30% just few months ago. While this is great progress, 11% is still extremely high. (Germany is less than 2%).
If markets had total confidence in the rescue plans for Greece, then its sovereign debt should be regarded as debt of any other perfectly solvent country, with zero risk premium attached. But it is not so. And this proves that Draghis’ victory, while significant, is only partial and temporary. Avoiding the Euro’s meltdown is not the same as restoring full credibility in Europe’s future.
ECB cannot fix weak economies
The truth of the matter is that Southern Europe’s structural problems are not just fiscal. They are also economic. True enough, its public sectors are still too large and inefficient, its welfare programs too expensive. Partial reforms have yet to resolve these core problems. But, in addition, its economies are not competitive, productivity is too low. There is no business creation. Old and underfunded education systems are unable to turn out world class knowledge workers. And, to make it even worse, all Southern European countries have extremely low fertility rates. This means societies made out mostly of inactive old people clamoring for pensions, medical care, disability benefits and more.
Europe will under perform
Even if Mario Draghi were the best central banker in history, the ECB cannot fix these systemic problems all by itself. Without miraculous economic transformations, dragged down by its weak and needy Southern periphery, Europe will continue to under perform.