Mario Draghi, president of the European Central Bank, has been called “The world’s most important boring man”. Indeed, in this context of financial-fiscal fiscal crisis, there is perhaps no more powerful institution in Europe than that which he heads. Its refusal to buy Italian bonds, despite the country then-having the fastest-shrinking debt in Europe, effectively led to the fall of Silvio Berlusconi and the rise of Mario Monti with his election-free reform agenda. It alone decided to lend almost €500 billion to European banks in low-interest three-year loans last December to calm the financial markets.
These may or may not be good things, but there is no official-legal-democratic way of influencing these incredibly important decisions, which can prop up or topple a government, prevent or cause recession, and effectively give mind-bogglingly massive amounts of free cash to the banks (but not governments). These decisions are the lone preserve of the “independent” ECB’s governing council, made up of assorted Frankfurt bureaucrats and Goldman Sachs alumni, answerable only to its conscience.
As such, the ideological preferences, prejudices and words of Draghi and other ECB high officials are intensely important, even if most Europeans even within the eurozone are completely ignorant of them. Investors and financial publications, in contrast, listen on every oracular pronouncement.
This brings us to what Draghi had to say in an enlightening interview with the Wall Street Journal when asked about his assessment Greece’s austerity measures, given the “depression-like conditions” in the country:
This is actually a general question about Europe. Is there an alternative to fiscal consolidation? In our institutional set up the levels of debt-to-GDP ratios were excessive. There was no alternative to fiscal consolidation, and we should not deny that this is contractionary in the short term. In the future there will be the so-called confidence channel, which will reactivate growth; but it’s not something that happens immediately, and that’s why structural reforms are so important, because the short-term contraction will be succeeded by long-term sustainable growth only if these reforms are in place.
At first reading, Draghi appears to suggest there is something uniquely European about high debt-to-GDP ratios. This is false. The average gross debt of EU nations is 82.2% and for the eurozone 87.4% (most recent figures). As the WSJ reports elsewhere, the comparable figures are 107% debt-to-GDP for the U.S. and a whopping 230% for Japan. Italy, by far the worst of the big eurozone economies, doesn’t then look so bad with 128%. Also note that eurozone debt had been decreasing last year until the ECB and European Council’s mismanagement led to Europe’s double-dip recession.
Draghi is correct in noting the “institutional setup” – the eurozone’s inherently dysfunctional design as of now – means that it cannot manage debt levels even significantly lower than other developed countries’. One solution would be to change this setup, but for Draghi There Is No Alternative (TINA) to budget cuts. He cannot suggest any such reforms, partly because his role precludes it, partly because this would mean acknowledging the ECB’s own role in Europe’s worsening debt outlook and recession.
If Europeans have struggled and have to consolidate before others – even though their debt is lower! – it is because their central bank cannot or will not act as the Bank of Japan, the Bank of England or the Federal Reserve and systematically buy up public debt. That is why those countries can borrow at rock-bottom rates on the markets despite comparable-or-worse bad debt outlooks.
Secondly, the interview is terrifying in that Draghi sees no difference between Greece and the rest of Europe on this issue. The “We Are All Greeks” protests are exactly right in that, as far as the ECB is concerned, the rest of the eurozone is next on the chopping block. This is evidenced by Draghi’s answer as to how to achieve balanced budgets, when he describes “good vs. bad fiscal consolidation”:
In the European context tax rates are high and government expenditure is focused on current expenditure. A “good” consolidation is one where taxes are lower and the lower government expenditure is on infrastructures and other investments.
For Draghi, the best way to balance the budget is actually to have lower taxes. It isn’t completely clear whether he is advocating outright tax cuts, although in any event that’s only one logical step away from the more generous interpretation of his comments.
Effectively the ECB is saying the burden of austerity must not be met by any additional taxes on those with means, but must be met exclusively though budget cuts on “wasteful” public services like pensions, healthcare, education, unemployment relief, etc (which make up the vast majority of national budgets).
Note that there is no strong relationship – in any direction – between low taxes, growth and balanced budgets. In the EU-15 the countries with the lowest debt are also those with the highest taxes (Denmark, Finland and Sweden).
If we exclude the actually-working Scandinavian models and focus on lower taxes, what Draghi is effectively advocating is achieving balanced budgets exclusively through cuts to public services, even if it leads to Greek-style social catastrophe. As the OECD’s FactBlog points out, public services in Europe effectively halve poverty rates. This is also at a time, as a new International Labor Organization study shows, when workplace and income inequality as well as economic insecurity for the bottom rung of society, have increased dramatically across Europe due to recession and austerity. In short, Draghi is urging massive cuts to public services at precisely the moment when these are most necessary.
When asked if all this might not mean the end of the European social model as we know it, Draghi answered: “The European social model has already gone”. As good a reason as any to defund and dismantle what’s left of it.
The ECB is not a “neutral,” “apolitical” institution. The positions Draghi expresses are intensely hostile to centre-left thought in Europe and more generally to the great Christian-Social Democratic achievements of the postwar era. Arguably the institution is within its role in demanding fiscal responsibility from members of the euro, it has no right however to tell members how to go about doing so.
French Socialist presidential candidate François Hollande has said he wants to start a “debate” on the role of the ECB. Given that EU treaties are virtually unchangeable if any major country opposes it – see French opposition to a single seat for the European Parliament, even if it means wasting €200 million every year – we can be pessimistic at his chances of reform. Germany is extremely unlikely to allow any changes to the Maastricht rules no matter how much these devastate the economies of the periphery, social democracy, and indeed the European ideal itself. Still, if we can have the beginnings of a debate to question the hollow, insipid and ultimately economically disastrous “consensus” of eurozone governance, that would be a start.