Europeans Continue Irresponsible And Reckless Economic Policies

What Happened?

Today (9/6/2012), the European Central Bank (ECB) decided to commit itself to unlimited purchases of short-term government debt as stated in their press release titled “Technical features of Outright Monetary Transactions”. This press release was accompanied by another, related press release titled “Measures to preserve collateral availability”.

Thus, the ECB is intending to print as much money as necessary. The hyperinflations of the 20^th century are being ignored. The European Union is more and more becoming lawless. Anything goes!

Strict Conditionality Attached

“A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. …

The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.” (Emphasis added)

What a joke! Empty promises heard before. Who believes that after the European governments materially breached major European agreements regarding the European Monetary Union.

Another Egregious Breach Of European Agreements

The Europeans are on a very slippery slope downhill. Their credibility and reputations is diminishing fast and the world is watching.

The ECB was not setup to bail out highly indebted governments. I am pretty certain this latest measure is in contravention to the European agreements to establish the European Central Bank.

There is, e.g., Article 123 (1) of the Lisbon Treaty:

“1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments,  … shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.” (Emphasis added)

Sterilization

“The liquidity created through Outright Monetary Transactions will be fully sterilized.” Really? Sounds to good to be true. More difficult to achieve promises. When central bankers pretend to be engineers, they may be surprised by market forces.

Manipulation Of Financing Costs

These latest desperate measures by the ECB aim to control the interest rates as demanded by financial markets when they buy Greek, Italian, or Spanish government debt.

As I wrote in a previous blog it is high time that the European interest rates diverged by country to reflect the huge government debt of some of the European Monetary Union (EMU) members.

Finally, private financial investors put a more realistic price on government indebtedness than in the decade before. This should not be discouraged by the ECB. On the contrary, higher interest rates would immediately force highly indebted countries to pursue drastic and immediate reforms.

Central Bank Independence Sacrificed

The ECB was patterned after the former German post-war central bank (Bundesbank) to be independent of political influence and to focus exclusively on price stability. The latest decision by the ECB surely implies that this central bank lost its independence from political influence like the German Reichsbank in the 20^th century.