Tag Archives: ECB

25 years after Maastricht, the euro is worth rescuing

GIS Statement* by Prince Michael of Liechtenstein

For the euro currency to thrive, the ECB must commit to protecting its value, as opposed to aiding politicians in their current budgetary troubles (source: dpa)


Europe is commemorating the inception of its common currency, the euro, a quarter of a century ago. The goal to establish it was set forth in the Maastricht Treaty, which was drafted in December 1991 and entered into force in 1993. The currency began its virtual existence in 1999, and euro bills and coins entered circulation in 2002. The anniversary is remembered, but not celebrated. The euro, created with great enthusiasm, is now widely perceived as a failure. In fact, the common currency was introduced not only for valid economic and business reasons. There was a political agenda attached to the project as well – to push forward the process of European integration and unification.

In the Maastricht agreement, conditions were set to guarantee the stability of the new currency and to make certain that it would enhance economic growth within the European Union. The supranational European Central Bank (ECB) was supposed to act independently and stay focused on ensuring monetary stability. Another crucial Maastricht criterion was that member states were to avoid budget deficits of more than 3 percent of their gross domestic product (GDP), and accumulated public debts in excess of 60 percent of their GDP.

That was the plan. However, there was also the political agenda of the “ever-closer union” and the “harmonization” mania. This led to misconstrued risk premiums for loans. Also, the critically needed program for weaker regions to increase their productivity, and a transition period before they fully entered the common currency system, were neglected. Under national currencies, countries restored their competitiveness through currency devaluation; under the euro, this avenue was closed to them. This resulted in financial signals that were misguiding. Business in southern Europe turned en masse to construction, financed with – thanks to the euro – comparatively cheap debt.

Tall bill for mistakes

The consequences were dire. A much larger disaster, however, was brought about by disregard for the deficit criteria. These were immediately flaunted by the two largest members of the community, the supposed stability guarantors Germany and France. Other governments took their cue from them and breaking the deficit ceilings became common practice.

The list of sins was expanded further when the eurozone’s entrance criteria were diluted to accept countries such as Greece. It was clear from the onset that some countries in the EU did not meet the requirements and never would. They cheated the system while the ECB, the European Commission and other member states looked the other way. Greece was the most striking case, but a few other states were in the same category.

In the new eurozone, states happily spent and accumulated debt. Politicians eschewed reform under the protective shield of baseless triple-A ratings on their burgeoning sovereign debt. Such fictions can continue only to a point; in 2010 a severe fiscal crisis hit. In many instances, the euro was blamed. It was an easy scapegoat.

The present policy of the ECB, of low to negative interest rates and “quantitative easing” (which consists of increasing the money supply and buying financial assets especially sovereign debt from banks) represents a complete breach of the rules and criteria of the ECB. This policy not merely debases the currency, it also erodes the public’s remaining trust in European institutions and, in consequence, the European Union.

How to rescue the euro

A grave mistake of the past was that not all eurozone criteria were correct. The pursuit of the “ever-closer union” and “harmonization” caused the architects of the euro zone to ignore the large regional differences in the real economy and economic behavior. Making matters worse, the proper criteria were given short shrift by many member states and the European Commission. Now the ECB has joined in the destructive process.

As the cures for the assumed failure of the euro are promoted, they again turn up to be the harmonization and the ever-closer union. It is said that what Europe needs to salvage its common currency is a common economic policy – which is rather difficult to accept, as a currency should serve the economy, not vice versa. In this bubble, the very same assumptions which led to undermining the euro are presented as the tools of its rescue. This is only a way of centralizing EU economies, nearly certainly making them more inefficient, and a script for arriving at a planned economy.

As a businessman, I appreciate the convenience of a common currency. It is hugely advantageous in trade inside the eurozone, as well as globally. As a means of exchange, saving and investment, the euro is beneficial to the entire European society and certainly worth maintaining. But this can work only if the political agenda, attached to the euro from the beginning, is dropped. A proper system requires a central bank committed to the value of the currency. It will also be necessary to allow some members of the eurozone to disengage in an orderly fashion and return to their national currencies.

The time is high for the technocrats to realize that Europe is successful in its rich, natural diversity, not in “harmonization” of an artificial, “ever-closer union.”


*GIS is a global intelligence service providing independent, analytical, fact-based reports from a team of experts around the world. We also provide bespoke geopolitical consultancy services to businesses to support their international investment decisions. Our clients have access to expert insights in the fields of geopolitics, economics, defence, security and energy. Our experts provide scenarios on significant geopolitical events and trends. They use their knowledge to analyze the big picture and provide valuable recommendations of what is likely to happen next, in a way which informs long-term decision-making. Our experts play active roles in top universities, think-tanks, intelligence services, business and as government advisors. They have a unique blend of backgrounds and experience to deliver the narrative and understanding of global developments. They will help you develop a complete understanding of international affairs because they identify the key players, their motivations and what really matters in a changing world. Our experts examine the challenges and opportunities in economies old and new, identify emerging politicians and analyse and appraise new threats in a fast-changing world. They offer new ideas, fresh perspectives and rigorous study.

Cheap money policy does not fool citizens

GIS Statement by Prince Michael von Liechtenstein

The socialist idea of a planned economy is gradually being made a reality by the monetary policies of central banks, such as the United States Federal Reserve and the European Central Bank. The idea is also promoted by a considerable number of western economists and politicians. The conventional wisdom within that group is that economies are driven mainly by consumption. They blissfully ignore the importance of investment and savings – even of the kinds that help people set money aside for retirement.
The purported logic behind the banks’ current monetary policy is that extremely low to negative interest rates will discourage savings and boost consumption, fanning economic growth. This is superficial, short-term thinking from ideologically misguided people.
The policy, if successfully applied, would lead to an increase of the indebtedness of households in the affected countries. Indebted peoples tend to be less free than societies with savings, which give individuals freedom and independence. One is tempted to start suspecting that a hidden agenda might play a role here – a politically motivated desire to push private households deeper into debt in order to gain better control of consumption and to be able to centralize investments by institutions. This would amount to a triumph of economic planners over markets.

yellen-draghi-2016

Fortunately, people have not been responding as expected. Citizens understand mathematics and they know that they need a financial cushion in hard times, and for retirement. They are aware that low to negative interest rates are eroding their financial reserves and the value of their nest eggs and retirement entitlements. Those negative effects are exacerbated by planned inflation. Inflation is biting already, but that is obscured by statistics that do not reflect the purchasing structure of a typical middle class household. Rightfully, people worry of being impoverished in their old age.
And they are acting on their concerns. Demonstrably, people in the countries with extremely low to negative interest rates have been saving more. They are bucking the trend that many politicians and central banks are irresponsibly trying to spawn.
The savings rate (the ratio of the disposable income that private households put aside as reserves) increased in Sweden from some 5 percent in 2006 to more than 16 percent in 2016. In Denmark during the same period, it shot up from a negative rate to more than 8 percent, and it has remained stable in Germany at around 10 percent. Even the U.S., normally not a savings champion, has seen a stable savings rate of some 5 percent. Switzerland, on the other hand, long a nation of big savers, increased its savings rate during that decade from about 15 percent to some 20 percent.
A danger exists that once the misguided monetary policy fails, as it must, some of the money-hungry governments will then try to confiscate large chunks of these savings. They also may be wiped out by inflation as soon as the huge money supplies created by central banks hit the economies.

Read the original GIS statement here ->
Cheap money policy does not fool citizens


*GIS is a global intelligence service providing independent, analytical, fact-based reports from a team of experts around the world. We also provide bespoke geopolitical consultancy services to businesses to support their international investment decisions. Our clients have access to expert insights in the fields of geopolitics, economics, defense, security and energy. Our experts provide scenarios on significant geopolitical events and trends. They use their knowledge to analyze the big picture and provide valuable recommendations of what is likely to happen next, in a way which informs long-term decision-making. Our experts play active roles in top universities, think-tanks, intelligence services, business and as government advisors. They have a unique blend of backgrounds and experience to deliver the narrative and understanding of global developments. They will help you develop a complete understanding of international affairs because they identify the key players, their motivations and what really matters in a changing world. Our experts examine the challenges and opportunities in economies old and new, identify emerging politicians and analyze and appraise new threats in a fast-changing world. They offer new ideas, fresh perspectives and rigorous study.

Murder is a Habit

GIS* statement by Prince Michael of Liechtenstein

World-famous British crime novelist Agatha Christie was an outstanding observer of human nature. In Murder in Mesopotamia, her sleuth hero, Hercule Poirot, makes this astute observation: “There are things that my profession has taught me. And one of these things, the most terrible thing, is this: murder is a habit.” The implication is that after one commits a crime for the first time, doing it again becomes easier. Looking at the present behavior of governments and institutions in Europe, one is reminded of the wisdom of this insight.

When a law – or even a best practice – is violated and no sanction follows, what was once a transgression becomes a common practice. Habitual abuse of the law is a form of corruption. There will always be miscreants deriving advantages from this – for example, to get reelected.

The tendency for disregarding sound rules of governance became noticeable in Western Europe a number of years ago, mostly due to public overspending. This has led to various crises today. Among them is a crisis of political institutions.

For one, the European Central Bank does not respect the necessity to separate monetary policy from fiscal policy. Its artificially low interest rates erode the value of money, while quantitative easing constitutes a significant breach of the EU’s fundamental no-bailout rule …

Continue reading the original statement “Murder is a Habit” here -> GIS Statements


*GIS is a global intelligence service providing independent, analytical, fact-based reports from a team of experts around the world. We also provide bespoke geopolitical consultancy services to businesses to support their international investment decisions. Our clients have access to expert insights in the fields of geopolitics, economics, defence, security and energy. Our experts provide scenarios on significant geopolitical events and trends. They use their knowledge to analyse the big picture and provide valuable recommendations of what is likely to happen next, in a way which informs long-term decision-making. Our experts play active roles in top universities, think-tanks, intelligence services, business and as government advisors. They have a unique blend of backgrounds and experience to deliver the narrative and understanding of global developments. They will help you develop a complete understanding of international affairs because they identify the key players, their motivations and what really matters in a changing world. Our experts examine the challenges and opportunities in economies old and new, identify emerging politicians and analyse and appraise new threats in a fast-changing world. They offer new ideas, fresh perspectives and rigorous study.

Monetary Voodoo

GIS statement by Prince Michael of Liechtenstein

The governors of the European Central bank met on December 2 and decided to make a further small reduction in already negative lending rates, while extending their bond purchasing program by another six months to March 2017. In its unsuccessful way, the ECB is trying to resolve a trilemma. It wants to spur economic growth through low to negative interest rates, hit its targeted inflation rate of 2 per cent by increasing money supply, and relieve the fiscal pressures on member states by a huge bond purchasing program.

The idea is that by paying negative rates for deposits at the central bank, the ECB will prod commercial banks to increase lending to corporations and consumers, rather than maximize liquidity. In addition, commercial banks are expected to pass these negative rates along to depositors, discouraging savings and boosting consumption.

This plan is understandable and logical, in a shortsighted way. The difficulty is that it is detrimental to the economy in the long term and completely unsustainable. I have yet to hear a convincing explanation of why the magic figure of 2 per cent inflation is beneficial.

In order to alleviate the debt servicing problems of all-but-bankrupt European states, the ECB began quantitative easing in March 2015. The central bank purchases 60 billion euros of sovereign debt each month under this program. Counting the latest six-month extension, the total cash injection provided by QE comes to 1.46 trillion euros.

This policy of flooding the economy with liquidity has not spurred growth. While inexpensive credit can support expansion in a healthy economy, it cannot create growth. What cheap money does do effectively is to destroy savings, especially retirement savings.

Sustainable growth happens when businesses decide of their own free will to invest. To make such decisions, companies need to have confidence in the future. Today, this confidence has been undermined by erratic policies and overregulation.

The quickest way to restore trust would be to introduce the dreaded (by politicians) structural reforms that truly unleash private investment. Public spending on useful infrastructure could play a supporting role in this recovery plan.

Bond buying is not solving the euro area’s sovereign debt problem because member states continue to overspend. What it does do is buy time, which the national governments use to put off reforms.

Consumer price inflation has not returned to 2 per cent, but asset inflation is evident in stocks, bonds and real estate prices. This kind of sustained growth normally ends in a bubble.

In voodoo and tribal religions, priests intercede with the supernatural to ensure the welfare of the community. Looking at the long term causes and consequences, there appears as much logic in a witch doctor’s potions to dispel evil spirits as in the ECB’s efforts to heal the economy. Except the witch doctor probably causes less harm.


Read the original statement “Monetary Voodoo” here -> GIS