GIS – Comment by Prince Michael of Liechtenstein*
For years, the ECB has egregiously violated its own statutes. Today’s high inflation is the predictable result.
For the first time in more than 10 years, the European Central Bank has increased its key interest rate, raising it by 0.5 percent. The move follows a long period of decreasing interest rates and pumping money into the economy via so-called quantitative easing. Europe, like the United States, was flooded with liquidity.
Some in the media even called the 0.5 percent rate rise a “courageous” step, because it was more than the expected 0.25 percent. The increase is ostensibly meant to help slow inflation, which the ECB leadership first denied and then ignored for months after it first appeared. Yet even as she announced the rises, ECB President Christine Lagarde made veiled promises to continue her institution’s irresponsible financing of some member states.
She revealed that the ECB’s governing council had approved the creation of a new policy tool, called the Transmission Protection Instrument. The TPI will enable the ECB to buy government bonds from certain member countries if the “risk premium” (the rate of return above that which is guaranteed) rises too much. Its purpose is to counteract what the ECB calls “unwarranted, disorderly market dynamics which pose a serious threat to the effectiveness of monetary policy in the euro area.” This statement is outrageous. The market dynamics that increase the risk premium are entirely justified, as the risk is naturally higher in fiscally mismanaged countries. In fact, any so-called “market disorder” would be the consequence of fiscal irresponsibility among member states, which the ECB among others, had encouraged with its policies over the years.
Breaking the rules
Do these explanations expose incompetence? Or is the easy-money policy a centralist agenda at the ECB, which clearly counteracts the bank’s role, function and statutes? If a company’s management team were to break the firm’s rules so egregiously, it would be considered a criminal act.
The ECB’s primary objective is to maintain price stability. It is clearly forbidden from financing public debt or setting fiscal policy. This is the cornerstone of the euro area’s monetary system. Guaranteeing the ECB’s political independence was crucial to ensure that it would not meddle in such matters. This meant safeguarding its institutional independence: the ECB must not seek or take instruction from any institution, government, or other body. It also meant assuring the bank’s functional and operational independence, financial and organizational independence, legal independence and the personal independence of its executive board members.
Unfortunately, most eurozone member countries began violating the rules of the Maastricht Treaty, which set limits on government deficit and total debt, shortly after it was signed. France and Germany were the first to do so. Yet these criteria formed a key pillar of the monetary union. Breaching them put stress on the system and led directly to the financial crisis of 2012.
That crisis was certainly not a market failure. Instead, it was a failure of states, due to excessive debt, caused by oversized public sectors. Governments refused to tackle the problem at the root by reducing the size and role of state institutions. On the contrary, the ECB president at the time, Mario Draghi, famously said on July 26, 2012, that the bank was “ready to do whatever it takes to preserve the euro.”
With that statement alone Mr. Draghi had already broken the ECB’s fundamental rule that its primary goal was to protect the value of the euro, not finance fiscal deficits. At that point, member governments had, de facto, received carte blanche to spend. Any problems that arose were “solved” by dousing them with money. To be fair, it is worth noting that such bad practices were not limited to the euro area.
The amount spent on financing eurozone members’ deficits increased more and more. After Ms. Lagarde, a professional politician, was appointed ECB president in an agreement between German Chancellor Angela Merkel and French President Emmanuel Macron, money printing rose to staggering levels.
If Mr. Draghi’s statement had not made it clear, then in the following years it became obvious that the ECB’s main purpose was no longer protecting the purchasing power, savings and income of those in the eurozone. Instead, the goal had become the defense of the euro itself as an institution.
This mentality was rife among Europe’s leaders. Chancellor Merkel, for example, made the outrageous statement in 2011 that “if the euro fails, Europe fails.” In doing so, she essentially admitted that she believed Europe’s very existence depended on a currency that governments could use to spend away their problems. What a cynical dismissal of the continent’s strengths, rules and people!
r the past three years, one of businesses’ main concerns has become securing supply chains for raw materials and semifinished products. But another factor that has grown just as troublesome, or maybe even worse, is the lack of good workers. Inflation is now the topic on everyone’s mind. Prices are rocketing. People are rightfully concerned. Officials attempt to calm the public by claiming that this situation will be overcome because it is mainly due to the interruption in supply chains caused by Covid-19, and now by the war in Ukraine. U.S. President Joe Biden even went as far as to call it Vladimir Putin’s inflation. The European Central Bank and its president constantly denied a medium- to longer-term problem and were consequently always wrong in their forecasts. These are either cynical lies or proof of incompetence.
On the contrary, this inflation is structural. It is caused by demand exceeding the supply of goods and services. Consumers, including governments, have money in abundance. Central banks’ irresponsible money printing to cover government overspending and waste has created a situation in which the amount of money circulating throughout the economy disproportionally exceeds the goods and services on offer.
This phenomenon is exacerbated by the growing number of people in nearly all economies engaging in supervisory and administrative jobs – mainly public services – instead of productive private sector positions. The flood of laws, rules and regulations issued on national and supranational levels has become a self-fueling engine, sucking up more and more resources.
Driven by irresponsible deficit policies, the public and administrative sectors are growing. In turn, the bureaucratic complications feed such sectors as tax advisory, compliance, legal services and standardization boards, but also supranational bodies such as the 38-nation Organisation for Economic Co-operation and Development.
Talent badly needed in business is absorbed into these new professions, made necessary by expanding government. These roles then feed complications that create more layers of unproductive positions in public administration and business advisory. At the same time, we see that next to inflation and supply-chain disruptions, a severe shortage of workers in productive jobs is one of the economy’s biggest problems.
We are becoming increasingly authoritarian and hiding behind democratically unaccountable supranational organizations. The unstoppable regulatory process gives authorities increasing power and opportunities to make arbitrary decisions. Any perceived threat, from terrorism to Covid-19 to climate change, is welcomed as a pretext to tighten the screws on freedom. It is certainly necessary to fight terrorism, support sustainability and take measures against pandemics, but all of those goals can be achieved without placing disproportionate limits on freedom and constructing convoluted bureaucracies.
Through excessive administration, legislation and regulation, restrictions on freedom, government overspending and irresponsible monetary policies, we are committing suicide as a free and prosperous society. This suicide is assisted by a collusion of governments, supranational organizations, rent-seeking cronies and ideas such as the “great reset” promulgated by the World Economic Forum.
When we will have finally succeeded in killing a prosperous economy, politicians, media and nongovernmental organizations will blame the failure on markets, not the state. The proposed solution will then be more government intervention and “full equality.” Such solutions are already being implemented. When the trend is complete, the bureaucratic dream of 19th- and 20th-century communists will have come true …
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ECB: Broken rules and frivolous policy
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