Another absolute cracker from Evans-Pritchard
Mario Draghi has saved the rich, now he must save the poor
The European Central Bank has washed its hands of any further responsibility for the 27m people across the eurozone listed as unemployed or classified as discouraged workers.
The Governing Council has concluded that nothing more can usefully be done to lift the region out of double-dip recession, a relapse that it failed to foresee and to a great extent caused by allowing all key measures of the money supply to contract in early-to-mid 2012.
It will not take fresh action to offset fiscal tightening this year of 2.3pc of GDP in Spain, 2pc in France, or 1.2pc in Italy -- not to mention draconian retrenchment in the three indentured states of Greece, Portugal, and Ireland -- or take action to cushion the shock of deep reforms.
Japan’s premier Shinzo Abe has more or less ordered his central bank to both reflate and target jobs creation. The US Federal Reserve stands ready to inject stimulus until America’s jobless rate falls to 6.5pc. Yet the ECB professes itself helpless in the face of 11.8pc unemployment, a post-EMU record and rising each month.
The ECB’s Mario Draghi said there is "not much" that monetary policy can do to fight structural unemployment. If it really was "structural", his plea might convince. It is not.
Ireland has one of the world’s most flexible labour markets yet its jobless rate has risen from 4.6pc to 14.6pc, and that includes the safety valve of massive job flight to the UK, US, and Australia.
Spain’s rate has jumped from 7.8pc to 26.6pc in four years, or 55.8pc for youth. This has occurred very fast precisely because it is easy to sack Spanish workers on short-term contracts.
The European Commission’s 400-page report last week on the jobless crisis quietly demolishes the claim that labour rigidities are the elemental cause of the social tornado sweeping across Club Med and parts of Eastern Europe.
It dutifully lists the sorts of things that can be done to help: Nordic flexi-security, or a lower "tax wedge" on labour.
But then goes on to finger a "demand shock" as the real culprit. All else is "less relevant". The report subverts the central claim of Europe’s austerity mandarins that labour reform will somehow, magically, deliver recovery before the democracies of these countries take matters into their own hands.
Note the latest surge of the eurosceptic Izquierda Unida to 15.6pc in the Spanish opinion polls, nearing a `sorpasso’ of the Socialists at 23pc. The Left speaks at last.
We learn that Greece’s unemployment has just reached 26.8pc. The headline rate for Italy is a deceptively low 11.1pc, but as you can see from this chart in the Commission’s report, a further 12pc are discouraged workers who have dropped out of the data. Italy’s combined rate is around 23pc.
The share of those out of work for a year or more -- two million in Spain alone -- has jumped from 33pc to 43pc, and is expected to rise further.
A fifth have never had a job in their lives. The longer this goes on, the more hopeless it becomes. Notice how badly Ireland scores in this chart. That surprised me.
The report warned that "new divide" is emerging between the EMU core and those countries "that seem trapped in a downward spiral of falling output, fast rising unemployment and eroding disposable incomes The waive of austerity policies raise important questions about the viability of Europe’s welfare states," it said. Indeed.
The Economist Poll of forecasters expects the eurozone to contract 0.2pc this year, with scant growth in 2014.
By then millions of people will have fallen into an "enormous poverty trap," to borrow the words of EU jobs chief Laszlo Andor.
It is why Gustav Horn -- head of Germany’s IMK Institute and one of the country’s five `Wise Men’ -- called for an end to the contractionary torture last week. "It’s a vicious circle. Excess austerity is not reducing debt, it is causing debt to rise," he said.
Dr Horn has concluded that the only viable way to close the gap is for Germany to tolerate an inflationary boom with 4pc wage growth for a while. He is right.
By any measure half of Europe is now in a great depression, less acute than it was for the same bloc of states in the early 1930s (America is another story) but more protracted and ultimately deeper.
Those who have the time should take a look at the Commission’s report, packed with fascinating charts.
You will see that very large numbers of people in Baltics, Slovakia, and the Balkans are in dire distress, the human sacrifice of ruling elites determined to defend EMU membership or euro currency pegs at all costs.
"Severe material deprivation" has surged to 31pc in Latvia and 44pc in Bulgaria. The great majority of those in their fifties in Latvia, Lithuania, and Estonia who lost their jobs in the crisis have not found work again and have little chance of doing so ever again, at least in their own countries. They are the forgotten residue.
Latvia’s 12.5pc jobless rate does not begin to tell the story. Another 7pc have dropped off the rolls. Some 10pc of the population has left the country.
Recovery is underway but ouput is still 12pc below the peak. Would it have been better to let Latvia's currency devalue and spread the pain more evenly, as the IMF privately advised? We will never know. But those selling Latvia as an austerity success story pass lightly over the cost.
Former ECB governor Athanasios Orphanides -- a world expert on deflation --has broken loose, rebuking his ex-colleagues for standing "idly by" as Europe’s socio-economic disaster unfolds.
"We are in the middle of a policy-induced recession and monetary policy can do more to contain it, without compromising price stability," he said.
Jacques Cailloux from Nomura says money is still ferociously tight for a string of countries. Their sovereign bond yields have fallen far, but not far enough to keep pace with GDP contraction.
Nor have the gains fed through to the economy. Italian and Spanish companies still pay twice as much to borrow as German rivals. The North-South gap is becoming hard-wired into the system.
He calculates that a string of states need drastic rate cuts this year under the classic `Taylor Rule’ or shortfall in potential output: 150 basis points for France, 230 for Holland, 240 for Ireland, 330 for Portugal, 350 for Spain, and 400 for Italy. For Greece, theoretically 1100, "no amount of easing would appear sufficient.
You cannot cut below zero. That is why you do quantitative easing, a crude proxy. The victim states need dollops to survive. But the ECB is betting instead that a fresh cycle of global growth and "positive contagion" from surging asset prices will lift Europe off the reefs later this year.
History may judge this to be a tragic policy error.
I do not wish to criticise Mr Draghi harshly. He has played a weak hand with great skill, true to his Jesuit training. By securing German assent for his plan to backstop the Spanish and Italian bond markets, he has for now defused the financial crisis. It comes very late, and in the wrong way, but that is not his fault.
Yet, it is worth remembering how we got here, and what this rescue implies.
Berlin was cocksure this time a year ago that it had mastered the crisis, so much so that Wolfgang Schauble and others seemed think it was safe to kick Greece into the Aegean as a salutary example.
The Germans were shaken out of their complacency only when the Spanish banking system went into melt-down in July 2012, and Latin bloc leaders finally rebelled and threatened to wield their Council voting power.
Some like to claim that the "Draghi Put" vindicates EMU crisis strategy. It does no such thing. The Nordic creditor states were forced to allow drastic measures because all else had failed.
I might add that ECB bond purchases amount to fiscal union by stealth, outside democratic control.
Chancellor Angela Merkel has mutualized EMU debt without telling German taxpayers. This may be necessary if the goal is to save the euro -- not a goal of any moral content -- but it is hardly a healthy state of affairs. The Bundesbank’s Jens Weidman is right to warn that it will come back to haunt.
That is a story for another day. The horror before our eyes right now is social ruin. Europe’s crisis strategy is to the break the back of labour resistance to pay cuts by driving unemployment through the roof. That is what `internal devaluations’ are. It stinks. And the ECB is adding to the cruelty by keeping money too tight.
Mr Draghi deserves his accolades, but his job is not yet done. He has saved the rich. Now he must save the poor. Coraggio.
