According to Stephanie Flanders, BBC Economics Editor, the Euro has been saved. She believes if the Head of the European Central Bank had said a long time ago what Mr Draghi said this week, there would have been no Euro crisis! The BBC Economics Editor degenerated into putting forward uncritically appraised Euro propaganda. She had no grip on the story at all. At least they later interviewed Norman Lamont, who was able to explain all the hazards from here with the new Draghi plan. Let’s look at what she should have considered after hearing the Draghi spin.
Mr Draghi has said the ECB will buy 1-3 year bonds of problem countries. He will sterilise the intervention. Why does this make such a difference?
First, the ECB will not buy any more bonds of Greece, Portugal and Ireland who rely on money from the EU/IMF. So this statement does nothing to tackle the Greek problem. Second, the ECB will only buy 1-3 year bonds of countries that can still raise money on public markets, if they have asked for help and have submitted to programmes of deficit cutting supervised by the EU and IMF. Spain seems reluctant to ask for such help, so no buying can take place. Third, artifically propping up a bond market does not solve the underlying fiscal or balance of payments problems. They will bubble out in some other way. Fourth, how will they sterilise the intervention? Is thECB going to raise all the money needed for bond buying on its own credit rating? How easy will that be? Has Germany agreed?
The markets love the hint of easy money, and love the idea of quick profits at the expense of taxpayers who would be dragooned into propping up these bonds for a time. It does not solve the problems of the Spanish or Italian economies or budgets. It does not create a fiscal and political union. The BBC should have put the other side of the case as well, instead of stating this has solved the Euro’s problems.
We have heard many times that the Euro area has at last solved its problems. We have heard of many big bazookas. We also hear that several of these countries remain in severe financial trouble, with overspending and overtaxing governments, declining output and high unemployment. Their political systems are no longer allowed to elect governments that speak up for the unemployed and offer a different economic strategy.