Europe dancing on thin ice

European Central Bank President Mario Draghi
ECB President Mario Draghi’s policies will come back to haunt Europe (source: dpa)

Deutsche Bank recently issued a report saying that low-to-negative interest rates by themselves will not redress growth in Europe. Instead, the report found, they lead to capital misallocation. Together with the European Central Bank’s money printing (known as “quantitative easing”), low rates allow governments to delay necessary reforms. GIS has espoused this view for more than two years.

Along with cutting interest rates, ECB President Mario Draghi is using freshly printed money to buy bonds worth 80 billion euros per month. The target is 2 percent inflation in the eurozone. Initially, the bond-buying was intended for sovereign debt. However, governments had not been issuing enough, so the ECB began buying corporate bonds, a move that heavily distorts the market.

European governments that have recently been strapped for cash now find it available in abundance. This accelerates the folly of deficit budgeting.

Necessary reforms, such as streamlining welfare, will be delayed. The surfeit of cash allows governments to maintain their oversized public sectors and gives them the luxury to overspend.

In a few years the bill for this spending orgy will be delivered. Poverty and social unrest will come along with it.

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