Steen Jakobsen has never been less outspoken regarding historic moment that is about to live the Eurozone. He explains his particular vision of the economy, bluntly. This morning, visiting Madrid, Jakobsen warned that quantitative easing (QE), printing money to buy government bonds, will be the biggest mistake of the European Central Bank, making matters worse.
In his view, the ECB wants to get funding rates low for listed and public companies. However, big companies have taken much of the credit, while SMEs (small and medium size enterprises) remain unfunded. Funding goes to the 20% of companies that “never again will create jobs.” Interest rates declining few tenths more will not improve the economy.
Europe is not USA
Jakobsen says success stories like the three QE Federal Reserve (Fed) cannot be extrapolated to the Eurozone. His reason? The US is a net debtor and falling interest rates affects international creditors and rising national income. In Europe the opposite is true. Citizens of the euro countries are net savers, which means that falling interest rates deteriorates their income and does nothing to activate the economy.
In addition, Jakobsen believes that monetary stimulus suffers from a glitch: “The negative deposit facility and buying sovereign bonds are counter each other.” This means that banks will not be willing to get rid of their bond portfolio to deposit excess liquidity at the ECB when interbank rates are negative.
In the case of monetary policy in the US, Jakobsen believes the Fed will have a very difficult raising interest rates in 2015. In his view, unless wages start to increase steadily, neither the Fed nor other major central bank may tighten monetary policy.
Consequences of Poor Construction of the Euro
To Jakobsen, many of the current problems stem from poor construction of the euro. “I do not think that the euro is a good idea. It’s poorly built, without a fiscal union, and without consolidation of common funding streams for all member states. As designed, the euro does not have sufficient foundation to support the Eurozone.
ECB Has Done Nearly Everything Wrong
So the ECB has done it all wrong? No … but almost.
The great mistake of the European entity was to allow the economic cycle of the economy take its course. “They have not allowed the market to purge mistakes and now the situation is worse.
Had the business cycle been left alone, many broken banks would have been acquired by larger ones, reducing debt and generating a prone position to lay the foundations for recovery indicates. Instead, entities transferred bad debts from one place to another, from financial institutions to “bad banks”, not solving anything in the process.
That’s a “full-board” European bingo, with every square covered.
The euro cannot and will not work because it’s fatally flawed as I have noted for years.
Fatal flaws include no fiscal union, wildly differing social agendas of member states, wide variances in productivity, wage discrepancies, and retirement benefit discrepancies.
Those problems make it impossible to conduct monetary policy. The “Target2” system of payments is icing on the fatally flawed cake. (See Eurozone Target2 Imbalances Rise Again, Led by Italy).
Finally, I maintain QE did not work in the US either, unless “work” means creating one of the biggest equity bubbles in history coupled with the absolute biggest junk bond bubble in history.
Nothing Fixed Anywhere
It’s not just Europe. Nothing has been fixed anywhere.
Bernanke says letting Lehman fail was his biggest mistake. What a bunch of nonsense. Lehman failed in every sense of the word.
In effect, Bernanke wanted to bail out a failed institution at taxpayer risk and expense. The markets need to purge excesses. Instead, central banks refuse to allow just that, blowing bubbles of increasing amplitude over time in the wake.