23 January 2020

Paul Goldschmidt: Could the ECB turn out to be the Achilles tendon of the EU’s democratic legitimacy?

Goldschmidt warns that the ECB’s current status and its lack of oversight could make it the Achilles tendon through which nationalists and populists will contest the democratic legitimacy of the EU itself, further weakening the € and precipitating a financial crisis that would spread globally.

[...]Financial markets have become increasingly dependent on ECB policy. Thus, forced to rely exclusively on monetary policy to ensure broader government policy objectives than those foreseen by its mandate, the ECB reduced progressively its policy rates creating an (unnatural) long term environment of “negative” interest rates from which it seems incapable of extricating itself without major negative economic consequences. In the interval, many economists attempt to justify this “new normal” in the same way they explained the outrageous level of the Japanese stock market in the 1990’s just before it crashed by 80%, a fall from which it has not recovered a quarter of a century later!

Eurozone governments, benefitting from cheap financing, encourage the status quo which facilitates their budgetary calculations. They are facing, however, disgruntled citizens who’s savings are – when adjusted for even low inflation – continuously losing purchasing power. The recent reduction to a historic low rate of 0.5% the popular “Livret A” savings book in France in the context of deep social resentment could worsen further an already highly inflammable environment.
 
It is clear that the ECB cannot react one on one with the French government nor could it respond individually to specific concerns of anyone of the other 18 EMU members. The answer lies with the creation of an economic government or the Eurozone which could act in concert with the ECB in coordinating economic, monetary and fiscal policies. However there seems to be little appetite on behalf of Members to share (even partially) their sacrosanct “sovereignty” in these matters.
 
The EMU’s unfinished construction (the perception that the € is not necessarily irreversible) is contributing to the considerable weakness of the EU on the world stage. Its long term positioning as one of the three leading powers within a global multilateral system is being continuously eroded in favor of the United States (in monetary, military,  R & D and technological terms) and progressively relative to China (in trade and technological fields).
 
Since WWII, the world has lived under a “U.S. Dollar” regime in which the progressive removal of currency controls, the creation globally interdependent “financial markets” as part of the trend to globalization have steadily reinforced the USD’s dominance. Until recently, the convergence of interests in aiming at financial stability as a shared objective meant that US policies at least took into account some of the needs of its foreign partners in defining its internal priorities.
 
This attitude was demonstrated in the aftermath of the 2008 financial crisis when the US FED, under Ben Bernanke, literally rescued the dollar based world economy by providing major foreign central banks with unlimited access to dollar funding through bilateral swap arrangements so that they could replace the moribund private dollar interbank market by funding directly their own domestic banks’ dollar denominated assets.
 
Since the 2008 crisis, dollar assets of non-American banks have continued to increase reflecting the growing share of USD denominated international trade and financial transfers globally. The multiplication of international supply chains, requiring a single universally accepted unit of account has contributed significantly to this trend. In parallel, in implementing his mantra of “America First”, President Trump has not shied away from weaponizing the dollar as a (so far) powerful and effective instrument of achieving objectives in the areas of trade (China), foreign policy (Iran), security (Huawei), etc., the threat of cutting off access to USD denominated markets acting as the equivalent of a weapon of mass destruction of which the USA has the unchallenged monopoly.
 
With its huge internal market, authoritarian regime as well as its technological prowess, China should be capable in due course to assert its independence. The EU - theoretically far better equipped at the start of the race - is quickly being marginalized (of the 20 largest technological multinationals, 11 are American and 9 Chinese!) by its incapacity to reform and integrate in order to retain its vanishing sovereignty in a fast changing world.
 
The speed at which the European nations are losing influence on world affairs is accelerating and the need for a “federal” EU has never been greater. The defensive measures in terms of climate change or personal data protection are certainly welcome but will not replace active development of innovation and research in the digital economy, the integration of energy and transport markets, the emergence of an European defense under a unified foreign policy, all of which are unimaginable if first EMU is not completed and the ECB remains a vassal of the American FED for all practical purposes.
 
Creating an alternative to the mighty USD should be a priority, not so much to be used as a weapon but, as was the case in the nuclear standstill once the USSR had acquired the bomb, to serve as a deterrent. The Euro is ideally placed to provide this much needed tool which deserves the support not only of EU members but of any country that wishes to escape the unilateral dictates that the USA has currently the power to impose.
 
Currently, there are enormous headwinds, reinforced by the realization that individual nation-states (except the US and China) have lost their sovereignty and are clinging on in vain to its virtual attributes. This situation is largely the result of globalization, offering the major multinational enterprises the capacity to make demands that only governments, controlling markets that the former can’t ignore (among which the EU still figures) , can at least partially resist. The controversy surrounding the taxation of major digital giants is emblematic in this respect: even the US government is being instrumentalized by these mastodons, forcing it to fight for their corner in the commercial battle it has engaged with the EU. For greater efficiency, exploiting the incapacity of Member States to speak with one voice, Trump is taking on Members individually and has already forced France to retreat; it will be interesting to see the reaction of the UK, supposed to introduce similar measures next April.
 
There will be a dire confrontation at the forthcoming Conference on the Future of Europe between those who will aim at an effective sharing of sovereignty at EU level and those who blame the EU’s very existence for their own shortcomings.
 
In this context, the ECB’s current status and its lack of oversight could make it the Achilles tendon through which nationalists and populists will contest the democratic legitimacy of the EU itself, further weakening the € and precipitating a financial crisis that would spread globally, engulfing all of those who boast today about the virtual benefits of “taking back control”!

Full article on Paul N. Goldschmidt website

© Paul Goldschmidt