The ECB’s loose monetary policy has been reducing consumer savings for years. It is now becoming increasingly clear that the course of the central bank also entails risks for Europe’s economy.
By Klaus-Rainer Jackisch, MR New money to stimulate the ailing economy is generated by the European Central Bank rather silently and unspectacularly. To combat the crisis, the central bank does not buy meters high paper or tons of paint to use to print new banknotes. Their delivery vans also do not transport cash from the catacombs of the Eurotower. And there is no printing press in the cellar that rattles, runs hot and steams vigorously. No, central bank money is usually created with a few clicks of the mouse on the computer – and in times of Corona even in the home office. The ECB thus produces book money, writes it in its books and distributes it on the markets.
Almost two trillion just for PEPP
1.85 trillion euros are generated almost incidentally in this way to combat pandemics alone. For this huge sum, the ECB buys bonds on the international financial markets in its PEPP program, which was set up especially for the coronavirus pandemic: government bonds, for example, with which the euro countries raise money for their budgets. Municipal bonds, the proceeds of which municipalities use to finance a new waterworks or the renovation of their town hall. And corporate bonds, which companies use to finance the development of new e-cars, economical washing machines or unusual chocolate creations, for example. Some of these bonds have excellent credit ratings and sell like hot cakes. You shouldn’t have others in your depot. The ECB will buy them anyway if they do not fall below certain criteria. The large amount of money that flows into the cycle is supposed to keep the economy going. It enables banks to lend companies cheaply so that they can continue to exist and hopefully expand again soon. Overall, it lowers interest rates because the central bank buys almost everything and the issuers can easily get rid of their bonds: So you only have to pay low interest. And finally, it provides the entire system with sufficient liquidity so that there are no bottlenecks. Since the financial crisis, the ECB, like other central banks, has seen bond purchases as a panacea for getting the economy going again. She didn’t really succeed. But at least the economy was able to recover a little for a while and did not slide down completely.
Risks and Side Effects
The side effects of this monetary policy are visible everywhere: the stock markets are exploding as if there is no tomorrow. Because of a lack of returns, the money flows to the stock exchanges. In the real estate markets, the home is becoming a barely affordable luxury property. After all, the sheer mass of liquidity also produces inflation in the long term, so it devalues the money if it is not collected again in time. The first signs are already noticeable in real life. Another phenomenon that has so far received little attention is developing more in the dark. Experts call it the “zombization” of parts of the economy – a development that causes great damage in the long term and is likely to further reduce the level of welfare. The somewhat creepy term describes companies for which the large amount of cheap money from the ECB ensures their survival, although under normal circumstances they would have been bankrupt long ago. Either because your business idea is out of date or you cannot adapt to new circumstances. Or finally, because they are simply working inefficiently. So there are companies that can no longer pay their interest from current profits and would therefore have to file for bankruptcy. But given the current conditions, they can easily get more loans to service their interest.
Thousands of “zombie” companies in Germany alone?
The Cologne Institute of the German Economy estimates that around 5000 such “seemingly dead” companies have emerged in Germany alone in the wake of the pandemic. Their processing is also prevented because the obligation to report bankruptcy is currently suspended in this country. Worldwide, the share of such “zombie” companies is now around 18 percent, estimates the Bank for International Settlements in Basel (BIS), the central bank of the central banks and, so to speak, the mother of the entire central banking world. This value is the highest ever measured. Before the crisis it was twelve percent. This is partly due to the corona crisis. But the BIS experts have calculated that around 70 percent of these companies have no chance of getting back on their feet even without the virus. Instead, they would be artificially kept alive with the cheap money. The BIS has viewed this development with great concern for years. That is why it repeatedly calls on its members to end the loose monetary policy and return to reasonable interest rates. From an economic point of view, dragging sick and unproductive companies through is fatal in the long term because it lowers the welfare of societies and thus widening the gap between rich and poor.
Innovation slowed down, dynamism paralyzed
The structural problems of the European economy, which have at least been aggravated by the ECB policy, can be seen in bare figures: The productivity of workers in Europe has stagnated for years and continued to decline during the crisis. The number of start-ups, particularly in Germany, is also falling. In the land of inventors and inventors, the volume of patent applications is also stagnating. In fact, the monetary policy of the ECB is also causing economic dynamism in the euro zone to slacken because the “seemingly dead” companies are clogging the system. Because they occupy market areas and thus make it more difficult for new, innovative companies to enter. “Zombie” companies tie up capital, expertise and skilled workers that are lacking elsewhere in order to get new developments off the ground. The OECD has been warning of these developments for years and has repeatedly made it clear that Europe in particular is falling behind in global competition. Because in order to be able to keep up with an aggressive China and the self-conscious USA, functioning, dynamic economies are needed in Europe that are characterized by high innovative strength. Otherwise, they will not be competitive in the long run. However, this is exactly what the current monetary policy prevents.
ECB fears turbulence in the financial markets
The ECB is well aware of these connections. But when it comes to choosing between plague and cholera, it is better to stick to current politics. Even the appearance of a change in monetary policy immediately triggers unrest in the financial markets, as the rise in bond yields a few weeks ago as a result of higher inflation rates showed. The ECB is not primarily concerned with the welfare of the financial markets. But severe turbulence there always has very negative consequences for the real economy – especially for the labor market. ECB boss Christine Lagarde will probably also assure this week after the council meeting that the ultra-loose monetary policy will be continued. In fact, as announced in March, the pace of bond purchases has increased significantly in recent weeks. The ECB regards this monetary policy as a blessing. But how much it will become a curse for the economy in the long term will only be able to be assessed in years.
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