Monday, February 27, 2012

European Central Bank Head Mario Draghi Condemns Europe to Long Term Economic Decline

Maybe He Thinks This Will be Good for the Continent

Recently the European Central Bank was given a new Chairman, Italian financial expert Mario Draghi.  One would have thought that given the problems of the Italian economy Mr. Draghi would be focused on implementing policies designed to improve Europe’s staggering economy.  One would be wrong.

Mr. Draghi has taken the position that only austerity, primarily cutting government expenditures, raising the unemployment rate, reducing the middle class to near poverty like conditions and doing little or nothing to stimulate growth is what is needed in Europe. 

There are no quick fixes to Europe's problems, he said, adding that expectations that cash-rich China will ride to the rescue were unrealistic. He argued instead that continuing economic shocks would force countries into structural changes in labor markets and other aspects of the economy, to return to long-term prosperity.

There can be no doubt in Mr. Draghi’s mind that he has the right policy

"There is no feasible trade-off" between economic overhauls and fiscal belt-tightening, Mr. Draghi said in the interview, his first since Greece sealed its second bailout.

"Backtracking on fiscal targets would elicit an immediate reaction by the market," pushing interest-rate spreads higher, he said.

Yes you are reading that correctly.  “Economic shocks” by which he means recession are the tool that will force Europe to reform and return to prosperity.  Of course, Mr. Draghi himself is completely immune to such shocks, having a nice job as head of Europe’s central bank.

Mr. Draghi is concerned about youth unemployment.

Mr. Draghi, Not Explaining How he
will Alleviate Youth Unemployment in Europe

He said Europe's vaunted social model—which places a premium on job security and generous safety nets—is "already gone," citing high youth unemployment; in Spain, it tops 50%. He urged overhauls to boost job creation for young people.

Now Mr. Draghi is correct in that labor markets need to be liberalized so that employers can hire workers without fear that they can never ever be terminated, but exactly why any business will hire any workers when business conditions are abysmal is not something people like Mr. Draghi understand.

A former IMF economists has stipped the rhetoric down to its core

"He's just sugar coating the message," said Simon Johnson, former chief economist at the International Monetary Fund.

"A lot of this structural reform talk is illusory at best in the short run…but it's a better story than saying you're going to have a terrible 10 years," he said.

Oh, and the ECB which owns a lot of Greek debt protected itself when Greek debt had to be written down.

In the interview, Mr. Draghi defended the ECB's decision to shield its €50 billion Greek bond portfolio from the steep losses private-sector bondholders face as part of a separate deal between Greece and its creditors to write down €107 billion in debt. He said the ECB "is committed to protect the taxpayers' money."

The person who is President in 2013 is going to face the repercussions of Europe’s policies, which will spill over and weaken the rest of the world’s major economies.  Of course, if it is Mitt Romney then he will be adopting those same European policies, so at least the rest of us will know what results to expect.

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