The most disturbing aspect is the stubborn persistence of policies that have already proven their failure. The Japan's shock move, and the appeal to the ECB.
Each time the alarm rises in the eurozone, so mounts the invocation of a deus ex machina, namely Mario Draghi, the ECB president.
The economic situation in the eurozone could not be worse (See, R. Paladini Eurozone's Autumn. [1]). Six years after the start of the crisis, the eurozone is in a mess. Historians who will investigate the political process that paralyzes the heart of Europe will be surprised by the paradoxes fed by the governments that lead the main countries.
The most disturbing aspect is the stubborn persistence of policies that have already proven their failure. Faced with this situation we are witnessing with increasing frequency the appeal to the High Priest in Frankfurt that controls the keys of the monetary policy.
The appeal makes sense, when you consider the vital role that the Federal Reserve has played in the U.S. Now, while it is going to declare that its mission has been accomplished, we see the Bank of Japan to decide a shock move to confront the long Japan crisis. It 's very likely that the strong decision of the Japanese Bank have raised the attention on the European Central Bank, and enhanced the determination of its President to move towards "unconventional" measures to avert the looming danger of a long and destructive deflation.
In any case, the Japanese example, hypothetically applied to the eurozone, would put at stake not just the typical instruments of the monetary policy; in effect, it would impose a deep change in the very political paradigm which so far has governed the eurozone.
Let's look more closely to the interlacement between monetary and fiscal features.
The Japanese central bank, as noted by Martin Wolf (Financial Times, 5/11/14), decided to buy government debt in a huge amount equivalent to 16 percent of Japan's national income. To give a concrete value to this quantitative dimension, we can say that for countries such as Italy as well France, a similar measure, if adopted by the ECB, would mean the annual purchase of government bonds worth about 250 billion euro. Since, following the example of the BoJ, the sovereign bonds would have a long-term maturity of 7-10 years, along with nominal yields close to zero, and negative real interest rates, the outcome would be the consolidation of a very large part of the debt, substantially freed from the burden of the interest.
The eurozone countries in difficulty, on one hand, would benefit from a reduced need to relay on the market for the renewal of the outstanding debt, benefiting from a reduction in interest rates; on the other hand, could use some of the funds made available by the central bank to make a remarkable cluster of public investment, intended to raise growth and employment.
A mass of infrastructure investments, which could also revive private investment, would have an immediate return in terms of employment, increased household income and consumer spending, breaking the vicious cycle that combines low (or no) growth with the increase in the debt / GDP ratio. It is not a coincidence that the monetary policy aimed to stimulate investment, growth and employment has allowed the United States to bring the GDP above the level prior to the crisis, and to reduce the unemployment below 6 percent. UK moved in a similar direction. Now it is the Japan that is going to give new breadth to the monetary channel.
Can the eurozone point out to a similar policy? In principle, why not?. But in order to be viable this policy should overcome two obstacles. The first is the opposition of Germany to a similar move by the ECB at the extent that it is not a purely defensive and limited strategy, mired to save the euro from a supposed collapse, but a measure explicitly addressed to expand the sovereign fiscal resources in order to implement a bold amount of government investment as an effective tool aimed to hinder the devastating combination of recession and deflation.
The second and ever harsher obstacle is in the budgetary constraints linked to the Fiscal Compact that requires a forced march towards a balanced structural budget and the debt reduction in a context of stagnation which makes impossible to get either these goals. So the appeal to the ECB is a sign of desperation and, at the same time, of hope that the current unbearable course can be reversed. In any case, an actual solution can’t be found just in Frankfurt, due to the interdiction posed by the German government. Eventually, the solution is in the hands of the main member states most hit by the crisis.
But, at the same time, a disenchanted view of the current political behavior, starting with Hollande and Renzi governments, which are at the helm of the two most important eurozone countries after Germany, makes us very skeptical of the chance of catching and implementing an effective way out from the current eurozone quagmire. Yet the crisis has deeply hit the old political balance, as the new electoral trends and prospects show, from France to Spain and Greece. Meanwhile, in Italy, the most remarkable novelty is that the trade unions are coming out from a long sleep and are pointing out to the reunification of the mass movement that the economic crisis and the political disorientation on the left front has contributed to fragment. The next 2015 may still carry out many surprises in the eurozone.