For the third time in three years, the European Central Bank (ECB) deployed heavy artillery to lift the Eurozone out of the doldrums. Mario Draghi, President of the ECB, continues to find new monetary recipes to save the political currency. But southern Europe is cracking under the austerity policies, while France is in the grip of anti-EU sentiment. Political turmoil is threatening Europe and there is nothing the ECB can do about it.
Without the ECB, the euro would no longer exist, but can the currency union survive only thanks to the ECB? The answer is no. At the end of 2011, monetary union was on the verge of collapse and European leaders were powerless. Draghi stepped in and pumped €1.1 trillion into the banking sector. Banks got loans for a period of three years at a low interest rate and without asking a lot of questions about collateral. This 'revolutionary action' helped for several months. In the summer of 2012 Draghi was again taking the lead as interest rates on Italian and Spanish government bonds were skyrocketing. To save the euro, he said he would do "whatever it takes". Lenders could count on Draghi to speed up the printing press if necessary. They were temporarily reassured.
But Draghi can do less about the underlying problem, the economic stagnation in the Eurozone. Banks did not invest the borrowed money in the economy, but stacked hundreds of billions at the ECB, where they at least received an interest, albeit at low rate. Therefore, the ECB decided last week to move to a negative deposit rate for banks in order to force them to invest that parked money into the economy. On top of that, the ECB wants to provide €400 billion to lend to productive enterprises. The ECB will also leave the loaned money in circulation as long as possible, and won't demand payback for the time being. Draghi is implementing a cheap money policy in order to prevent prolonged stagnation. Borrowing costs money, but so does saving. In Germany, negative interest rates spur resentment. The newspaper 'German Press' spoke of Punish Rates, because ethically speaking, saving is a virtue for Germans (as it is for the Dutch). But not for Draghi.
Politically, Draghi is buying time so that leaders in various troubled countries can implement structural reforms: reducing budget deficits, making labour markets more flexible, and restoring competitiveness. After years of overspending, that means fiscal consolidation. Structural reform is a lengthy process. It is doubtful whether Italians will persevere, and whether the French want it at all. The European elections showed a clear divide: south of the Alps the left won, the right in the north. France voted against both Paris and Brussels.
The new Italian Prime Minister, Matteo Renzi, is the new figurehead in the fight against austerity policies. His Democratic Party is the biggest Italian formation in the European elections with 40%. In the Socialist Group in the European Parliament, the Democratic Party is even larger than the German SPD. Renzi sees electoral support as a mandate to fight European austerity policies. He wants his country to have more time to reduce the budget deficit and reduce debt, he claims. Starting next month, Italy will hold the rotating EU presidency; Renzi is actually prime minister of southern Europe.
Renzi is at least trying to implement structural reforms, while France has not even seriously started. Left and radical right in France don't want it, while the centre-right in France can't. The victory of Marine Le Pen hypnotizes French politics. She focuses on the presidential elections of 2017 for which she is not hopeless by the way. Her victory in the European elections was due to support from the right, but also from the left. Economically, she hardly differs from the left. Le Pen can pass the first round of the elections in 2017 easily and will remain a tough opponent in the second round. How will France do in 2017? Apathy, popular anger, hopelessness, stay at home voters: they are unpredictable elements of the electoral process.
The ECB is buying time to ease the pain of troubled countries, but at the same time monetary morphine reduces incentives to solve problems. Problem countries simply want more morphine in the form of cheap money. If France decides it does not want the euro, even the ECB will be powerless.