Year LVII, 2015, Single Issue, Page 60



The ECB’s Quantitative Easing Programme:
Necessary, but Not Enough






The decisions taken by the Governing Council[1] of the European Central Bank (ECB) on Wednesday 3 December 2015, and the immediate negative reaction on the financial markets, have re-opened the debate on Quantitative Easing (QE), i.e. the programme of public and private bond purchasing introduced by the ECB in March the same year as a means of boosting inflation and reviving the economy of the eurozone.

In this regard, it should immediately be pointed out that the ECB programme, deployed on 9 March 2015, gave results that, with regard to both the above objectives, fell short of the initial expectations. And it is this circumstance that led the Governing Council, after analysing the results of economic and monetary analyses conducted by ECB internal bodies, to reach the decision, over recent months, to step up its efforts to increase the circulation of money.

In the light of these events, it is opportune to examine carefully the nature and real objectives of this monetary manoeuvre, the instruments used and, above all, its effectiveness.

In order to assess the ECB’s programme, it is necessary, therefore, to examine a series of issues:

1. QE: an “unconventional” monetary instrument;

2. the reasons that prompted the ECB to adopt QE measures and then extend the programme;

3. the ECB’s observance of the Treaties and the principle of monetary stability;

4. the relationship between monetary and fiscal policy and the economic government of Europe;

5. the eurozone’s real chances of reviving growth and employment;

6. QE in the USA and its international repercussions;

7. the complementary measures needed to revive the European economy.

Quantitative Easing: an “unconventional” monetary instrument.

QE is a method adopted in recent years by the major central banks of the OECD area in order to create new liquidity that can be injected into the financial system. It is used in periods of deflation,when commercial banks are reluctant to lend money to private individuals and businesses and there is no possibility of resorting to the “conventional” solution of reducing interest rates, since these have already fallen to zero or thereabouts. In these circumstances, central banks may decide to create money by unconventional means, through the purchase of financial assets (private and public equities and bonds), in order to increase the money in circulation and/or improve the budget structure of credit institutions and provide them with the means to grant more loans.

A key objective of this strategy is to bring inflation within the economic system close to (but always below) 2 per cent, a target believed by the main central banks to guarantee monetary stability, since it prevents prices from falling below the cost of production and thereby exposing businesses to losses and the risk of bankruptcy. Other related objectives are to revive economic growth and employment.

However, simply injecting liquidity into the financial system does not necessarily mean that this will immediately be fed into the economic system. There is always a risk that liquid assets obtained from the sale of government bonds could end up being deposited in the central bank. To avoid this, a central bank implementing QE combines the purchase of public and private bonds with the adoption of a negative deposit rate.

Schools of economics highlight two possibly critical aspects of this method that should be monitored carefully: 1) QE, in boosting inflation, also tends to increase the value of the financial and capital assets of those who already possess them, and this inevitably exacerbates social inequalities; 2) the purchasing of government bonds by central banks pushes up their price and consequently reduces their yield; while this eases the public debt burden on the issuing state, it also provides an incentive to postpone consolidation. Either way, the QE operation should go hand in hand with government policies of income redistribution and fiscal consolidation.

These are the aspects that underlie the reservations expressed by the Bundesbank over the ECB’s programme. Furthermore, the devaluations induced by QE policies are a further cause for concern, as they could give rise to a currency war between major world currencies.

The ECB’s operation comes in the wake of other QE operations deployed, always with controversial results, elsewhere in the world: by the Bank of Japan, the Bank of England and the US Federal Reserve (Fed). The Bank of Japan, after reducing the cost of money to zero, has repeatedly resorted to QE in order to counter the deflation in its domestic economy that had already set in in the late 1990s. The latest Japanese QE programme, amounting to the equivalent of 1.4 trillion dollars, was authorised by the country’s prime minister Shinzo Abe in 2013 for a period of two years; to date, its results appear disappointing in terms of reviving inflation, but very positive for the Japanese economy[2] and for exports, which have benefited from the devaluation of the yen.

The Bank of England implemented this policy in 2009. Between March and November that year, it acquired financial assets, mainly government bonds, worth 200 billion pounds. Further purchases followed: 75 billion in October 2011, 50 billion in February 2012, and 50 billion in July 2012, amounting to an overall total of 375 billion pounds. The bank has made no further purchases since 2012, but as the funds linked to maturing securities were reinvested, the UK’s QE stock continues to stand at 375 billion pounds. The Bank of England has kept interest rates on hold at 0.5 per cent since 2009 and its chief economist recently expressed doubts over the wisdom of a possible rate hike, given the persistent weakness of inflation in the UK.

In the USA, the Fed responded to the explosion of the financial crisis in 2007 by rapidly cutting interest rates from 5.25 per cent to zero. The arrival of next crisis, in 2008, prompted its president Ben Bernanke, towards the end of that year, to launch the first round of QE. This consisted of the purchase of so-called toxic assets — these purchases served to free up the balance sheetsof the banks and financial institutions — and US Treasury bonds. In June 2010, the Fed’s balance sheet stood at US$ 2,054 billion, having risen from a pre-recession level of 7-800 billion dollars. In November 2010 the Fed embarked on a second round of QE, buying further Treasury bonds worth a total of 600 billion dollars. In September 2012, it adopted a third round: the purchase of government bonds and ABS[3] to the value of 40 billion dollars per month, which subsequently reached 85 billion per month. In the US, the process of winding down (or tapering) of QE began in September 2013 and ended on 29 October 2014. Subsequently, with the Fed's balance sheet standing at a remarkable US$ 4,300 billion, the new president of the Federal Reserve, Janet Yellen, examined the possibility of a rate hike, which was duly announced on 16 December 2015,[4] albeit leaving the door open for a possible backtrack. This move provoked reactions, both in the United States and in emerging countries, linked to fears of an end to the flow of easy money.

Finally, in 2014, the ECB also decided to consider the possibility of launching a QE operation. This decision followed its attempts to resort to longer-term refinancing operations (LTRO) as a means of resolving the difficulties created by the crisis. Indeed, through auctions (one in December 2011 and the other in February 2012), the ECB granted commercial banks three-year loans at attractive interest rates, secured by selected government bonds. Although the LTRO plan resulted in an expansion of the ECB’s assets to 3,000 billion euros, the effects on the production system were limited as the banks preferred to redeposit the available funds with the ECB or use them to feed speculative financial transactions. In 2014, a new plan of targeted longer-term refinancing operations (TLTRO), which consisted of longer-term bank loans granted as a form of credit support for manufacturing industries, gave similarly disappointing results.

The reasons that prompted the ECB to adopt QE measures and then extend the programme.

The BCE’s ambitious QE programme, launched on 9 March 2015, was welcomed by a large section of the business and political worlds. The ECB’s stated objective, in line with its statutory mandate to safeguard monetary stability, was to bring the average inflation rate of the eurozone, which was slightly negative at the time, to a level close to 2 per cent of the eurozone’s GDP.

The financial market reacted positively from the outset, and this was apparent both in anticipation of the measure and following the official announcement of 22 January 2015, and in any case in the run-up to its actual deployment on 9 March the same year. Share prices were soon seen to be rising rapidly, albeit with temporary interruptions due to uncertainties generated by the negotiations on the Greek debt initiated by the government of Alexis Tsipras following his electoral victory on 25 January. In this regard, it is worth recalling that the ECB president, Mario Draghi, speaking on 22 January, had already ruled out the participation of Greek government bonds in the QE programme, due to the risks related to the precarious state of Greece’s finances.

The announcement of the QE programme had other immediate effects: the appreciation of the Swiss franc, decided by the Swiss Central Bank, and the devaluation of the euro against the dollar, which had a positive impact on the EU’s exports to non-member countries.

To understand the full significance of the operation, it is necessary to refer to the address given by Mario Draghi at the European Banking Congress on 21 November 2014.[5] On that occasion, Draghi confirmed the ECB Governing Council’s inclination to activate a plan for the purchase of covered bonds, held in the portfolios of banks, as a means of allowing the latter to expand their loans to households and businesses. He also referred to the difficult economic situation in the euro area and its fragile growth prospects, due to the low level of investments and inflation; in particular, he warned of the risk of an excessively “prolonged period of low inflation [becoming] embedded in inflation expectations”, a statistical concept that fails to take into account current temporary factors such trends in energy and food prices.

In short, on the basis of the ECB’s internal surveys, Draghi warned of the possibility of Europe having to reckon with a long period of falling prices, which would: a) impact negatively on the strategic choices of companies and make it less appealing for them to invest (due to the difficulties they would have establishing remunerative prices for their products, and the increase in real interest rates on invested capital); and b) reduce the power of workers to negotiate higher wages, as well as their chances of seeing an increase in the purchasing power of their pay. In other words, the ECB president was concerned about the prospect of incorrect functioning of the production system, on both the supply side and the demand side.

All this explains the decision of the ECB Governing Council, announced by Draghi on 22 January 2015, to launch a programme, set to run from March 2015 to September 2016, of monthly purchases of 60 billion euros’ worth of public and private bonds with maturities of between two and 30 years (the programme thus envisages total purchases worth 1.14 trillion euros). To appease the Bundesbank and some Nordic members of the Council, provision was made, within the mechanism, for only minimal sharing of the debt-related risks among euro area countries. Accordingly, it was established that the national central banks were to purchase bonds from their own country’s credit institutions or government agencies (according to their stake in the ECB) to cover 80 per cent of the programme. This meant that the ECB would assume the remaining 20 per cent risk; in reality, however, the ECB actually assumed only 8 per cent, given that the remaining 12 per cent had to be made up by purchases of securities issued by Community institutions (EBI and EFSF/EMS). Moreover, the eurozone national central banks were not authorised to purchase more than 33 per cent of their own country’s government bonds, or to purchase more than 25 per cent of any single bond issue.[6]

The operation was intended to free up the portfolios of banking institutions from the fixed assets represented by public and private bonds, inject liquidity into the system, and boost the eurozone economy through an expansion of credit facilitated by the rock bottom interest rates. The risk that the banks might, in reality, not circulate the liquid assets obtained, instead depositing them in the ECB, was averted by the fact that the ECB would apply a negative rate (-0.20 per cent) on these deposits, and also by the fact that the ECB’s main refinancing rate still stood at the record low of 0.05 per cent set on 10 September 2014. The reasoning of the ECB was that these measures would induce commercial banks to increase their loans to households and businesses, invest in equities or real estate, and make direct investments abroad. In turn, all this was expected to arrest deflation and bring about a recovery of the economy.

It was thus an “unconventional” monetary policy action, designed to impact both on demand, by facilitating consumption, and on supply, by providing incentives for investment.

In truth, however, the period between March and November 2015 failed to bring decisive developments as regards either the eurozone GDP or the level of inflation.[7] According to forecasts by the ECB’s internal departments, the rate of growth (expressed as a percentage of eurozone GDP) is now expected to be 1.5 per cent for 2015 (rising from the 1.4 per cent predicted in the summer of the same year), 1.75 per cent for 2016 (unchanged), and 1.9 per cent for 2017 (up from the original forecast of 1.8 per cent). Inflation rates are predicted to be 0.5 per cent higher than those recorded prior to the introduction of QE, and in detail to be 0.10 per cent for 2015, 1 per cent for 2016, and 1.6 per cent in 2017 (down from the original forecast of 1.7 per cent). All this adds up to a picture of slowly rising inflation.

For these reasons, on 3 December 2015, the ECB, wanting to bring about an overall strengthening of the favourable impact of the measures deployed as from June 2014, decided:

1. to lower the negative rate on bank deposits from -0.20 per cent to -0.30 per cent;

2. to extend the bond purchasing programme (originally due to end in September 2016) to March 2017, reserving the possibility, thereafter, to prolong QE further, if necessary;

3. to reinvest funds from bonds coming to maturity in the QE period so as to maintain the level of liquid assets in the financial system;

4. to include bonds issued by eurozone local and regional governments in the list of purchases;

5. to continue with the 60 billion euro monthly purchases;

6. to continue its main refinancing operations at least until 2017.

The ECB has thus undertaken to increase the total injection of liquidity through its QE programme from €1,140 billion to €1,500 billion.

In view of the financial markets’ immediately negative reaction to the above measures, it should be stressed that it was certainly not the ECB’s intention to encourage financial investors’ speculations on zero, or quasi-zero, interest rates to shift towards more remunerative assets, and neither did it wish to endorse a weakening of the national governments’ commitment to fiscal consolidation.

In words, it can be argued that the BCE’s measures are focused on fighting deflation and the economic crisis that is afflicting the eurozone. It can also be added that the decisions reached on 3 December send out a very clear message to the financial markets and governments, on a par with Draghi’s “whatever it takes” remark in July 2012.

Indeed, it is one thing maintaining interest rates at zero, or close to zero, in order to help governments keep their borrowing costs in check, or injecting into the banking system the liquidity needed to promote lending to households and businesses; it is quite another thing endeavouring to meet the expectations of easy money of speculative adventurers or those wanting to postpone the governments’ much needed fiscal consolidation.

This clarification is necessary in order to ensure that the BCE’s monetary policy operation is set in its correct framework, also in the light of the analysis that the ECB’s internal services have been developing for some time and which Draghi has been explaining ever since the time of his meeting with the central bankers at Jackson Hole (Wyoming, USA) in the summer of 2014.[8]

In addition, Mario Draghi, meeting the press on 3 December 2015, duly recalled the responsibility of governments to ensure sustainable fiscal policies in order to sustain market confidence. He went on to exhort the eurozone governments to ensure a favourable environment for investments given the ability of the latter to affect current demand and the potential for future growth, provided that appropriate structural policies are deployed.

The ECB’s observance of the Treaties and the principle of monetary stability.

The fact that the ECB decided to adopt a QE programme of the kind already implemented by other major central banks, namely the Fed, the Bank of England and the Bank of Japan, should not allow us to be misled over the institutional correctness of its action.

It should be clearly understood that, contrary to the practice followed by other central banks outside the eurozone, the operations conducted by the European System of Central Banks (ESCB) are certainly not direct purchases of government bonds. Such purchases would be tantamount to funding the issuer, a practice that is prohibited under Art. 123 of the Treaty on the Functioning of the EU (TFEU). In the course of the crisis of recent years, Mario Draghi and his predecessor Jean-Claude Trichet have both made bond purchases, but all these concerned the portfolio stocks of commercial banks, in other words, they always operated on the “secondary market”, being careful to avoid assuming the role of “lender of last resort” to the governments. In reality, these operations always amounted to the injection of liquidity into the credit circuits in order to support the economy, in accordance with the ECB’s statutory mandate, under Art. 127 TFEU, to safeguard monetary stability. Reference to Art. 130 is also necessary in order to underline that the ECB took its decisions on QE in full autonomy, but with close attention to the state of the European economy.

It should be stressed that the objective of monetary stability (whose corollary is sound public finances), introduced through the Maastricht Treaty and the creation of the single currency, represents a decisive innovation in terms of protection of the democratic system and the citizens' control over public spending.

In fact, it should be underlined that independence of the central bank, a concept introduced into Europe’s evolving “constitutional” framework, constitutes a great democratic revolution that effectively removes the “mint” from the hands of the “Prince”, in other words removes all possibility of it being manipulated by politicians motivated by electoral concerns.

Independence of the central bank and monetary stability were, indeed, two principles that were imposed on the new Germany rising from the ashes of the Third Reich, precisely for the purpose, respectively, of preventing monetary financing of public expenditure on the military and keeping the state budget under close democratic control.[9]

This was a lesson that the Germans learned and appreciated, and today, after having demanded in Maastricht that the ECB be constructed in the image of the Bundesbank, it is one that they preach at European level. But since everyone is accustomed to the easy spending and monetary expansion that was fuelled, in other eras, by the dollar, politicians and scholars in the other member states (which would like to see an ECB that resembles the Fed) fail to understand them. It is important that we, as federalists, remember that we have never criticised the “fiscal discipline” introduced by the Fiscal Compact (“rigour for the member states” as Tommaso Padoa Schioppa called it), only the absence of “economic discipline” (i.e., a European development plan) and “democratic discipline” ( i.e., federal decision-making powers of the European Parliament — to be exercised in concert with the Council — on EU “own resources”). Today there is much complaint about the effects of austerity in the euro area (recession and deflation) and the high social cost of this approach, but it must be recognised that the responsibility for all the difficulties experienced by the economic system and for all the social hardship lies firmly with the national governments, which, anxious not to relinquish any share of fiscal and budgetary sovereignty, failed to consider and address the other side of the coin (“development for Europe”, in the words of Padoa Schioppa).[10]

Monetary stability, which the ECB is required to pursue, prevents arbitrary transfers of resources and guarantees, within the monetary union, structural solidarity:

— between social classes (the cost of inflation is borne by those on a fixed income; Einaudi regarded inflation as the most iniquitous of taxes);

— between generations (inflation erodes the savings made by current generations for their old age and, in the same way, growing government debts result in the transfer of the financial burden to future generations);

— between regions (devaluation and competitive devaluation alter the factors of competitiveness in the exchanges between monetary regions; they interfere with fair competition).

The relationship between monetary and fiscal policy and the economic government of Europe.

The monetary stability rule thus assigns the governments and parliaments the task of tackling, using resources deriving from taxation, a series of issues: the social distribution of income, the promotion of investment and employment, bank bailouts,[11] and public funding of production activities. Its application demands that development objectives be pursued through structural reforms and fair and efficient fiscal policies, concerted income policies, structural policies designed to protect savings and the soundness of the financial system, and structural policies for income redistribution among regions (Finanzausgleich or fiscal sharing), the extent and affordability of which can, through calculation of the sustainable and necessary tax burden, be democratically assessed by political representatives and citizens.

These constraints, in fact, are already applied thanks to the Fiscal Compact, the Six Pack and the Two Pack[12] and they create the narrow conditions within which national fiscal policies are debated. However, in order to produce all its virtuous effects, this rule, on which the ECB is based, needs:

1. the European system of government to assume a multilevel federal structure based on the financial autonomy of municipalities, regions, states and federation, and on mutual coordination between federated entities in order to allow dual democratic control: parliamentary (by the “lower chambers” of each level of government) and institutional (by the “higher chambers” representing regional entities);

2. the political forces in such a system to become bearers (again at each level of intervention) of realistic and responsible programmes that are capable of opening up, within the body of society, an in-depth debate on long-term choices and on the ultimate goals of government action(planning), also with regard to foreign policy, security and the protection of institutional values.

The model is valid for Europe and for the process of world unification, as well as for the functioning of any supranational monetary union.

It is a golden rule because it takes the “mint” out of the hands of the “Prince” (or, in today’s terms, out of the hands of politicians interested only in winning electoral support) and brings it under democratic control (by making monetary stability a constitutional requirement).

The eurozone’s real chances of reviving growth and employment.

To understand the reasons behind the ECB’s adoption of the QE progamme, it is necessary to refer back to Mario Draghi’s address before central bankers meeting on 22 August 2014 in Jackson Hole (Wyoming, USA).[13] On that occasion, after remarking that, in the wake of the 2007-2008 crisis of the financial institutions, unemployment in the USA had begun to decline in 2011, he went on to warn that the euro area faced a second period of growing unemployment due to the sovereign debt crisis. The ECB president explained that the sovereign debt crisis conditioned fiscal policy in different ways in different countries. At this point, it should also be underlined that, in the continued absence of a fiscal union, this conditioning continues to exist, and, as Draghi underlined at Jackson Hole, the ECB in its monetary management has to deal with as many fiscal policies as there are countries adopting the euro. In this setting, in the absence of a common intervention (as implemented elsewhere, in countries whose central banks were able to act as lender of last resort to the respective governments), the eurozone fiscal consolidation policies have led to declining employment in areas financed by public spending (administration, procurement and public investment, economic aid), which has to be summed with the declining levels of employment being recorded in the private sector. In particular, the euro area countries in difficulty have had to face an increase in the cost of capital, in a context in which monetary policy and fiscal policy are, together, putting the economy under further pressure. Therefore, as the ECB president never tires of repeating, the need to repair the monetary policy transmission mechanism in order to support aggregate demand goes hand in hand with the need to intervene on the labour markets and on the evolution of the economy. The unfavourable conditions, in terms of flexibility and new opportunities, that characterise the labour markets in some European countries mean that people are taking longer to find new jobs and often ultimately abandoning the search. In his Jackson Hole address, Draghi also underlined the structural nature of the crisis, caused by the emergence and establishment of new processes and new products. These changes have contributed to the large-scale destruction of jobs, particularly low-skilled ones, and thus created a need for active policies in a range of areas: education systems, professional training, the product market and the operating environment for business — policies that would clearly be different from country to country since they would depend on each one’s specific production capacity and employment situation, and need to promote the process of EU convergence.

Accordingly, given that the European countries cannot compete with the low labour costs of the emerging countries, and also that the European social model must be preserved, it follows that Europe must specialise in high value-added production, and that employment levels can be increased only through coordinated monetary, fiscal and structural measures designed to support aggregate demand and counteract any fall in inflation.

This is why the ECB president, in his address, stressed the importance of giving fiscal policy a key role, while leaving the Fiscal Compact intact. In this sense he suggested that:

1. the existing flexibility for national fiscal policies should be exploited, within the framework of the Treaty rules;

2. a more growth-friendly composition of fiscal policies should be achieved at European level, in particular a reduction of the tax burden on labour in order to give confidence to businesses and encourage investments;

3. more effort should be made to improve coordination of fiscal policies in the euro area;

4. supplementary measures should be taken to encourage EU-wide investments (Cf. Juncker’s 315 billion euro investment plan).

It can therefore be underlined that, contrary to the interpretations of some,[14] the ECB president called for fiscal policy to play a decisive role in support of monetary policy as implemented by the ECB. In other words, Draghi called for a coordinated policy, at EU and at national level, designed to support aggregate demand, which would replace the role, as “lender of last resort”, that is played by the central banks of Japan, England and the USA.

In fact, more than once, through his contributions to discussion papers on the EU and the revival of the integration process,[15] Draghi has clearly expressed his support for Juncker’s 315 billion euro plan aimed at enhancing investment at European level, and also for completion of the monetary union with fully-fledged banking, fiscal, budgetary and political unions.

Quantitative Easing in the USA and its international repercussions.

In the light of Draghi’s appeals for substantial European economic policy interventions, it is appropriate to look back at what the USA did in order to overcome the 2007-2008 crisis of the financial institutions. In fact, the 3.5 trillion dollar QE programme deployed by the Fed from 2009 to 2014 (a longer and more substantial programme than the ECB one implemented to date) was associated with a large programme of federal investment spending.

On 19 February 2009, just a few weeks after the start of his first term in office, President Barack Obama signed the American Recovery and Reinvestment Act (ARRA),[16]a public investment plan worth 787 billion dollars, which was increased to 840 billion with the federal budget of 2012.

The plan had three immediate objectives:

— to create new jobs and save existing ones;

— to support economic activity and invest in long-term growth;

— to bring about an unprecedented level of transparency and accountability in government spending.

The federal government introduced a series of measures: tax breaks and help for households and businesses, funding for specific programmes, such as unemployment benefits, federal aid and loans to boost the economy.

However, in spite of these considerable combined efforts by the Fed and the federal administration, their intervention produced mixed results.

At the level of the real economy, it has been shown that the activation of each stage in the bond purchasing programme was followed, a year later, by a 1 per cent increase in industrial production;[17] the response in employment terms, on the other hand, was slower — an increase of 0.4 per cent. For several years now, the US economy, albeit with ups and downs, has once again been running at growth rates of over 2 per cent, with quarterly rates even coming close to the 4 per cent mark; furthermore, it has absorbed the unemployment generated by the 2007-2008 crisis: indeed, in 2015 the rate of unemployment in the US fell to the level (considered structural) of 5 per cent.[18]

While some consider that the changes in GDP, employment and wages can be attributed to other reasons, and that the impact of QE was actually negligible, others argue that without the QE plan, the USA would have seen deflation at ?1 per centin the third quarter of 2009, a GDP fall of 10 points in the same year, and unemployment rising to 10.6 per cent.

Conversely, the plan seems to have had more noticeable effects on the distribution of wealth, given that share prices have returned to pre-crisis levels. Between 2007 and 2010 the share of wealth held by the top decile of the population rose from 81.3 per cent to 85.6 per cent. In the same period, the expenses-to-income ratio of the wealthiest 40 per cent of the population is reported to have increased, whereas for the second 40 per cent this ratio fell.[19]This suggests that, in practice, QE led to an increase in social inequalities.

The reported decline in the rate of unemployment (to 5 per cent of the workforce) should be interpreted in the context of the recent reduction (from 63 per cent to 60 per cent of the population) in the size of the workforce as a whole, which is the result of the exit, from the job market, of the children of the post-WWII baby boom and those who have given up hope of finding work. It is also interesting to note that the areas in which employment has grown the most are those that offer precarious and low-skilled, low-paid jobs (trade, catering, hotels, family and medical support, construction work), with the result that there has been no significant increase in the average wage. However, the increase in employment has driven a rise in domestic consumption,[20]which is compensating for the effects of both a temporary decrease in the level of public investment and the presence of difficulties in the economy and in international politics.

Various factors have contributed to the recovery in the USA: a) policies promoting the “migration of talent” and legalisation of foreigners, which have had positive effects on the production system, on tax revenue and on consumption; b) the increased flexibility of the labour market, which, through lower salaries, has made it possible to kick start the economy; c) the support for entrepreneurship through government policies promoting technological advancement (Cf. ARRA); d) the growth in productivity to 2.5 per cent; and e) the recovery of a degree of energy autonomy (thanks to shale gas and shale oil).

These are, essentially, the economic conditions that have inclined the Fed to opt for a gradual increase in its benchmark interest rate in order to curb speculative behaviour during the recovery. In this regard, there need be no concerns for US exports, given the high added value of US production, while increased imports from the rest of the world should help to keep domestic prices stable.

In actual fact, it is the global economy that should be the main focus of concern, given that the prospect of progressively increasing US interest rates may encourage an inflow of foreign capital to cover the enormous US debt,[21] in particular from emerging countries, depriving them of resources. In addition, rising interest rates objectively increase the cost of these countries’ debts in dollars, and of any new credits opened in their favour. Finally, the prospects for international trade could worsen with the possible start of a new era of competitive devaluations; although these would mainly involve the fragile economies, they could also be introduced by the major economies, in addition to the ones already implemented (by China, Japan and the eurozone), — and all this would result in further destabilisation of the international economy.

The complementary measures needed to revive the European economy.

So far, the reactions in the European economy to the ECB’s programme of QE have fallen short of expectations. From this perspective, the coordinated intervention implemented by the central bank and federal government in the USA could be instructive.

According to Tommaso Monicelli,[22] for example, QE is not working well in the eurozone because of the climate of low confidence that is pervading its markets and manufacturing industry; indeed:

1. ever since 2008, the rate of money circulation, which indicates the extent to which the money supply is transmitted to economic activity (GDP), has been falling; this is because individuals, families and businesses, perceiving the future as uncertain, are preferring to defer spending decisions and investments;

2. although banks and businesses know that monetary expansion will be absorbed and that loans must be repaid, they are struggling to identify remunerative investments;

3. reviving inflation is difficult in the context of a stagnant economy and persistent unemployment;

4. certain groups of consumers (the unemployed, temporary workers, the elderly) may be unaffected by changes in consumer credit interest rates;

5. the average inflation rate in the euro area is the result of the inflation rates in the different eurozone member states, which are in turn determined by their economic policies; the overriding problem, therefore, is to adjust the relative inflation rates (between the countries), and thus their real exchange rates.

What Monicelli is really highlighting is the generalised lack of confidence within the European economy that derives from the lack of structural coordination between the centralised monetary policy and the heterogeneous national economic policies, an aspect repeatedly underlined by Draghi.

Sound and sustainable national public finances are, indeed, the positive result of the crucial stability mission pursued by the ECB; the budget deficit and excessive debt of any country will always create problems for the economies of other countries, as the Greek crisis so strikingly illustrated.

In a eurozone seeking to overcome the structural differences in development between its members and lacking a common fiscal policy and, above all, a common political strategy, responsibility for making the necessary adjustments lies with the national governments, which find themselves falling into the austerity trap.

No country, Germany included, can afford expansionary policies. In fact, Germany, which in the past few years has had to save its banking system first from the American banking crisis and then from the Greek crisis, has learned its lesson and is now striving to achieve the dual objective of a balanced budget and a reduction of its accumulated debt.[23] Correction of excessive deficit and excessive debt is the shared objective of the 25 countries that adopted the Fiscal Compact. Moreover, the bank bailouts impacted on the finances of a number of important member states; as a result, eurozone public debt rose to 91.9 per cent in 2014.[24]

Furthermore, in the face of their own resistance to the creation of an additional European budget for the eurozone, financed by new own resources, all the euro area countries have found themselves caught in the austerity trap, whose negative effects on them have been multiplied by the fact that the macroeconomic measures to achieve consolidation have been implemented in the setting of a strongly interdependent single market. Europe has seen investments in production cut, welfare systems eroded, and labour costs curbed, all in order to ensure fiscal consolidation. This has naturally resulted in a loss of confidence in the future.

Nevertheless, alongside the damage to the European economic system deriving from the asymmetry between the centralised monetary policy, serving to control inflation, and the national economic policies, which are deflationary as they are pursuing fiscal consolidation, we should also highlight the need for a change in development strategy, in terms of the promotion of advanced technologies and modification of the labour market, on the basis of what has been done in the USA.

The ECB president, Mario Draghi, has clearly invoked this change in strategy on numerous occasions — every time he has referred to the need for Europe to focus on higher value-added products and the development of a more skilled workforce.

Indeed, because of globalisation, the recent years of economic crisis have seen the establishment of a major structural change in the global economy following the affirmation of emerging countries that are proving able to dominate the field of intermediate and even advanced technology at far lower labour costs than are possible in the industrialised economies. Furthermore, changes in the global production system mean that some important sectors of the European economy are struggling, since they no longer correspond to the needs of the market and the way the modern workforce operates.

Another aspect to consider is the fact that across industry and the services sector we are witnessing a proliferation of labour-saving technologies (3D printers, remote-controlled machines, online banking and shopping services, driverless trains, vending machines).

It is, indeed, significant that in the United States, employment growth has occurred mainly in the trade and services sector, rather than in industry; in Germany, meanwhile, the current 5 per cent unemployment rate conceals the fact that more than 10 per cent of those in employment (over 6 million workers) do part time jobs or have been channelled into the field of community service work as an effect of the Hartz labour market reforms of the past decade.

What these brief considerations show is that, as a result of the change in the types of jobs available and in the mode of production, we now find ourselves faced with a trend towards the formation of a dualistic structure of the labour market. This is reflected in the presence of, on the one hand, a highly qualified category of workers offering specialist skills with high added value, who enjoy high salaries and an employment market characterised by dynamic interaction between supply and demand — this explains the American and German policies designed to encourage the “immigration of talent” —, and on the other, declining and increasingly poorly qualified categories in which demand exceeds supply, giving rise to pockets of structural unemployment.

In the absence of strategic guidelines defined by continent-wide public policies, this whole situation only generates uncertainty and makes it difficult to make business choices. In this regard, it should be recalled that following the crisis of the 1930s, the New Deal provided indications on how to manage a major industrial power and the Beveridge Plan completed the design by introducing the welfare state. Furthermore, the Bretton Woods agreements introduced the instruments necessary to govern the international monetary system: a regime of adjustable fixed exchange rates, the World Bank and the International Monetary Fund.

Today, Europe — the eurozone primarily — needs to work out how to manage the ongoing technological and scientific revolution, what kind of welfare state model is needed to support a new phase of development, and, finally, what interventions are required at global level in order to ensure adequate governance of globalisation through, to begin with, reform of the international monetary system (so as to stabilise the system of exchange rates of major currencies) and reform of the International Monetary Fund. It is a Herculean and ground-breaking task that the national governments are not equipped to undertake; however, it is one that could be taken on by a political class placed at the helm of the EU by a federal reform of the European institutions — a reform giving power to the European Parliament and a global parliamentary mandate to the Commission. This would be a political class capable of recognising Europe’s responsibility to create a new and solid global framework, in whose absence the future continues to offer only uncertainty. Furthermore, given the interdependence between economic government and the governance of external relations and security in defining Europe’s destiny in today’s rapidly changing world and in influencing its development, its mandate clearly could not be limited exclusively to economic government.

These complex issues, only touched upon here, bring us back to the QE programme introduced by the ECB. There can be no doubt that it is a monetary policy action designed to support the European economy and keep it afloat, thereby giving politics time to reform the system of eurozone governance and thus the European Union.

In other words, it is certainly a necessary operation, but it is not enough.

[1] The Governing Council is the ECB’s main decision-making body and it is composed of the six members of the Executive Board plus the governors of the national central banks of the 19 euro area countries. It takes its decisions by majority according to a system of rotation of voting rights. This is a mechanism that allows it to make decisions without falling into the veto trap,

[2] Cf. Kenji Ueno, Giappone, probabile terzo Quantitative Easing in arrivo,

[3] ABS stands for asset-backed securities, which are financial instruments based on loans made by banks to businesses. An ABS is a set of real loans incorporated into a single financial security that, like a bond, has a price and a daily quotation. Its redemption value is linked to the effective repayment, by businesses, of the underlying loans when they reach maturity.

[4] On December 16, 2015, the Fed decided to raise its key interest rate to 0.25 per cent. Furthermore, if the state of the economy allows it, there are likely to be three further increases, each of 0.25 per cent, in 2016, after which the rate will continue to rise, to reach 3.25 per cent in 2018.


[6] These restrictions were introduced to avoid surreptitious financing of emissions of bonds by national central banks and to keep the economy's financing channels open. Indeed, the national central banks can sell a limited quantity of the public bonds in their portfolio to the ECB, however, since they have to deprive themselves of the yield, albeit limited, that these bonds offer, they have to make sure that the funds obtained from these transactions are used in credit operations that will make them interest rather than remaining idle in their accounts, a situation that would be damaging to them. The national central banks can also sell bonds in order to buy other higher yielding ones, but current rates on public bonds do not encourage this practice.

[7] Cf. Mario Draghi, Introductory Statement to the Press Conference, Frankfurt, 3 December 2015,


[9] As is well known, together with the principle of independence of the issuing institution (central bank), a federal model of state was introduced into the German system. In this way, extensive autonomy was attributed to the Länder, which were assigned responsibility for tax and administration, and co-determination was introduced in enterprises with more than 2000 employees. These mechanisms amounted to a strengthening of democratic control over public spending and investment. The cornerstone of the public budgetary system is the Bundesrat (federal council), which controls the distribution of tax revenues collected by the Länder between the federal government and regional governments, and horizontally among the latter, implementing additional transfers in favour of the less developed regions through the mechanism of fiscal equalisation, or fiscal sharing (Finanzausgleich). It also implements a multilateral surveillance system to monitor the efficiency of public spending in the various settings. Co-determination, for its part, allows union representatives to monitor corporate resources and investment policies, and is thus, over time, an important means of strengthening the assets of large enterprises and promoting shared production policies.

[10] The 2012 "Four Presidents' Report” entitled Towards a Genuine Economic and Monetary Union indicated the objective of the progressive realisation of the banking, fiscal, budgetary and political unions. In particular, it stated: “A fully-fledged fiscal union would imply the development of a stronger capacity at the European level, capable to manage economic interdependences, and ultimately the development at the euro area level of a fiscal body, such as a treasury office. In addition, the appropriate role and functions of a central budget, including its articulation with national budgets, will have to be defined”,

[11] On this topic, see the article by Andrea Bonanni, A chi tocca pagare gli errori, La Repubblica, 13 December, 2015. In the wake of the recent collapse of four Italian banks, which wiped out their customers’ savings, the author provides a clear explanation of how, through the activation of the EU banking union, following the bank bailouts necessitated by the 2007-2008 crisis, it was decided, at European level, to protect taxpayers against the risk of having to contribute to the rescue of reckless or dishonest administrations. The new European legislation underlines the primary responsibility of bank stakeholders to prevent the cost of the bailout from being borne by public finances (ultimately the taxpayer). At European level a resolution fund has been established for such interventions, financed by the banks themselves, however, it will be eight years before it is fully operational,

[12] These constraints were introduced through the intergovernmental Fiscal Compact treaty of 12 March 12 2012 and through the Commission’s six-pack and two-pack regulations:
. The Fiscal Compact, formally called the “Treaty on Stability, Coordination and Governance in the Economic and Monetary Union”, which was signed on 12 March 2012 by 25 EU member states and came into force on January 1 2013, introduced the basic rules regulating the balanced budget target to be met by the signatory countries. It should be noted that this objective was also shared by some countries that, for the moment, are not part of the eurozone. The UK, the Czech Republic and Croatia did not sign the Fiscal Compact.

[13] Mario Draghi, Unemployment in the Euro area, .

[14] See, among others, Jean Pisani-Ferry, La sveglia di Draghi per la politica, in Il Sole24Ore, 15 September, 2014.

[15] In addition to the aforementioned report entitled Towards a Genuine Economic and Monetary Union, see The Five Presidents’ Report: Completing Europe’s Economic and Monetary Union,

[16] Cf. .

[17] Industrial capacity utilisation in the USA, which stood at 85.0 per cent in 1994-1995, dropped to 66.9 per cent in 2009 before rising to 77.7 per cent in October 2015,

[18] In November 2015, the unemployment rate stood at 5 per cent (whites 4.3 per cent, blacks 9.4 per cent, Asians 6.4) while the employment-population ratio was 59.3 per cent,

[19] Cf. Stefano Corsaro, Un bilancio del Quantitative Easing della Fed, posted on 3 June 2014 on

[20] Consumer credit, which had dropped to -1 per cent in 2010, rose by 7 per cent in 2014 and by 9.9 per cent in October 2015,

[21] Rising interest rates may encourage greater foreign placement of public and private US debt, which cumulatively stands at 270 per cent of GDP. Cf. Giulia Ugazzo, Il debito Usa è la bomba ad orologeria dell’economia mondiale, in “Diario dal web”, 3 October, 2015,

[22] Tommaso Monacelli, QE e inflazione: poche illusioni,

[23] The German plan to achieve a balanced budget in 2015 and a reduction of its debt has necessitated a policy of fiscal consolidation, which in turn has led other euro countries to accuse Germany of not wanting to practice expansionary policies to boost aggregate demand in the eurozone. In any case, Germany achieved a balanced budget at the end of 2014, a year ahead of its deadline.


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