Europe now wants the rest of the world to foot the bill for its own economic mismanagement.
Suppose a family can no longer pay its debts and dad decides to solve the problem by going down to the cellar and printing extra money. Society would not approve. Printing money is a form a robbery, stealing from everyone else by diluting the value of their financial assets.
Last week, Mario Draghi, the president of the European Central Bank [ECB], announced that in the coming months the ECB is going to pump an additional €1.1 trillion into the economy, at a rate of €60bn a month. When dad does it, it is called "counterfeiting," but when Mr. Draghi does it, it is called "quantitative easing" and one euphemistically speaks of a "stimulus package for the Eurozone." Every criminal printing money can now argue in court that, rather than a jail sentence, he should be given a medal and a reward for stimulating the economy.
The headquarters of the European Central Bank in Frankfurt, Germany. (Image source: Flickr/Solvency II Wire)
The European debt crisis began in late 2009 after Southern European countries, using the euro as a common currency with Germany and other Northern European countries, were no longer able to pay the debts they had foolishly accumulated during the preceding years. To prevent the eurozone from collapsing and its banks from going bankrupt, the ECB began to purchase the government bonds of countries in difficulty, including the junk-rated bonds issued by Greece and Portugal. As a result, the ECB balance sheet swelled to almost €2 trillion. Mr. Draghi has now solved that problem by using his big bazooka and creating €1.1 trillion out of thin air.
The effects were immediate. The euro fell against all other currencies. It hit an 11-year low against the dollar. In July 2008, one dollar was worth €0.62, and one month ago still €0.81; today it is worth €0.89. Analysts expect that the effects of Draghi's "bazooka" will soon push the euro to parity with the dollar, perhaps even lower.
The Swiss central bank SNB anticipated Draghi's decision. Two weeks ago, it stopped pegging the Swiss franc to the euro. In 2011, the SNB had decided to fix the exchange rate between the Swiss franc and the euro at 1.20 or higher. The aim was to keep the franc from getting too strong compared to the euro. On January 15, the SNB surprised the markets with its dramatic decision to reverse its policy. Traders came to refer to the decision as the "Francogeddon": it led to huge losses for those who had not expected it and resulted in an immediate 30% rise of the franc versus the euro. Meanwhile, the Swiss franc, which in October 2007 was worth €0.57 and on January 14 of this year stood at €0.83, is now already worth slightly over €1.
Obviously, this is extremely bad news for Swiss companies and for the Swiss tourism sector. The SNB reckons, however, that keeping the franc artificially low compared to the euro by buying large quantities of euros, which are rapidly going to lose their value as a result of Draghi's strategy, would be an infinitely worse scenario. So they stepped out of the currency war. Other economic competitors of the eurozone, such as the British, the Americans, the Japanese and the Chinese, will either have to do the same or try to keep their own currencies low by buying large quantities of euros or by following the ECB's example and switching on their own money presses.
Within the eurozone, however, Draghi's decision is also leading to tensions. France and the southern countries are supporting Draghi, while the central bankers of northern eurozone countries, such as Germany's Bundesbank president, Jens Weidmann, and his colleagues from the Netherlands, Austria and Estonia, opposed the decision.
They are, however, outnumbered by the southerners. The northerners fear that Draghi's program will reduce the pressure on governments in the south, including France and Mr. Draghi's own Italy, to reform their economies and stop living beyond their means. The Greek elections yesterday resulted in huge gains for the far-left Syriza party, which opposes the current austerity policies. Now that the ECB is buying Greek junk bonds with newly created money, the Greeks may well feel that they no longer need to reform their economy.
Last week, in Davos, Finnish Prime Minister Alexander Stubb warned that there is a bottom line when it comes to Greece. He said that he even preferred a "dirty exit" of Greece from the eurozone, rather than allow it to shirk further economic reforms. "All of us have taken very difficult structural reforms," Stubb said. "I can't take issue with the Greek elections. The Finnish position is: we will deal with any democratically-elected government that Greece has, but it will be very difficult for us to forgive any loans or restructure debt at this particular moment."
On Sunday, Bundesbank President Weidmann reiterated his doubts about the effectiveness of the ECB bond-buying plan. He questioned whether quantitative easing in the eurozone would lead to an economic stimulus -- as it did in the US after the financial crisis of 2008 -- because the sluggish growth in Europe is largely due to high levels of debt and, in certain countries, a lack of competitiveness.
It seems that the refusal of some European countries, such as France, to tackle their high debt levels and lack of competitiveness is now also affecting the non-eurozone. As a result of the ECB's decision, non-eurozone countries, such as Switzerland and America, will also be affected. Their companies will have more difficulty exporting to the eurozone because their currencies will become too expensive. In short, they will be paying the price of the ECB's decision to lift the burden from the economies in Southern Europe.