Below we have excerpted parts of an article by Marshall Auerback in New Economic Perspectives discussing Mario Draghi's role as the head of the European Central Bank.
The Road to SerfdomRead the whole article here
By Marshall Auerback - New Economic Perspectives
. . . .Here's another interesting thing: in the 1990s, a number of countries, including Italy, engaged deliberately in transactions which had no economic justification, other than to mask their public debt levels in order to secure entry into the euro (see an excellent paper on this by Professor Gustavo Piga, “Derivatives and Public Debt Management”, which documents this practice). Italy actively exploited ambiguity in accounting rules for swap transactions in order to mislead EU institutions, other EU national governments, and its own public as to the true size of its budget deficit.And Eurostat signed off on these transactions. And who worked at the Italian Treasury at that time? That’s right: “Super Mario” Draghi, who was director general of the Italian Treasury from 1991-2001 when all this was going on, and then joined Goldman Sachs (2002-2005), when the privatisations came up. Interesting that he is now the guy who has to deal with the ultimate fall-out. Karmic justice.Virtually everybody has lied about their figures (Spain is a notable offender today), so listening to Europe’s high priests of monetary chastity is akin to listening to someone coming out of a brothel proclaiming his continued virginity.Is there a solution? Of course there is. But the eurozone’s chief policy makers continue to avoid utilizing the one institution – the European Central Bank – which has the capacity to create unlimited euros, and therefore provides the only credible backstop to markets which continue to query the solvency of individual nation states within the euro zone. They are, as Professor Paul de Grauwe suggests, like generals who refuse to go into combat fully armed (“European Summits in Ivory Towers”):“The generals… announce that they actually hate the whole thing and that they will limit the shooting as much as possible. Some of the generals are so upset by the prospect of going to war that they resign from the army. The remaining generals then tell the enemy that the shooting will only be temporary, and that the army will go home as soon as possible. What is the likely outcome of this war? You guessed it. Utter defeat by the enemy.The ECB has been behaving like the generals. When it announced its programme of government bond buying it made it known to the financial markets (the enemy) that it thoroughly dislikes it and that it will discontinue it as soon as possible. Some members of the Governing Council of the ECB resigned in disgust at the prospect of having to buy bad bonds. Like the army, the ECB has overwhelming (in fact unlimited) firepower but it made it clear that it is not prepared to use the full strength of its money-creating capacity. What is the likely outcome of such a programme? You guessed it. Defeat by the financial markets.”The ECB should, as De Grauwe suggests, be using the economic equivalent of the Powell Doctrine: when a nation is engaging in war, every resource and tool should be used to achieve decisive force against the enemy, minimizing casualties and ending the conflict quickly by forcing the weaker force to capitulate.The ECB is the monopoly supplier of currency. They can set the price on the rates, (obviously not the supply) so if they set a level (say, Italy at 5%) why should there be a default? Capitulating to the markets, or entering the battle half-heartedly not only ensures more economic collateral damage, but effectively emboldens the speculators by granting them a free put option on every nation in the euro zone. They’ll line them up, one by one, starting with Greece and ending with Germany.
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