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  November 1, 2017

What Will Cutting 'Quantitative Easing' Mean for Europe?

The European Central Bank (ECB) announced that it will reduce its cash injection program, known as quantitative easing, by half. Economist Heiner Flassbeck discusses the consequences this will have for Europe's struggling economy
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Dr. Heiner Flassbeck graduated in April 1976 in economics from Saarland University, Germany, concentrating on money and credit, business cycle theory and general philosophy of science; obtained a Ph.D. in Economics from the Free University, Berlin, Germany in July 1987. 2005 he was appointed honorary professor at the University of Hamburg.

Employment started at the German Council of Economic Experts, Wiesbaden between 1976 and 1980, followed by the Federal Ministry of Economics, Bonn until January 1986; chief macroeconomist in the German Institute for Economic Research (DIW) in Berlin between 1988 and 1998, and State Secretary (Vice Minister) from October 1998 to April 1999 at the Federal Ministry of Finance, Bonn, responsible for international affairs, the EU and IMF.

Worked at UNCTAD since 2000; from 2003 to December 2012 he was Director of the Division on Globalisation and Development Strategies. He was the principal author of the team preparing UNCTAD's Trade and Development Report, with specialization in macroeconomics, exchange rate policies, and international finance. Since January 2013 he is Director of Flassbeck-Economics, a consultancy for global macroeconomic questions ( Co-authored ACT NOW! The Global Manifesto for Economic Policy published in 2013 in Germany.


SHARMINI PERIES: It's The Real News Network. I'm Sharmini Peries coming to you from Baltimore. The European Central Bank, the ECB, announced last week that quantitative easing measures will be cut in half. Although the European economy is not showing the level of inflation which the ECB was trying to achieve, low interest rates may be fueling a stock market bubble. Therefore, the ECB head, Mario Draghi, said that the ECB will no longer buy bonds at a rate of 60 billion euros every month.

MARIO DRAGHI: From January 2018, our net asset purchasers are intended to continue at the monthly pace of 30 billion euro until the end of the September 2018 or beyond.

SHARMINI PERIES: At the same time, CNBC is reporting that the European Commission considers expanding the authority of the European Stability Mechanism, a fund which assists the eurozone countries in debt crises. This seems to be a move that will push the International Monetary Fund, the IMF, out of Europe by taking over its responsibilities. Now joining me to talk about all of this is Dr. Heiner Flassbeck. He's the director of Flassbeck Economics, a consultancy for global macroeconomic questions. He co-authored Act Now: The Global Manifesto for Economic Policy, published in 2013 in Germany, and the book Against the Troika, which he co-authored with Costas Lapavitsas.

Heiner Flassbeck, I thank you so much for joining me today.

HEINER FLASSBECK: Thank you for inviting me.

SHARMINI PERIES: Heiner, let's begin by explaining the ECB’s bonds buying program, which is a form of quantitative easing. What is the impact of buying back bonds at a staggering rate of 60 billion euros per month?

HEINER FLASSBECK: One thing is, the European economy is very slowly recovering, which is a good thing, but as I said, the pace is very slow. At this point in time, the unemployment is not yet going down, and so it seemed that he wanted to signal that the worst is over. Indeed, for the moment, the worst is over, but we should not forget that most of the stimulus that came to Europe in the last months was from the weak euro that we had in the last year. These things always happen with a certain delay, a lag.

My view and my reading is that what we have seen, the recovery in Europe since the beginning of this year, was very much due to the weak euro. Now the euro has turned around, is much stronger against the dollar, and that is why I think Mario Draghi did not stop the program overall, but found, so to say, the middle of the road. They said, "We will not continue like before, but we'll still continue," and interest rates will be very low.

SHARMINI PERIES: Heiner, the monthly inflation rate, from what I understand, in the eurozone is about 1.5%. Why is Mario Draghi not happy with that and want even more inflation? Doesn't inflation erode wages?

HEINER FLASSBECK: The inflation that we see, the actual inflation, the headline inflation is not the real picture. The real picture is lower than 1.5%. It's around 1%, 0.9%, is the core inflation. This has been persistently so for quite a time, for a few years or so. They know the reason for that. The reason for that is that wages are growing at a very, very slow pace. You see in the United States they're talking about a slow pace of wage increases with a rate of something like 2.5%. In Europe, we have a nominal wage increase at this point in time of 1.5%. It's still much lower than the United States, and as I said, the ECB has understood meanwhile, it took them a while but nevertheless they have understood, that Europe's labor costs, that is to say the relation of nominal wage increase to productivity is the main determinant of the inflation rate in the longer term.

SHARMINI PERIES: Heiner, I understand that the European stock markets are experiencing a long rally. Germany's stock market, in particular, is at this time at a very high. Is there a stock market bubble because of the low interest rate, which drives people to make I guess more risky investments?

HEINER FLASSBECK: Sure, to a certain extent we have that. We have in my view a clearly overvalued stock market, not only in Europe but also in the United States, also in Germany. This is, so to say, collateral damage of the policy of the ECB. It's unavoidable. They have no reasonable way to conclude from that that they should stop to avoid the bubble in the stock market. At least the bubble's in the stock market. Certain kinds of theory also have expansionary effects on the economy. I doubt it but nevertheless, so far they could say, "Also there, you have a positive stimulus." As I said, the economy overall in Europe is still very weak. We had a long recession that you cannot compare to what you had in the United States, and so far, it's absolutely justified that they take the risk of a certain turnaround in the stock market, which will not be too bad. It will not be a financial crisis like in 2008-2009. The stock market alone is not so important that it could trigger a similar financial crisis.

SHARMINI PERIES: Heiner, given the role that the IMF has played in imposing austerity in Greece, what do you think about the European Commission's idea to empower the European Stability Mechanism to take over the function of the IMF? I know the IMF played a better role in Greece later in the negotiations than it did previously in the crisis, but will this have an adverse effect on the rest of the world if the EU withdraws from funding the IMF and leaves it in the hands of the U.S.?

HEINER FLASSBECK: The answer is very much depending on what you think is behind the policy of either the Commission or the IMF. Let me start from the beginning of the story. I am not of the opinion that the IMF should participate in Europe. Europe can easily settle its problems alone. It doesn't need the IMF for nothing. So far, to take the IMF onboard in the beginning of the crisis in 2010 was mainly coming from conservative German politicians who said, "We need a stronger, much harsher policy, and that will not be implemented by the European Commission," which was wrong at that point in time.

Meanwhile, things have changed a bit. The troika was [inaudible 00:07:44] the institution that produced the policy recommendations that were executed by the Eurogroup. The troika was the ECB, the IMF and the European Commission. The last years, when it became clear that the policy of the troika was a complete failure in Greece and elsewhere, then in my view, and I think there are clear indications for that, the IMF was the institution that was, so to say, the most flexible in acknowledging that they were wrong. So far, the IMF played not a bad role in the last years. The beginning, yes, but not in the last years. In the last years, it was okay.

Overall, if the European Commission has understood, but it's not quite clear to me, but at least they know a bit better what is at stake than in the years before. If the European Commission fully understands what is happening, and is moving away from a purely neoliberal approach that it had for a long time, then we do not need the IMF and Europe can do it alone. We do not need the money of the IMF, nor do we need the guidance of the IMF. As I said, it's not needed in Europe at all.

SHARMINI PERIES: What is the European Stability Mechanism? What was it established to do, and what role has it played until now? What are they suggesting in terms of its renewed role?

HEINER FLASSBECK: Up to now, the role that it played was not a good one. The Stability Mechanism as such did not, as I said, do the evaluation of the country programs, of the adjustment programs of the country. That was done by the troika. Some people of the European Stability Mechanism possibly, I don't know, played a role behind the scenes, but overall, up to now it didn't have that role. If you want to introduce it as a European monetary fund, then it's okay but the question is only, what kind of direction do you give this fund in terms of the theoretical direction, in terms of the dogmatic direction? If it would be as neoliberal and as neoclassical as the Eurogroup has been I the past, then it's useless to have such an institution, in my view.

This is a very open question at the moment of time. As I said, at least the European Commission and the ECB, quite a few people have understood that the old approach was totally wrong. In my country, Germany, this is not the case here. The new government in Germany have been more orthodox in this direction than the government before.

SHARMINI PERIES: All right, Heiner. I thank you so much for that update and I thank you so much for joining us today. I'm looking forward to having you back.

HEINER FLASSBECK: Okay. Thank you for inviting me. Bye-bye.

SHARMINI PERIES: Thank you for joining us here on The Real News Network.


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