[Under the continued impact of the European debt crisis and economic depression, Europe's progress from monetary integration to fiscal and even political integration will not only not be smooth sailing, but there is also the risk of possible reversal]
At the end of last year, the author visited investors in five European countries within two weeks, during which he had in-depth exchanges with officials from four major European central banks, including the Bank of England, the European Central Bank, the Bundesbank and the Bank of France. It is not difficult to find that although they are both in the EU, due to the huge differences in economic growth, employment levels, asset prices and other aspects of each country, the four central banks have gradually drifted apart in terms of economic and monetary policy attitudes. In the author's opinion, the increasing separation of major European central banks may be the epitome of the growing risk of fragmentation faced by the Eurozone and even the European Union.
Bank of England: Is having an independent currency actually a better option?
The author first visited the Bank of England in London.
Across London, I couldn't help but be struck by the busy construction sites in London. While Europe as a whole is still reeling from the global financial crisis five years ago, London is full of people and traffic. What is particularly impressive is that just as many foreign friends commented that Beijing and Shanghai ten years ago were "big construction sites", today this title can be well-deservedly given to London.
In fact, London house prices rose by around 65% from the beginning of 2009 to the end of 2014. The rise in house prices and the large inflow of foreign population have stimulated the supply of housing in London, leading to the unprecedented prosperity of London's construction industry. Reinforced concrete structures and construction workers wearing hard hats can be seen everywhere in London today. The bubble in real estate prices has even prompted the Bank of England and the government to take measures to maintain financial stability, including tightening mortgage loans and raising taxes to curb speculation in the real estate market.
Behind London's prosperity is that the British economy has initially emerged from the haze of the financial crisis. Currently, many institutions, including the British Chamber of Commerce, predict that UK economic growth will reach about 3% in 2014, which is almost the highest among major European economic powers. In addition, the UK's unemployment rate has also dropped to 6%, the lowest point since 2008.
The UK's better economic recovery is certainly related to the fact that the UK does not have a rigid labor market and inefficient public sector like southern European countries. In the author's opinion, its independent central bank and its ability to adopt flexible monetary policies are also indispensable. It can be seen that after the financial crisis, the Bank of England adopted two rounds of quantitative easing measures from April 2009 to May 2010 and October 2011 to November 2012, plus some emergency measures taken during the financial crisis. Liquidity injection measures have expanded the balance sheet more than three times. Easing monetary policy has supported asset prices and consumer spending, and has also boosted exports through the depreciation of the pound.
The Bank of England's current "happy worry" is that the economy has recovered, but should it raise interest rates? Taking into account that the current level of inflation is still low, the Bank of England decided to keep the policy rate and balance sheet size unchanged at its interest rate meetings in the past few months.
Bundesbank: Firmly opposed to the European Central Bank’s direct purchase of member states’ government bonds
Perhaps to a certain extent, the Germans are a little envious of the independent monetary policy facilities that the British have. Germany, which joins the Eurozone, will often have to accommodate the economic conditions of other countries in the zone and be forced to make many compromises. However, the Bundesbank has always had a tough attitude towards the European Central Bank's attempt to directly purchase government bonds to implement "quantitative easing".
Looking back on 2012, when the European debt crisis was at its worst and the risk of euro zone disintegration increased at an unprecedented level, European Central Bank President Mario Draghi was forced to implement Outright Monetary Transaction (OMT) to purchase the treasury bonds of member countries in a way to hedge liquidity injections. Finally, European financial markets were stabilized. At that time, the only person on the Monetary Council who voted against the decision was Bundesbank President Weidmann.
Since the second half of 2014, the Eurozone economy has fallen into a downturn again. By December, the Eurozone CPI fell into negative growth for the first time in five years. However, at the latest regular meeting of the euro zone monetary policy, Draghi publicly admitted that the statement of "expanding the balance sheet" did not receive "unanimous consent." According to subsequent media reports, the two members who voted against were all from Germany. .
In Frankfurt, the attitude of Bundesbank officials is consistent, that is, they oppose further expansion of the European Central Bank's balance sheet, especially expansion of the balance sheet by purchasing member states' treasury bonds. There are two main reasons: First, they are concerned about the effects of quantitative easing. Secondly, they are worried that buying government bonds will delay structural reforms in other European countries.
In fact, there has always been debate about the effectiveness of quantitative easing. Before the European Central Bank officially started a new round of quantitative easing in October 2014, the European Central Bank had implemented multiple rounds of long-term refinancing operations and targeted long-term refinancing operations. The ECB allows eurozone banks to borrow unlimited amounts from the ECB at very cheap interest rates. However, the scale of borrowing for refinancing operations is always lower than expected, and banks that have already borrowed money have also taken a large number of proactive repayments, which shows that the real economy's demand for currency is not strong and the effect of money printing may be limited.
Germany, on the other hand, does not have high hopes for the further depreciation of the euro to promote exports – in fact, Germany's exports are still good and have supported the moderate growth of the German economy. On the contrary, too cheap credit and housing mortgage interest rates have pushed up Munich. Many Germans have complained about the housing prices in major German cities such as Berlin and Berlin.
In terms of structural reforms, the European Central Bank's direct purchase of member states' treasury bonds will reduce the financial pressure on heavily indebted countries and may also reduce the motivation of these countries to implement structural reforms – which is exactly what the Germans hate most. Since the end of last year, German officials and German media have suggested that Germany has even prepared for Greece's exit from the euro area, which may interrupt fiscal austerity and structural reforms due to the general election, and does not hesitate to cause the euro area to be affected. Although German Chancellor Merkel denied this statement, it also reflects Germany's tough stance on this issue to a certain extent.
ECB and Banque de France: “Better compromise” plan and legal dilemma
Naturally, you will not miss the famous city Paris during your trip to Europe, but what makes me deeply moved is the desolation in Paris, which is very different from the bustling London.
Many roads in Paris still look old and narrow, and have not been renovated since I lived there in 2000. Paris's ring road is clogged with traffic. When exiting the Paris Eurostar train station , there was a serious shortage of taxis and I had to wait for a long time. Interestingly, even the staff of the Bank of France seemed to be affected by this depressed atmosphere. The lady at the front desk even forgot to notify the interviewee who had made an appointment with the author. Almost every French person is complaining about the government's poor economic policies, and many people are calling for emigration abroad. No wonder some media reported that the biggest buyer of London real estate this year was the French.
The scene in Paris represents to a certain extent the depression of the French economy and even the Eurozone economy as a whole. In 2014, France's GDP registered zero growth in the second quarter, and the quarter-on-quarter growth rate in the third quarter was only 0.3%. The Bank of France predicts that the economic growth rate in the fourth quarter will fall back to 0.1%. France's unemployment rate increased for the sixth consecutive year in 2014.
Considering the current economic downturn in the Eurozone as a whole, with the unemployment rate still high at double digits, most European central banks, including the Bank of France, support the European Central Bank's expansion of its balance sheet to stimulate the economy. However, due to various factors, the European Central Bank has been unable to take the initiative to purchase bonds. In turn, as banks continued to repay borrowings under the "long-term refinancing operations", the ECB's balance sheet at the end of 2014 shrank by nearly 1 trillion euros from its peak in 2012.
Although the European Central Bank finally launched the long-called "quantitative easing" in October 2014 and actively purchased securities to expand its balance sheet, the current operations of the European Central Bank are based on asset-backed securities (ABS) and asset-covered bonds ( The stock of these two securities is quite limited, and the scale of purchases by the European Central Bank in the past few months is not even enough to hedge the impact of bank repayments.
From this point of view, if President Draghi is to realize President Draghi's commitment to restore the European Central Bank's balance sheet to the level of early 2012, it is essential to expand the target of "quantitative easing" to the national debt of member states. In order to obtain a compromise from Germany, the European Central Bank is currently considering purchasing the sovereign bonds of each country in proportion based on the paid-in capital of the euro area central banks. Other "compromising" arrangements include that in addition to the direct purchase of government bonds by the European Central Bank, part of the government bonds are purchased by central banks of various countries at their own risk. But even if these plans are adopted, there is still uncertainty about whether Germany can reach an agreement with other countries on core issues such as purchase quantity and risk sharing.
In addition, there are certain legal obstacles for the European Central Bank to directly purchase the treasury bonds of member countries in the region. In February last year, the German Federal Constitutional Court expressed concerns about OMT, saying that the European Central Bank's OMT may violate EU law and requested the European Court of Justice to rule on OMT. If the OMT plan is ultimately ruled as "illegal" by the European Court of Justice, this will also hit the European Central Bank's design of "quantitative easing".
Are European countries drifting apart?
Although building a unified Europe is the dream of many European politicians, and the establishment of the European Union and the launch of the euro also embody the efforts of several generations of Europeans, the author has observed that under the impact of the economic downturn, whether among European countries or In some countries, there are signs of increasingly acute conflicts.
Due to the ongoing economic depression and unemployment, the political forces in Greece, Spain and other countries have become more left-leaning. Not only have far-left parties won more seats in parliament, there are also far-left parties in Greece that may come to power and overturn the agreement with the EU. Fiscal austerity in exchange for the possibility of a bailout deal.
In turn, the German public is increasingly hardline and right-leaning over endless bailouts for other countries, and the talk of allowing Greece to exit the eurozone is representative of this. Some analysts believe that the recent terrorist attacks suffered by France are partly due to the rise of far-right forces in French society and the intensification of conflicts between Muslim immigrants.
And if the decision to remain sterling was controversial in the UK at the dawn of the euro, today there are undoubtedly more Britons who feel lucky to be independent from the eurozone. Prime Minister Cameron even has plans to hold a referendum in 2016 to decide whether the UK should leave the EU.
From this point of view, the contradictions in the policies of the major European central banks may be just a microcosm of the various conflicts that are emerging throughout Europe. Even if Germany finally agrees to the ECB to implement a certain scale of member country debt purchases, many deep-seated problems within Europe will not has been solved.
In turn, if the European Central Bank eventually directly purchases Greek bonds that have long been "junk grade", it will even cause more anger and dissatisfaction among Germans. The author believes that although it is too early to conclude that the EU or the Eurozone will eventually fall apart, it is also an indisputable fact that the Eurozone has not experienced the test of a real crisis since its establishment. Currently, under the continuing impact of the European debt crisis and economic depression, Europe's progress from monetary integration to fiscal and even political integration will not be smooth sailing, but there is also the risk of possible reversal, which requires close attention. Photographer/Wang Xiaodong[Weibo]
(The author is chief economist of Mizuho Securities Asia)