Monday, July 30, 2012

ECB May Be Preparing to Cross the Rubicon

This week, the European Central Bank (ECB) is going to announce policy measures to bolster the Euro and the bond markets in Spain and Italy (among others).  All of the available measures "Europeanize" the problems of Spain and Italy.  The real significance of this will be a disaster for Germany.  This won't be apparent in the immediate aftermath of the ECB policy announcements.  The instant reaction will be joy in Euroland and rallies in world markets. 

That happiness will gradually give way to the realization that nothing has changed in Europe.  The problems in Greece, Spain, Italy, and Portugal will continue to get worse, though, briefly, yields on their sovereign debt will be lower.   The idea that simply bringing in one more guarantor will solve the problems of Europe is almost laughable.  The media and the world's economists should be ashamed of themselves for believing that there is anything that ECB can do by itself to solve Europe's problems.  This is the same absurdity as believing that the Fed can offset the damage to the US economy being done daily by the Obama Administration.

Europe's problems stem from overwhelming levels of sovereign debt, absurd entitlement programs, and stultifying regulation of business and employment.  Nothing the ECB is mulling have anything to do with these problems.  All Draghi and the ECB are proposing is a temporary liquidity fix that effectively takes reform off the table.  This has been the strategy from the beginning -- find a way to increase the amount of sovereign debt without addressing the root cause of the problems of the Eurozone.  The ECB is leading Europe down the road to economic and political disaster.  One has to wonder if the US will take the same path.