The European Central Bank has injected huge amounts of assets into the economy over the past two years in the course of rediscounting public debt of the Eurozone countries, which represents an exceptional monetary measure, referred to as quantitative easing is intended to bring back the rise of the inflation rate, which is itself supposed to neutralize the deflationary and recessionary forces that are affecting development.
While, in the beginning, the single European currency was weighed down by the proclamation of new measures to support the European economy, it has recovered against the dollar once the ECB suggested that a descent in interest rates should not necessarily continue for the foreseeable outlook. At that moment, investors began to distrust the efficiency of the monetary policy of the ECB and were increasingly worried about the collapse of solutions. The hope expressed by its leaders that rates should not go lower is not something that could restore their confidence. Subsequently, the dollar plunged to the lowest level since mid-February against the single European currency.
This situation emerged when the recession started to put pressure on interest rates, as investment requirements were extremely low, causing the quantity of money borrowed to fall by diminishing the interest rate. Following this, the ECB announced that it would lower its major interest rate to zero with the plan of infusing inflation and increasing growth.
These conditions have caused the creation of three major problems. Firstly, even though the ECB lowered rates, the growth of the inflation rate did not return. Secondly, the euro lost its value because there was plenty of ready-to-use money in the financial sector of the Eurozone. Thirdly, there was an increase in public debt, as it served as security for the money produced.
Furthermore, all of the liquidity boosters made the euro more plentiful, decreasing its value, primarily against the dollar. This caused it to become cheaper in terms of interest rates, while on the other side, these financial actions constituted access to the unsound environment of public debt. Conversely, any downgrading of the green currency makes dollar purchases of gold less expensive for traders with other currencies. This is a trend expected to uphold the price of gold, which also benefits from its category as a safe haven, boosted by these circumstances.
Without the refinancing of the ECB, this kind of debt would have suppressed the economy by collecting the money of individuals and companies through the balance sheets of banks and insurance companies. So, Eurozone countries found willing creditors for their refinancing at zero or even negative rates.
However, the two key features of this kind of indebtedness are that the total amount is equal to the aggregate of the sums borrowed by the country and the interest on the debt that the government has agreed to pay. On the surface, one might conclude that it is acceptable to practice financing by debt, though in this case, without bearing the burden of salaries. To repay this debt, the state has only one option: to charge a tax by forcing taxpayers to pay it, which also has its particular cost.
In cases where the central bank lends money to the government at a zero rate, the central bank makes pure monetary creation since it does not pay off. This creates market tension, especially due to the growing complexity of the repayment of the debt reinforcing the distrust of depositors.
The only subject in the Eurozone that has the privilege of monetary creation is the ECB, although the Treaty of Lisbon bans lending directly to the states. It explains that it might mean rescuing the countries that would be those who receive the money from other members at their own cost, as well as to avoid causing inflation. Consequently, those would be the Eurozone members that agreed to the massiveness of their public debts, slightly in the form of deposits made with credits where other members act as lenders.
The situation as such would generate an extremely high inflation rate. Besides that, there would be strong tensions on interest rates or stimulated outcomes that would further increase it, creating an environment completely insupportable, both for households and companies. It would strongly affect the poorest ones, as well as inflict a heavy blow on the middle class, whose purchasing power would decrease so rapidly that the income tax would be impossible to collect in the amount planned by the yearly budget.
These were the reasons why monetary creation was presented as required. However, it is inadequate to stimulate growth and inflation this way because its actual purpose is to hide public debt in the balance sheet of the ECB through insignificant interest rates. Besides that, these are the banks that make this possible through very low or zero interest rates, and whose savings will ultimately be cut off by inflation.
European contracts do not allow the ECB to buy new debts issued by Eurozone members. It could only purchase them on the secondary market, using existing savings rather than printing new money out of nothing. However, such public debts stay in proper balance sheets only as much as it is required to relocate newly issued money through the quantitative easing program, which made these public debts replaced by nonexistent monetary assets.
All of this is a subject of financial authoritarianism, representing a situation that leads to recession and a struggle against debt repayment. Financial repression is a context characterized by artificially low rates to reduce the burden of the public debt burden.
This article is part of the academic publication Dividing by Zero by Ana Nives Radovic, Global Knowledge 2018
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