Monetary policy

How would you feel if you suddenly discovered that you were much wealthier than you thought? Well great, obviously. But after the initial amazement, your mind would turn to what you should to do with your unexpected riches. And that’s where things usually get complicated.

In a world ruled by quantitatively easing, unorthodox central bankers, Germany’s hard money focus may appear anachronistic. But given Germany’s history, it is entirely understandable for them and should be a lesson for all.

A curious coalition of exporters, newspaper commentators, Labour, the Green Party, and New Zealand First wants the RBNZ to relinquish its traditional focus on inflation. Instead, they want the central bank to intervene and curb the rising exchange rate of the kiwi dollar.

The ECB now occupies a bizarre position in the pseudo-democracy of the EU. On the one hand, it has the power to compel struggling countries to implement austerity policies, cut their welfare states, reform their labour markets and change their tax systems. On the other, it effectively forces the stronger economies of Europe into a de facto liability union as all the ECB’s risky bond purchases are ultimately underwritten by the taxpayers of countries such as Germany, Luxembourg and Finland.

As much as I understand the esteemed economists’ desire to end the euro crisis quickly, even with bizarre proposals such as euro devaluation, not every medicine is effective and not every cure is better than the disease.

Europeans should be grateful to Signor Draghi as he has given them a glimpse into their future. It is a future in which the continent’s economic fate may be determined not by parliaments, governments, treaties or courts but by its central bank. It is a scenario in which every owner of money will be robbed a little each year to pay the debts of sovereigns and the financial sector.

Continuing the Target 2 madness prevents the long overdue adjustment of intra-European trade and payment balances. It locks both PIIGS and GNFL countries into a monetary system that works for neither. If Europeans only understood half the severity of this problem, there would be a revolution tomorrow morning. For the time being, however, the European soccer cup provides a most welcome distraction.

Draghi’s central bank thwarts any attempts at economic reform by taking yields pressure off periphery governments. It keeps a terminal monetary union on life support without curing its many diseases. It creates vast amounts of money which one day may well create inflation outside asset markets, where it is already underway. And it is an imaginative monetary scheme that keeps on giving as long as the next shot of monetary stimulus is in sight – but not a single day longer.