Monday, January 14, 2013

"Our Mandate Is Not Full Employment"

ECB press conference, Jan. 10th, 2013:
Question: The fragmentation in the labour markets seems to be getting even more pronounced, especially in youth unemployment, which is almost 60% in Spain and 8% in Germany. Overall unemployment is over 25% in Spain and a little over 5% in Germany. At what point does this become an issue for monetary policy?
Draghi: Our mandate is not full employment. Our mandate, and our statutory objective, is to maintain price stability.
Question: Jean-Claude Juncker has said that too much fiscal consolidation could have a negative effect on countries like Spain, because unemployment is so high. What can you say about that?
Draghi: This fiscal consolidation is unavoidable, and we are aware that it has short-term contractionary effects. But now that so much has been done, I do not think it is right to go back.

There was a self-congratulatory air at the ECB press conference last week. Draghi took credit for declining bond yields and for “positive contagion” in the financial markets. He acknowledged that unemployment was high, but said that it was inevitable, and would only subside when structural reforms are completed and budgets are balanced. He reminded his audience that “our mandate is not full employment”.

The poor man must be suffering a considerable amount of cognitive dissonance, since the dials on the ECB’s dashboard tell a different story than the happy talk that he is providing:

Economic growth: continuing decline

Unemployment: 12% and rising
Industrial production: continuing decline
Peripheral government fiscal balance: large, persistent deficits
Private sector loan growth: negative

The eurozone is in a persistent recession with high and rising unemployment, large fiscal imbalances, declining industrial production and ongoing credit contraction. The ship is sinking, but “flotation is not our mandate”.

The ECB thinks that its monetary policy has been successful because “inflation expectations for the euro area remain firmly anchored”. This is analogous to the Fed’s satisfaction with its performance during the Depression because the dollar maintained its gold price, and employment was “not its mandate”. The world maybe plunging into catastrophe, but that is beyond our mandate.

In peripheral Europe today, an irresistible force is colliding with an immovable object: voter dissatisfaction continues to build as unemployment rises, while the message from Europe is that the pain must continue into the indefinite future. Stuck between these forces is the political class, which cannot ignore the will of the people but which lacks the intellectual capacity to challenge Europe’s ruinous orthodoxy. Just as the only people who held the key to recovery in the Depression were the “prairie radicals”, so today anyone who would challenge the ECB’s deflationary prescriptions is a left wing radical or, even worse, an inflationist!

The European Right sees the euro and its accompanying depression as a means to “reform” southern Europe and make it more like Germany, while the European Left thought that they were successfully building “socialism in one monetary zone” until things went a bit haywire. There is no one in the eurozone who appears capable of explaining that the cost of “structural reform” is extremely high and in fact counterproductive.

What makes the Germans think that a starving person is more likely to reject unions and the welfare state than one with a full belly? The Germans think that the lesson of their history is that inflation leads to political chaos. It isn’t. The lesson of German history is that deflation leads to political chaos. They have somehow forgotten that 1929-33 was a period of deflation, depression and unemployment.

Europe as a bastion of liberal democracy is imperiled by incompetent monetary policy based upon a willful misreading of economic history. I find it frustrating that a lesson so well understood in the anglosaxon world has been forgotten or was never learned on the Continent. This is at root a cultural problem. Right now, every anglosaxon central bank is either experimenting with reflationary policies or is at least actively debating them. Somebody needs to start translating these websites into European so that these ideas can start percolating.

To give you a flavor of where the ECB stands on the matter of unemployment and unconventional policies, this is what Draghi said last week:
Each central bank has its own institutional set-up, has its own statutory objectives and its mandate. Within this institutional set-up, within the statutory objectives, each central bank tries to steer private sector expectations. As far as our mandate goes, namely maintaining price stability, I think we’ve shown how to do it.

Translation: “Employment is not our mandate”. It would be one thing if Draghi were asking for an expanded mandate. But he isn’t, because he evidently believes, with Andrew Mellon, that unemployment is a way to purge the rottenness out of the system, and that people will work harder and live a more moral life. Mellon quit before he was impeached.

I cannot blame Draghi for complying with his insane mandate, but I can blame him for embracing it without a struggle. His leadership is catastrophic.

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