by Nomi Prins
Concerning the Eurozone, he prophesized, “Differences between states will become too big and stability of the currency zone is in danger.”41 He warned that the fund’s cash could run out and be severely affected by the current situation, having its resources consumed in six to eight months. “That’s why I’m already asking member states for additional funds.”
Two weeks later, and feeling the heat at the Davos World Economic Forum, Trichet fielded questions about the viability of the Eurozone. Replying to criticism from Strauss-Kahn, Trichet said, “There is no risk that the euro will break apart.”42
His declaration coincided with mounting questions as to whether countries such as Greece and Italy would stay in the European Monetary Union. Yield spreads on Greek, Irish, and Italian bonds had jumped to record levels versus German ones, an indication of the perceived economic risk of those countries relative to the core of Western Europe.
On April 2, 2009, in London, the G20 organized its second meeting (of three) that year to discuss the international crisis. With markets in dire straits around the world and economies no better off, they attempted to devise more coordinated solutions.
In the group’s “Leaders’ Statement,” they unearthed another white knight. They chose to boost the IMF’s capacity to provide international liquidity and to cooperate in refraining from currency wars. To help their European-leaning ally, they agreed to triple the resources available to the IMF to $750 billion. All told, this constituted a $1.1 trillion program to “restore credit, growth and jobs in the world economy.” Combined with existing measures, this was a “global plan for recovery on an unprecedented scale.”43 Big US banks that hadn’t yet died were resuscitated by the Fed, and the rest of the world picked up the conjured-money tab.
The sheer unfairness of this exercise did not go unnoticed. Massive protests beset the G20 event. Demonstrators closed in on the Bank of England and stormed a Royal Bank of Scotland branch. The European population’s economic frustration and discontent escalated.44
Four days later, four other central banks—Swiss, European Union, England, and Japan—agreed to help the mother ship, to provide $287 billion to the Fed as currency swaps that could be used as credit lines to banks that needed quick cash.45 They would provide liquidity of up to £30 billion, €80 billion, ¥10 trillion, and SF 40 billion (Swiss francs). They fabricated such sizable funds in the hope of stabilizing an ailing and flailing banking system at the risk of losing credibility for impotence.
A month later, in May 2009, at a press conference at ECB headquarters, Trichet and ECB vice president Lucas Papademos announced another 50-basis-point rate cut on the main refinancing operations and the marginal lending facility, to 1.00 percent and 1.75 percent, respectively. The rate on the deposit facility remained at 0.25 percent.
This was the seventh time the ECB had cut the key rate since October 2008, when it was 4.25 percent. Trichet—his inner hawk shed completely—implied more to come: “We have not decided today that the new level of our policy rates was the lowest level.”46
The ECB was caught in a land of make-believe—a place where money was crafted to buy up hoards of bonds. The ECB’s latest unconventional policy entailed purchasing €60 billion worth of covered bonds47 and providing unlimited money to banks for twelve months. In a news conference that month of May, Trichet emphatically denied this measure could be called “quantitative easing.”48 But it was just that.
These actions, lacking any historical precedent, stirred the pot in Germany. About a month later, in Berlin, at a conference of the Initiative New Social Market Economy, a think tank for Germany’s metal and electronics sectors, chancellor Angela Merkel delivered her most public criticism of the central banks’ post-crisis actions.
She strongly admonished US political and loose banking policy: “Among the causes [of the crisis],” she said, “is ultimately behavioral patterns that were also politically supported, so for example through monetary policy in the United States and through refusals in the world’s biggest [financial] markets to accept any rules.”49 She didn’t want the ECB on the same policy path.
Merkel, pressing her commanding role in the EU and ascension in the global political arena, was incensed. “I view with great skepticism the powers of the Fed, for example, and also how, within Europe, the Bank of England has carved out its own small line. The European Central Bank has also bowed somewhat to international pressure with the purchase of covered bonds. We must return together to an independent central-bank policy and to a policy of reason, otherwise we will be in exactly the same situation in 10 years’ time.”50 Her words were prescient; that’s precisely what has happened. This was a major political statement. The fact that the leader of Germany was critiquing the US Fed was a monumental shift in PC-politics, one that would reverberate for years to come. And it was not just the Fed that Merkel was castigating but also the ECB and the BOE.
Economic conditions had declined, though. The May unemployment real rate for the sixteen Eurozone member nations rose to 9.3 percent, its worst level since the euro’s establishment. Conditions in Southern European countries were abysmal. (The rate would rise and eventually fall to that 2009 low in 2017, indicating the sheer lack of usefulness job-wise of the ECB’s monetary policy.)
European banks, fighting for their own survival, weren’t lending their cheap funds any more than US banks were. On July 2, 2009, Trichet showed his cards. He gave banks a pass for their hoarding behavior, saying, “The flow of bank loans to non-financial corporations and households has remained subdued, reflecting in part the weakening in economic activity and the continued low levels of business and consumer confidence.”51
About a month later, on August 6, when they warned of a corporate credit crunch at the Associated Press conference, Trichet and Papademos took more heat, this time from companies. To distance himself from corporate wrath and blame, Trichet said, “We do not intend to set ourselves up as a substitute for the banks.”52 But that’s the very thing the ECB had become, one step removed, by financing banks that wouldn’t finance companies in return.
The next day, August 7, with a muted recovery the best-case scenario, the BOE and ECB kept their benchmark rates unchanged at record lows—0.5 percent for the BOE and 1 percent for the ECB. The BOE decided to print another $85 billion toward asset purchases, supposedly to boost the availability of bank credit. “In the United Kingdom, the recession appears to have been deeper than previously thought,” the Bank of England said in a statement. “Though there are signs that credit conditions may have started to ease,” the statement continued, “lending to business has fallen and spreads on bank loans remain elevated. Financial conditions remain fragile.”
The adverse economic situation between the United States and Europe had elevated the euro. And with increasing confidence in the wake of dedicated central bank moves to keep money pumping, Germany and France (and Japan) finally returned to positive GDP growth during the second quarter of 2009 relative to a 1 percent GDP growth drop in the United States.53
This concerned Trichet, who tried to make it seem as if a strong dollar was the plan all along. On October 8, 2009, at a press conference in Venice, Italy, attended by Mario Draghi in his capacity as governor of the Italian Central Bank, Trichet repeated assurances that the United States wanted a strong dollar: “When the Secretary of the Treasury and our friend Ben Bernanke say that a strong dollar is in the interests of the US economy and that they are pursuing a strong-dollar policy, this is a judgment that is obviously very important for us and for the global economy.”54
When Trichet and Draghi were asked what message they would pass on from recent summits (the G20 meeting in Pittsburgh in September and the IMF annual meeting in Istanbul in October), Trichet emphasized cooperation. For his part, Draghi wanted a financial system “such that the banks will ultimately be able to finish repairing their balance sheets and which will ensure that the cycle starts up again.”55
So, although Draghi touted the notion of
there being a clear line drawn between the hierarchy of power and the subsequent autonomy of public policies in nations throughout Europe, he remained more concerned with the banks’ stability than with that of the various local populations. But that didn’t happen in practice. Crises amplified the split of the Eurozone economy into a more or less prosperous north and a debt-driven periphery in the south. With such contrasts, a fair and unified EU was impossible to attain.
When asked about the possibility of joint intervention of the United States and the ECB in the euro-dollar exchange rate, Trichet replied that both regions were cooperating. He said he was not campaigning for the euro’s international use.
Another more personnel-oriented question arose: whether Draghi had any interest in occupying Trichet’s post. Draghi replied with the perfect stoic composure of a political banker, “We have a President and he could not be better.”56 Draghi was hitting the big time: he was there with Trichet and Lucas Papademos, which boosted his platform and showed that he was not only part of the conversation but an equal in it.
Regarding the low level of current rates on October 9, Trichet remarked that anyone who considered the situation a return to business as normal was “absolutely plain wrong.”57
By late October 2009, the decline of the US dollar benefited the American economic recovery, making US exports cheaper. This was the type of currency war tactic the United States would complain about other nations using later. The move drew criticism from Europe, Japan, and the Persian Gulf countries. The weaker dollar made American industry more competitive and improved the US trade deficit, but in Europe and Japan the weaker dollar brought reductions in exports and a swerve off the trajectory toward economic recovery.
Trichet later told the Financial Times that in late 2009 Bernanke effectively handed over his money-conjuring playbook, saying, “Now, Jean-Claude, it’s your turn!” Trichet observed, “We—the central banks of the advanced economies—had to embark on very bold, non-standard measures and the governments had to step in massively.… A dramatic great depression was avoided.”58 He might have been skeptical at the onset of the money-conjuring policy, but like his monetary mentor, Bernanke, he believed in his own hype.
“NO-LIMIT” QE
Throughout 2010, central banks of developed countries advocated cheap-money policy despite no discernible evidence of a return to financial normalcy as a result. The ECB left rates at 1 percent the entire year, the Fed kept rates near zero, and the BOJ left rates unchanged—and a slew of newly crafted policy measures littered the markets.
Within continental Europe, new problems were rising; heightened risks of sovereign debt defaults, greater political differences, and a growing economic divide among countries.
In particular, the Greek economy suffered from a prolonged recession that brought it to the verge of bankruptcy. The most elite politicians and central bankers wanted to secure debt repayments through the use of broad reforms and austerity measures.
Greece may have been the first out of the Southern European countries to take on such burdens, but it would not be the last. Western Europe would decide the financial destiny of Southern Europe, but even that provoked dissent. Germany and France were at odds on how to do it. Germany (and the ECB) played hardball. It wanted Greece to undergo a strict austerity program policed by the ECB, European Commission, and the IMF. France wanted a more reasonable approach. Both used the solidity of the EU as a reason for their preference.
Across the Atlantic, on January 28, 2010, Federal Reserve chair Bernanke was confirmed by the US Senate to a second term. The 70–30 vote was the weakest endorsement in the Fed’s ninety-six years of existence. While Republicans pushed fiscal conservatism, many Democrats perpetuated the belief that the Fed’s cheap money would filter through to the population. Senator Bernie Sanders, who would later run for US president, noted something about the vote relevant to the US and European populations: the tepid vote sent a “clear message to the Fed and to Chairman Bernanke: Start representing the needs of the middle class and working families, not just Wall Street CEOs. Stop credit card ripoffs. Free up credit for small businesses. Break up big banks, and stop the secrecy surrounding trillions of dollars in blind loans.”59 The Fed would begin its second round of QE (or QE2) on November 3, 2010.
As concern spread from Greece to the heavily indebted PIIGS countries (Portugal, Italy, Ireland, Greece, and Spain), on January 14, 2010, Greece announced an ambitious “Stability and Growth Program” designed to cut its budget deficit from 12.7 percent (in 2009) to 2.8 percent by 2012.60 It would ostensibly bring the deficit into alignment with the convergence criteria of the Maastricht Treaty.61
By late March, Eurozone leaders and the IMF reached an agreement on how to rescue Greece.62 Trichet, who had initially opposed the joint measure, said he was “extraordinarily happy that the governments of the euro area found out a workable solution.”63 French president Nicolas Sarkozy did not want the IMF involved in the agreement, but German chancellor Angela Merkel insisted on it to avoid Germany having to take on a bigger individual burden.
The IMF has always had a unique connection to the French government. Europeans have always steered the IMF, and France has supplied more leaders than any other country. At that time, Dominique Strauss-Kahn, the former French minister of economy and finance, was managing director of the IMF. If Sarkozy was to be all-in on the IMF taking action, it would be as much an IMF move as it would be a French one.
In the central banking arena, if Greece—and, many believed, the Eurozone—was to be saved, it rested on the willingness of France and Germany to come to an agreement. If the IMF was to go it alone without the approval of the Germans, the French would hold the bill for Greece. But if they were to go in with the Germans, it would be a “European” move.
On April 27, rating agency Standard & Poor’s cut Greece’s credit rating to junk status. It would also downgrade Portugal.64 The risk of a general European sovereign debt crisis caused the French CAC 40 to fall 3.83 percent and the German DAX 2.73 percent. Gold prices jumped as investors sought safe havens disconnected from central banks and the global monetary system.
The head of Greece’s central bank, George Provopoulos, tried to calm markets by reassuring the world of his commitment to spending cuts and austerity measures. But the truth of the matter was that central banks concocted trillions of euros for banks to restore bankers’ confidence. The only checks handed out to the average person were in the form of social welfare checks, the same ones they were seeking to cut through austerity-based policy.
Ten days later, on May 7, the German parliament approved the bailout plan the IMF and EU put together to provide Greece with €110 billion (US$146 billion) in loans over three years.65 Germany provided the largest component, about €22 billion, of the EU’s €80 billion portion. In exchange, Greek prime minister Andreas Papandreou committed to austerity measures, including €30 billion in spending cuts and tax increases.66
The Fed remained anxious about a European spillover back into the United States. On May 9, the Fed responded to the Greek bailout by reestablishing temporary US dollar liquidity swaps.67 Bernanke took pride in his role as global policy executor, noting that for the ECB, “There will be no limit to the amount that they are going to be prepared to buy.
Recall that Bernanke said, “I just want to emphasize what an extraordinary step this is, particularly for the ECB.… I would also characterize Trichet’s call to me as being a personal appeal.… I got very much some of the same tone from Mervyn King, and, to a lesser extent, even from Shirakawa, who says that Japan is also facing pressure, and they are very concerned about contagion.” Though these bankers hailed from different countries, they were by no means foreign to one another, given their periodic encounters during the year at their regular meetings at the BIS, in Basel, Switzerland.
Also on May 9, 2010, the Eurozone nations created the European Financial Stability Facility (EFSF) with €440 billion in capital. The European financial stabil
ization mechanism pledged loans up to €60 billion. The IMF pledged €250 billion,68 concluding that “to buy securities helped to ease some of the more severe euro area bond market pressures. After the announcement of the securities purchase program in early May, spreads over German sovereign bonds on Greek, Portuguese, and Irish debt had narrowed.” It would not last. Market liquidity in Europe remained strained. By July 2010, the ECB had purchased €59 billion in government debt from the secondary market to provide liquidity.69
Although the euro might have brought the participating members together, it did not mean they shared an equal part in the economy. Germany, a traditional power in Europe, was positioned to guide the major Western states while leaving the southern ones to either follow or be left behind. In many ways, that’s what happened. Easy-money policies simply exacerbated the trend.
Less than a week later in May, Spanish prime minister José Luis Rodríguez Zapatero (of the Socialist Workers’ Party) announced austerity measures, an “extraordinary effort” to save Spain €50 billion. He cut government spending and employees’ pay by 5 percent. In the third quarter of 2008, the Spanish economy had officially entered recession. By February 2010, it had supposedly “exited the recession,” but once Greece faltered, the so-called exit was imperiled.
In an attempt to allay the fears of unions and his constituency, Zapatero stressed that, despite new austerity measures, “the pillars of the welfare state will remain untouched.”70 The response brought about the first general strike since 2002, where ten million workers marched in solidarity.71
Austerity was a misguided response to a financial crisis caused by banks fortified by monetary policy crafted by the Fed and exported to its G7 allies. But it wasn’t seen in that context. On May 25, 2010, Italy agreed to a €25 billion austerity package to cut its deficit from 5.3 percent to 2.7 percent by 2012.72