There are signs that pressure is building for a radical monetary experiment in the eurozone. Over the past four years, the central bank has printed more than €2trn euros, flooded the banking system with money, bought up government bonds and slashed interest rates down below zero in an effort to boost its flagging economy. In 2017 and 2018, all that printed cash briefly fired life into the European economy. But now it is flagging again. Germany is close to an outright recession, growth is tepid in France, and Italy is no closer to a sustained recovery than it has been since it joined the euro 20 years ago. This is the problem facing Christine Lagarde when she takes over next month as president of the European Central Bank (ECB). It seems certain she will have to do more. But what?
Will MMT go mainstream?
The ECB can’t cut interest rates any more and it has already bought up almost all the bonds it is allowed to. If it wants to go any further then it needs to come up with something different. The outgoing president of the ECB, Mario Draghi, last week spoke approvingly of “modern monetary theory”, the economic theory that the government can take on almost unlimited debt financed by the central bank so long as inflation isn’t a problem, then use that money to finance its spending. There have been plenty of other hints the bank is looking at some form of “people’s QE” – putting printed money directly in people’s pockets. It remains to be seen whether it actually happens or not. But there is no question it is under discussion. There is a problem, however – and not just the obvious one that it may not work. It will create even worse political divisions within the eurozone than exist already. Why? Because it is Germany that will benefit.
Of all the countries within the zone, the one that most needs a fiscal boost right now is Germany. It is the major economy in the most trouble – its export-driven model is running out of steam, and its massive car industry is over-reliant on big, highly polluting diesel vehicles at precisely the moment when the world has turned against them. It needs to find a way of kickstarting domestic demand, and the most obvious way to do that is with higher government spending. Chancellor Angela Merkel has already announced plans to spend €50bn on environmental initiatives and more infrastructure spending is likely to be unleashed soon. There is even a debate underway about relaxing the constitutional requirement to balance the budget.
In fact, Germany could easily afford all of that with more borrowing. Its debt-to-GDP ratio is only 60% and its bonds are on negative yields. Borrowing could hardly get any cheaper. And yet instead it looks as if the ECB will simply come along and print the money for it. What that means is that the whole zone will in effect finance a blast of infrastructure spending in Germany.
The winner takes it all
Right from the launch of the euro two decades ago, it has been clear there has been one big winner from the project: Germany. From the start, it locked in a low exchange rate that massively boosted its exports. Ever since the euro was launched, Germany has grown consistently faster than France (the two countries used to be more or less equal) and far, far faster than any of its southern European rivals. In effect, the euro has sucked demand and jobs from the rest of the zone and shifted them to Germany.
Now it looks as if it will be the main beneficiary of the next round of printed money as well. Demand will be boosted in that country, with money that it will never have to pay back. Its wages will continue to grow, it will renew its roads, railways, airports and energy systems, and it will do so at the expense of its neighbours. That’s great for Germany. But it is hardly fair on the other countries – especially those that received no form of fiscal boost when they were in deep trouble. The other countries have already started to notice they are stuck in a monetary system that only works for Germany. Helicopter money will just confirm that all over again – and create an inevitable backlash.