Germany Could Break Euro. It’s Becoming Impatient with ECB’s Stimulus and Italy
Germany, or at least many politically influential Germans, think that Italy has become a major burden for the euro. The European Union (EU) punctually scolds Italy when it tries to bend the set of rules known as the Stability and Growth Pact (SGP). The SGP promotes sound public finances and fiscal policies. But, if Germany wants Italy out, it would spell the total collapse of the euro itself.
Because of the cost of reconstruction after two earthquakes in 2016, Italy has tried to soften its compliance with the SGP. But the outgoing prime minister, Mario Draghi, who is pro-Euro, also stretched the rules further. This put him on a collision course with Germany, which urged Italy to correct excessive budget deficits or public debt burdens.
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Italy and most other EU states accuse Germany of running an excessive trade surplus. These other countries complain that Berlin remains deaf and insensitive to its excessive imbalance in external trade.
Germany exports a lot, but does not buy enough from its European partners, violating European obligations. Meanwhile, Germany also complains that the European Central Bank (ECB) is favoring Italy with its quantitative easing (QE).
Conflict Between “Virtuous” Germany and Most of Eurozone Can Only Get Worse
The euro is no longer under threat from states that have not fully benefited from it. It is under threat from those that have gained the most from it, like Germany.
The first hint that 2017 could produce even more heated monetary policy debates in the eurozone has already emerged. The ECB has just announced it will extend QE beyond its deadline of March 2017. QE will last all of next year. Mario Draghi told journalists at a press conference that the ECB would continue to maintain its “presence” on the markets for a lot of time. (Source: “Markets soar as ECB extends QE programme until December 2017 – as it happened,” The Guardian, December 8, 2016.)
The ECB, noted Draghi, would continue to purchase bonds at a rate of €80.0 billion (US$85.0 billion) until the end of next March. Then, starting in April, it would reduce the rate to €60.0 billion per month ($64.0 billion). That might have been a concession to Germany, whose officials have been critical of Draghi’s management.
Draghi, meanwhile, said that the eurozone economy would grow, but his predicted rates of 1.6% or 1.7% are still rather lackluster. Inflation remains a far-off destination. The ECB sees inflation in the eurozone rising to 1.3% in 2017, 1.5% in 2018, and 1.7% in 2019.
Germans Shall Continue to Denounce Italy’s Weakness
Germany may ultimately demand the ECB shut off the credit tap, running like a bus straight against Draghi’s stimulus wall. The Germans could accuse Draghi of working to favor the Mediterranean countries, like Greece and Italy.
Draghi will insist that he is non-partisan and that the ECB works for the eurozone as a whole. The excuse for stimulus will be achieving the inflation targets of just under two percent per year. But that rate, as noted above, might not arrive until 2020 at the earliest.
But it’s not just Germany that sees an Italian risk. Italy is a burden for Europe because the “No” vote at the country’s recent referendum has weakened it politically. The referendum result has forced the resignation of a government intent on reform. The risk is that populists will eventually win the next elections, provoking more economic stagnation. The trigger for Italy’s next recession, as always, comes from the banks.
The problems of Italian banks are long overdue. They threaten the eurozone, directly and indirectly, because eurozone leaders like Germany are becoming ever more concerned. Germany will force member states to evaluate whether it’s worth it to keep Italy within the eurozone or accept the fact it should leave.
