Deutsche Bank Assails ECB Policies a Failure, says Draghi Has Created ‘Moral Hazard’

Deutsche Bank is giving zero fucks with this assessment of the ECB’s QE programme. It’s very simple, actually. They believe the mechanisms by which the ECB creates digital currency — out of thin air —  in order to buy EU bonds, so that yields drop and member states get to enjoy super cheap and artificial borrowing rates is inherently bad for the overall economy. Moreover, they believe it creates moral hazard, which is backed up by data which suggests deficit nations in the EU have decelerated the pace of reform during QE and instead lounged on the beach, like sloths, eating yams.

It’s worth noting, ECB QE is scheduled to expire in March of 2017.

“While European central bankers commend themselves for the scale and originality of monetary policy since 2012, this self-praise appears increasingly unwarranted,” he writes, going on to conclude that the “ECB is stuck … between an unfavorable equilibrium of low growth, high unemployment and zero reform momentum on the one hand and growing risks to core country balance sheets on the other.”

Folkerts-Landau lists a number of the dastardly deeds of the ECB’s 80 billion-euro ($89 billion) a month asset-purchase program, which, lest we forget, has so far achieved its aim of preventing a spiral of deflation in the euro area: Bond prices have lost their signaling function; national balance sheets risk being overburdened; savers are being penalized; asset bubbles are forming. You may recognize some of these arguments.

The data seem clear: “Deficit countries” – France, Estonia, Greece, Ireland, Italy, Portugal, Slovakia and Spain – made a much greater effort in 2011 and 2012 than they did last year. Indeed, the OECD itself says that in the early part of the European debt crisis “reform responsiveness” was greater in countries that were facing more difficult circumstances, though that correlation has broken down somewhat lately. The OECD also warns against over-interpreting year-over-year changes too much, as many types of improvements to economic frameworks take years to complete.

But Folkerts-Landau draws a conclusion that the OECD does not, namely that the reason for this slowdown is the more favorable conditions that the deficit countries are enjoying on bond markets, in particular after the ECB announced its OMT bond-buying plan in 2012. That compressed bond yields as well as the urge to reform, he argues.

“Any incentive to reform disappeared with the guarantee to bail out countries in need via OMT,” he writes, not mentioning, for instance, the labor-market reforms that Italy has made since then or the constitutional revamp that’s scheduled for December.

And in the end Folkerts-Landau comes back to what has been the classic point of German criticism of ECB policy, namely that it creates “moral hazard.” While the presence of a central bank ready to step in in times of stress always bears the risk of encouraging even more lax behavior in the future, Folkerts-Landau sees the ECB under President Mario Draghi on a completely different scale.

“With Mr Draghi’s promise of ‘whatever it takes,’ the implied moral hazard was pushed into a much larger dimension,” he writes. “It remains to be seen how it will escape from this dilemma of its own making.”

The Bundesbank probably wishes Draghi would die in a car accident for what he’s doing to their Austrian school of economics. He’s made a mockery of them, at the expense of the German taxpayer, for the benefit of the Italians, Greeks and the Spaniards.