Page 7 - ISQ UK_October 2017

JANUARY 2022

“ The ECB’s own estimates confirm that following massive

deficit spending in 2020, governmental fiscal largess will have
risen again, by 3.4% when data for 2021 is released, and to fall
only slightly, by 1.2% in 2022 ”

that actively avoids them! Even allowing for the robust economic inflation is imparting significantly adverse pressure on the growth
rebound both the Commission and the central bank forecast for outlook.
this year, few regional governments are willing to reduce spending
and curb elevated deficits in any meaningful way. The ECB’s own
estimates confirm that following massive deficit spending in 2020,
governmental fiscal largess will have risen again, by 3.4% when “The broader challenge for both regional
data for 2021 is released, and to fall only slightly, by 1.2% in 2022. governments and the central bank is that the
prevailing policy setting…”

“…regional government spending will The broader challenge for both regional governments and the
consolidate the COVID pandemic increase, with central bank is that the prevailing policy setting, whilst appro-
very little in the way of improvement in the priate to address the worst of the impact from the pandemic,
fiscal position of most countries.” completely ignores demographic and other structural impedi-
ments to long-term sustainable growth. The region has an ageing
population, a fact which the prevailing monetary and fiscal policy
What this means is that regional government spending will con- setting overlooks, ignoring the evidence of altered consumption
solidate the COVID pandemic increase, with very little in the way patterns when citizens reach retirement age. To add to this the
of improvement in the fiscal position of most countries. In fact, demographic challenge, the fact that the region’s taxation system
countries such as Italy and Spain have actually seen their struc- routinely hampers the middle classes, businesses and invest-
tural deficits increase. ment, the inescapable conclusion is that the policy-setting looks
eerily similar to that implemented by Japan in the early 1990s.
What is entirely apparent is that persistent negative rates and
equally persistent liquidity injections, combined with relent- And so, inevitably and inexorably, to TARGET 2. Under the guise of
less government spending, have delivered no obvious multiplier “whatever it takes”, Dr Mario Draghi, the former president of the
effect. It is worth reminding ourselves that the region’s major ECB, swept all regional bad debts under the convenient cover of
economies were stagnating even before the onset of the pan- the regional banking settlement system.
demic and despite the Juncker Plan which drove hundreds of
billions of euros in investment. Worse still, despite ECB Governing
Council member, Mr Klaas Knot’s recent observation that the
central bank is “on track to end bond purchases completely by “By this subterfuge have still aggressively
end-2022, following which the policy rate can go up”, the majority leveraged regional banks been prevented from
of senior policymakers acknowledge that the central bank is effec- failing…”
tively trapped by its own policy. Any attempts to normalise over
and above that already announced would likely have a significant
adverse impact on the region’s bond markets and in consequence, By this subterfuge have still aggressively leveraged regional banks
deeply indebted governments would suffer the impact of a sharp been prevented from failing. Officially at least, no problem exists.
increase in borrowing costs. Yet on the other side of the coin, it This is because the ECB and all national central bank TARGET
cannot maintain the current pace of monetary support because 2 positions net out to zero. To its designers, a systemic failure

7