Fiscal consolidation – Liquidity without end

To rescue banks and governments, the European Central Bank (ECB) liquidity in unlimited amounts is available. This is stoking inflation. It comes to the bailout of the ECB since the outbreak of the economic crisis, and it can be summarized in one word – liquidity! The interest for this is currently at one per cent, with the consequence that the interest rates on the interbank market at 0.7 per cent have reached a low level. Moreover, the impact of the crisis prompted the ECB to further unconventional measures. As early as mid-2009, the Fed bought bonds to reduce volatility.

Then, when the Greek crisis broke out, they also intervened in the market for government bonds in which they bought from these papers the banks. For investors it is a buy signal for government bonds – because they can be unloaded if necessary at the central bank again. Perhaps the purchase of government bonds in the crisis is no alternative. Nevertheless, no case should it remain a permanent condition. In the medium plan, it is stoking inflation. For the ECB, it would be prudent to plan for a medium end of the acquisitions and signal a clear exit strategy.

Bonds in the capital market

The ECB continues, as before, that is what the central bank President Jean-Claude Trichet announced yesterday at a press conference. Firstly, we wanted to continue the unlimited provision of liquidity to banks and others continue to buy bonds on the secondary market. The signals, sent out by the central bank with these decisions are disastrous. This is because the financial crisis was largely caused by a policy of cheap money, in consequence of this; it came to an overvaluation of real capital goods. Now, we fight with the exact same strategy the impact of misguided monetary policy.

The consequences could be severe. With the second special measure the government bond purchase program, the ECB wants to prevent a widening of the debt crisis to other countries. It has not been possible. Rather, the decision takes the pressure off governments to bring their own budget back in order a vicious circle. This finally has to stop!