Interview granted to Nova Makedonija, Republic of Macedonia, March 16, 2015

Q. This month, the ECB embarked on a program of “quantitative easing” similar to the program of the Federal Reserve in the USA: injecting more than 1 trillion euros into the economies of the eurozone by buying bonds issued by governments, banks, and even certain commercial enterprises. This created some tensions with the Bundesbank in Germany. Why?

A. Article 2 of the Statute of the ECB (European Central Bank) limits its remit. The bank’s “job” is only to make sure that the eurozone as a whole doesn’t sink into deflation and, more importantly, doesn’t suffer from inflation. As opposed to the Federal Reserve, the ECB is not authorized by its Statute to take any steps to encourage economic growth or reduce unemployment in the eurozone. The Bundesbank regard the recent steps by the current President of the ECB, Mario Draghi, as a violation of the charter of the ECB and as a policy that may place the entire zone in danger for two reasons: (a) Easy money, the influx of euros issued by the ECB, may dissuade countries from undertaking painful structural reforms of their ailing economies by masking inefficiencies in their economies and the non-competitiveness of their products; and (b) A stimulus of 1.1 trillion euros in less than 2 years may engender inflation, which is exactly what the ECB is supposed to prevent.

Q. What can the Bundesbank do about this? Can it prevent the ECB’s quantitative easing?

A. Not initially. The ECB is autonomous and not subject to restraints by the central banks of the member countries. The Germans, as shareholders and members of the board of the ECB, voted against the new measures in January, but failed to elicit support from the other 27 countries represented in the ECB’s board of directors. Still, the ECB is resident in Frankfurt for a good reason: Germany is the EU’s largest economy and economic engine. It bankrolls most of the bailouts of countries such as Greece and Portugal and a large portion of the EU’s budget. It contributes a substantial portion of the ECB’s budget. So, if Germany decides that the policy of stimulus should be reversed or even that Draghi should go and be replaced with another banker, it has the power to accomplish these objectives.

Q. If a conflict between the Bundesbank and the ECB erupts, what will be the implications for the euro, the Macedonian denar (MKD), and Macedonmia’s economy?

A. Ever since Draghi announced the reflationary measures, the euro dropped like a stone and collapsed to its lowest level in 13 years. Strife between the 2 biggest stakeholders in the financial sector of the eurozone will depress the euro even further, to below 0.90 to the USD. A weak euro will have a salutary effect on European exports: European goods will be cheaper to buy with strong non-euro currencies. But, it will also have a devastating effect: the price of imports into the bloc will appreciate dramatically and this is unsustainable and injurious to the eurozone economies, which are all big importers.

The MKD is effectively linked to the euro and, therefore, faces the same mixture of beneficial and detrimental effects. Macedonian exports are rendered more competitive by the market devaluation of the euro, but imports into Macedonia from non-EU countries are more expensive. In the long run, the news is not good: a permanently weak currency distorts both monetary and fiscal decision-making and encourages uncertainty, profligacy, and inflation. Macedonia’s economy is weak and imbalanced with an enormous trade deficit. Any additional instability can push it over the edge. The first signs of trouble may appear in the financial (banking) sector, but they will soon spread into the real economy. In the short run, Draghi may be right: the anemic economies of the eurozone need to be remonetised and reinvigorated with this euro transfusion. In the long run, the Bundesbank is right: too much of this medicine could kill the patient.