Don’t envy Mario Draghi. He is sitting in his new tower in Frankfurt and must feel beleaguered. A powerful minority of his board makes loud noises about the planned bond purchase program. In so far that monetary policy has aecoinoimic-psychological moment this is a bit like a ‘left hand gives, right hand takes’ – effect. At the same time he must be plagued by deep envy when he looks across the Pond. In contrast to the Eurozone the US has become a job creation machine. In November 321 000 new jobs were created.Even better, the overall wage bill is supposed to increase by 5% over the year. This additional income will become one of the drivers of economic growth that is projected to be in the 3.5% range in 2015. Compare this to the Eurozone. Its growth projection has just been further downgraded to less then 1%; the German Bundesbank downgraded its projection for the largest economy of the Eurozone to 1% in 2015. This is not the locomotive the Eurozone would need to escape its growth trap. Simultaneously, inflation crawls back to .4% across the Eurozone, with some economies since quite a while sitting in a outright deflation. The US record may be the result of a number of intended and unintended effects but the case can be made that the policy mix of the US of serious clearing up of the mess of the financial industry – expansive monetary policy – expansive fiscal policy contributed significantly to the resurgence of growth.

The Eurozone never enjoyed the policy mix. The banking union is incomplete, comes late and never had the ‘constructive destruction’-effect as the one in the US. Who still believe in the political power of the European Commission only needs to have a closer look at its ‘investment program’. This program has so many weak features that only people who believe in Saint Nick can expect any positive growth effect. It may have been been smart politics on the side of Juncker but that’s actually the best one can say. The program depends on the willingness of the private sector to make use of a multi-leverage instrument that does not bring the kind of savings they may expect in order to compensate for potential risks. It needs actual direct kick-starting money to deal with the huge lack in public investment across the EU. It is well known that Juncker does not have such funds. He depends on a decision of the European Council to change course by not only ending the ill-advised austerity course but also by moving to a coordinated active fiscal policy that makes extensive use of the varying fiscal space of the member states. It is also well known that such a change of course will not happen. This is not so much about face keeping as it is about deeply entrenched convictions on the side of the creditor camp that staying course is the only way to go. Count in the fact that the German coalition government of CDU/CSU and SPD made the ‘black zero’ to its most prestigious political project and it is crystal clear that we will not see any change in the economic policy course in the near future.

And this where Draghi comes onto the scene. The unwillingness of Eurozone governments to  change course and the political castration of the Commission plus the deeply entrenched belief in private market moves the task to manage the Eurozone to the ECB. Monetary policy, even in its most unconventional form, can’t deliver on that task. This hold the more for the ECB which is bound by its narrow mandate. As a matter of fact, the provision of extra liquidity blows up it balance sheet and -depending on the concrete form of the program – may even worsen the quality of its balance sheet. Whether it brings inflation expectations back to the original taget of the ECB is highly questionable.  Most important, the ECB can’t generate growth by itself, and less so in a liquidity trap-like situation. Let me only hint to two main reasons. First, the wage bill in the Eurozone is not expanding in a way that would hint to a wage-push inflation process. The dominance of austerity actually reduced in many cases nominal wages as well as the number of jobs. Second, the private business sector is not lacking of liquidity. Profits are abundant. However, private companies are assiduously engaged in deleveraging and in the accumulation of war chests, may it be for safety reasons or to prepare for opportunities that may open in the global economy.




What the ECB can do, though, is to prevent the worst case, at least in theory. The ‘whatever it takes- promise has not yet been tested. The test may come as the open split in the executive board is slowly but steadily undermining this promise, and this may encourage some financial market actors to see what the ECB is willing and able to deliver.  It is astonishing to see that the fiscal hawks in the executive board deeply believe that structural reforms, aka the dis-embeddement of labor markets, will prepare the route for economic growth. They do so, and so does the majority of European governments as well as the European Commission. Such a verdict is not supported by empirical tests but that does not stop true believers to hang to their beliefs. The result of this ideological stubbornness is a weakening of the ECB. Not only does the political system move tasks to the central bank it can’t deal with, it also uses the ECB as a disguise for its own shortcomings. Not much chances for Draghi to end this game in a successful manner. Two years ago I titled a book chapter with ‘Sudden death, creeping decay or magical fix?’, and suggested that creeping decay may be the way the Eurozone is moving to. Today, we are on that path. The decay may end, though, when political forces from both sides of the political spectrum are no longer willing to play the game. I am sure this, too, would be no happy end at all.