ECB: running out of runway – Part II
ECB: running out of runway – Part II by Claudio Grass
Overall, under Mr. Draghi’s watch, the ECB’s balance sheet has ballooned to a previously unimaginable scale and aggressive policies like the extensive QE program and negative rates have encouraged the accumulation of debt and heavily distorted market mechanisms.
Scores of “zombie” companies, that would have otherwise died off without the artificial life support of cheap credit, are now plaguing most major economies. The encouragement and purposeful incentivization of debt over saving or prudent, long-term investing has created a toxic pile of bad loans, of a potentially catastrophic scale. Should a default avalanche be triggered, the already ailing and highly vulnerable banking sector is unlikely to be able to absorb the shock.
At the same time, key European countries are drowning in government debt and are in no position to use fiscal measures and stimulus programs to resuscitate their economies. Also, millions of pensioners and savers have been consistently penalized for responsible financial management and long-term thinking, while reckless corporate spending sprees with borrowed money have been encouraged. Additionally, as returns vanished from investment vehicles that were once considered slow, steady and safe options for those with low-risk tolerance, even responsible investors were forced into riskier areas of the market in the pursuit of healthy performances.
Apart from an adverse economic impact, these policies also fuelled social divisions. As those at the top of the pyramid saw the value of their assets artificially increase, the vast majority of the population, that does not benefit from climbing stock prices, was also denied the chance to benefit from saving. As the gap grew, such unfair advantages boiled over and contributed significantly to the political tensions we see today. To a large extent, the rise of populism all over the globe can trace its roots to the disparities that were encouraged by these policies and to the widening of the socioeconomic divide that they contributed to. What is even more worrying, is the toxic and unpredictable escalation of this toxic friction and internal conflict in the event of a crisis. As there is plenty of fuel already spread throughout many European nations, the match that another recession would light is a sobering thought indeed.