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Will Europe drag the world down?

The ECB's cluelessness will give Europe's politicians an excuse not to make the domestic restructurings that are needed to spark real growth

Steve Forbes
Published: Mar 23, 2015 07:21:40 AM IST
Updated: Mar 18, 2015 05:29:17 PM IST
Will Europe drag the world down?
Steve Forbes is Editor-in-Chief, Forbes USA

While Greece is dominating the headlines, two other recent pieces of news underscore why the EU is in a serious economic and political crisis that could have devastating consequences for the US and the rest of the world.

One event is well known. The European Central Bank (ECB) announced that it will embark on a gargantuan bout of quantitative easing to pull the continent’s stagnant economies out of their slump. The ECB is repeating the mistakes of the Federal Reserve and the Bank of Japan. It will be buying government securities (though, theoretically, the central banks of particular countries will bear the risk) to boost bank reserves and suppress interest rates. In a normal world, banks would then boost their lending, taking this “high-powered money” and “multiplying” it. Once upon a time, one euro of new reserves would end up creating €8 to €10 in new loans. Not now.

The rate of interest is the price a borrower pays for “renting” the money. Price controls always harm and distort markets. Suppressing interest rates has seriously distorted credit markets around the world, making it more difficult for new, small and medium-size businesses to get adequate credit at reasonable terms. Most households face the same situation.

Now we come to the lesser-known story: No sooner had the ECB embraced the Fed’s failed policies (it’s no coincidence that as the Fed wound down and ended QE, job creation in the US improved) than the news came that the ECB would tighten capital requirements on European banks. Even institutions that meet regulatory capital levels today will be urged to beef up their capital cushions.

The ECB’s cluelessness is breathtaking. How does a bank increase its capital cushion? By selling new equity, cutting dividends—and making fewer loans. Regulators are obsessed with gauging a bank’s “risk-adjusted assets”. By the perverted lights of bank overseers, a loan to Portugal is less risky than a loan to Apple. Politically unconnected businesses, i.e., most of the private sector, are shafted.

Most of the reserves created by this new version of quantitative easing will stay parked at the ECB. Worse, the ECB gives Europe’s politicians an excuse not to make the domestic restructurings that are needed to spark real growth, such as truly curbing bloated public sectors, slashing onerous tax rates and liberalising labour markets.

Europe’s troubled economies will continue to stagnate. As the elections in Greece demonstrate, these troubles are leading to ugly political repercussions. France’s xenophobic, fascistic National Front has gained immense new support. Radicals are set to dominate Spain’s elections later this year. May elections in Britain could set in motion a train of events leading to the Sceptred Isle’s withdrawal from the EU. A collapse of the EU and the euro would be disastrous, putting the world on a chaotic course not seen since the 1930s.

Feckless Obama endangers us all
In the 1950s C Northcote Parkinson, an author and British naval historian, noticed something rather odd when he was researching what had happened to Britain’s navy after WWI. Once hostilities ended, the navy was sharply downsized. Yet the bureaucracy running the navy expanded as the navy diminished. Parkinson hit on a truism: The size of an organisation is not related to the actual work with which it is tasked.

Parkinson’s law is at work today in our own defence department. Defence analyst Mackenzie Eaglen observed in a recent The Wall Street Journal piece that “since 2009, the Pentagon’s civilian workforce has grown by about 7 percent... while active-duty military personnel have been cut by roughly 8 percent. At the same time, dozens of military-equipment and weapons programmes have been cancelled”. The deteriorating global situation makes this trend especially foolish and dangerous. Military chiefs, though well aware that they’re subordinate to civilian officials, are extremely worried and are oh-so-delicately letting their concerns be known.

Will Europe drag the world down?
Image: Chaitanaya Dinesh Surpur

Even a Republican Congress will find it very difficult to force the president to devote more resources to beefing up our combat capabilities, but it has a duty to do so. A growing number of Democrats are waking up to the gravity of Barack Obama’s bizarre and feckless behavior: The contrast between the reactions of Jordan’s King Abdullah to ISIS’s recent barbaric execution of a Jordanian pilot and Obama’s to its beheading of an American journalist last summer (after briefly deploring the death, our commander-in-chief promptly went off to play five hours of golf) is embarrassing. Events are tragically reinforcing the need for Congress to act as Ukraine, the Middle East and Nigeria continue to deteriorate and Islamic terrorism spreads.

At a recent hearing of the Senate Armed Services Committee, Senator John McCain asked Obama’s defence secretary nominee, Ashton Carter, if the administration had a strategy for combating and defeating ISIS and, if it did, what it was. The poor man floundered. Clearly, the answer was one everyone already knew: Obama has no plan at all. And the whole world knows it.

Baseless bashing of E-cigs
Superstitions are alive and well. Not the kind athletes and other performers are known to indulge in, but big ones, like the belief in witches centuries ago, that affect all of us. One example: The weird war that health officials continue to wage against electronic cigarettes. E-cigs have been a godsend to people who wish to give up smoking or avoid taking up the habit in the first place. These devices involve no smoke, only a vapour, but give one the pleasure of nicotine without wrecking the lungs.

Smoking among teenagers is at the lowest level (in US) since authorities began surveying people back in 1975. Not coincidentally, e-cig usage among teenagers has grown enormously. But instead of being hailed as the most effective anti-smoking tool ever, e-cigs have been pilloried as the devil’s device to hook the unwary to tobacco and for posing hideous health threats to users. The latest example is a report entitled ‘A Community Health Threat’ from the California Department of Public Health, which apocalyptically attacks e-cigs and calls for drastic action to curb their use.

It turns out this report is scientific garbage: It twists facts, quotes scientific studies out of context and is laced with outright whoppers. Health expert Sally Satel succinctly and thoroughly demolishes this egregious example of junk science in a piece on “It is stunning that a public agency entrusted with the health of the population of California would promote such a one-sided, scientifically impoverished document.”

Alas, California isn’t an outlier in these baseless assaults. Other health officials who know better indulge the current hysteria. Numerous cities and states are imposing cigarette-like restrictions/bans on these life-saving devices. And politicians are pushing for punitive taxes on them. The new surgeon general, Dr Vivek Murthy, has sensibly noted that there’s a “desperate need of clarity” on the subject of electronic cigarettes. If a fact-based, non-hysterical approach were taken, all would be well. But don’t count on anything like that happening. The fanatical fervour of anti-smoking crusaders won’t be stopped by objective science. The reason? E-cigs too closely resemble the real thing—which is like waving the proverbial red cape in front of a bull. But there’s also another factor at work: An intolerant, puritanical mindset that is offended because e-cigs make abstaining from or giving up cigarettes too easy. Forsaking smoking should involve pain, not pleasure!

Instead of focusing on sensible guidelines to ensure the safe and sound manufacturing of electronic cigarettes, anti-smoking jihadists indulge in what might be called a scorched earth approach. All tobacco products are regarded as equally bad—a scientific falsehood—and anything resembling cigarettes, even when no tar or smoke is involved, must be quashed.

Steve Forbes is Editor-in-Chief, Forbes USA

(This story appears in the 03 April, 2015 issue of Forbes India. To visit our Archives, click here.)

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