Super Mario can'€™t save Europe alone

On Jan. 22, European Central Bank (ECB) director Mario Draghi announced plans to purchase national bonds from euro-member banks. By increasing the money supply and maintaining low interest rates, the ECB hopes to encourage businesses and individuals to borrow, invest and spend. Draghi’s plan will inject nearly $70 billion a month into the euro economy to prevent deflation, push down the euro and restore confidence in the shared currency. The ECB hopes that these steps will ultimately kick-start growth.

At first glance, it appears that Draghi fired the proverbial big bazooka that will blast Europe out of its lethargy. But monetary policy alone cannot stop the European economy’s slide into deflation or even offer the hardship cases in Southern Europe a light at the end of the tunnel. Against the backdrop of the rise of Euroskeptic parties in the EU, Draghi’s move points to long-simmering frustration with the German-led austerity policies, which is morphing into rebellion across the continent.

The ECB’s quantitative easing — the flooding of financial institutions with money to promote increased lending and liquidity — is not without merit. It heralds the beginning of efforts to throw off German shackles. The $1.5 trillion monetary stimulus program, which will be disbursed over the next two years, is bigger than anyone had imagined. It is a long-awaited sign that Draghi, whose decisive management of the euro crisis earned him the nickname “Super Mario,” grasps the precarious state of the eurozone economy and the dangers of its faltering recovery.

Part of the plan is to push down the value of the euro, thus making European exports more attractive abroad. The initial reaction was a surge in stock markets across the continent and the further decline of the euro, to 1.12 per U.S. dollar. But investment is the foremost goal, and interest rates are already at an all-time low. The problem is that businesses are not investing because they don’t see more bountiful times on the horizon. There is a pervasive fear that they won’t be able to pay back their loans, regardless of the interest rate.

Yet the size of the stimulus and Draghi’s urgency constitute a blow to the flawed German prescription to solve to the crisis: austerity, low inflation, budgetary discipline and structural reforms. The strategy of Europe’s austerity hawks has left the eurozone in the dumps while the U.S. and United Kingdom have gradually climbed out of their recessions. For years, economists have argued that tight money and wrenching structural reforms will only grind down the weaker EU economies, solidifying inequality between the wealthier, surplus-generating north and the poorer, debtor nations of the south. Draghi’s riposte to German Chancellor Angela Merkel’s orthodoxy is thus a crucial step in the right direction. As Draghi famously promised two years ago, it’s yet more evidence that the ECB will “do whatever it takes to save the euro,” even if that means going toe to toe with Merkel.

Much of the 19-member eurozone now faces the threat of a deflationary spiral. This happens when decreases in price lead to lower production, which in turn leads to lower wages and demand and further decreases in price. Consumers and businesses react to falling prices by waiting for them to drop even more before they purchase goods or invest. This results in falling revenue, which leaves debtors without enough liquidity to repay loans, much less to invest in new ventures. Left unaddressed, deflation could set in and pull the eurozone back into the vortex of recession.

In Southern Europe, prices are already falling. With the inflation rate at just 0.3 percent across the zone, a deflationary spiral cannot be ruled out. This is exactly what happened to Japan’s economy is the 1990s and 2000s, leading to the country’s so-called lost decade, from which it is still recovering.

Draghi acknowledges that there is only so much the ECB can do to fend off this worst-case scenario. Monetary policy can create the basis for growth, but he, too, says investment is needed for growth to pick up. Economists have long argued that the eurozone — and the EU as a whole — has to embrace expansionary fiscal policies. In other words, there has to be public spending on infrastructure, training programs and renewable energy to stimulate domestic demand and create investor confidence.

This is exactly what most EU leaders — with the notable exceptions of the heads of Germany, Portugal and the Netherlands — support. Their idea is the $350 billion European Fund for Strategic Investments, which would invest in public works such as power grids and broadband networks. Some observers believe such a fund could leverage enough capital to create more than a million jobs in the zone.

The victory of Greece’s leftist party Syriza on Jan. 25, which says it will end austerity and renegotiate the country’s debt, is just one sign of the roiling dissatisfaction in Europe and the political changes a foot. A like-minded new party is surging in the polls in Spain. Italy’s leftist Democratic Party is making similar demands while trying to coax investment with spending in open defiance of EU rules on budget deficits. But the euro crisis also has far right, thoroughly anti-EU parties on the upswing that could throw a wrench in the works of the EU even if they never come to power. There is no mistaking that the European establishment and the EU project itself are under heavy fire.

To be clear, the leftist parties are calling not for withdrawal from the euro or abandoning structural reforms — as most of the right-wingers are — but for the restructuring of loan repayments and a freer hand to spend. Syriza wants Greece’s debt trimmed to a manageable sum so that it can begin getting Greeks back to work. Everyone, including Merkel, knows that the current debt burden on Greece is unsustainable. The EU should meet Greece’s new government halfway by negotiating a fair reduction and new repayment schedule.

Yet Germany still calls most of the shots on euro crisis management. As pragmatic and undogmatic as Merkel is on domestic issues, she has taken a hard line on the euro crisis and budged only when she had no choice. This strategy is coming back to haunt her. She failed to put a positive spin on Germany’s role, despite the fact that eurozone conditions enabled Germany to balance its budget, expand exports and slash unemployment. Instead she made it look as though Germany was bending over backward to help ungrateful Southern Europeans. Now most Germans are opposed to easing the terms of the Greek bailout, even though this is most likely what will happen. This plays right into the hands of Germany’s new far-right party, Alternative for Germany, which accuses her of lying about the extent of the crisis and the cost of Germany’s involvement.

Merkel should heed the profusion of advice — including Draghi’s — that is calling on her to rethink Germany’s harmful eurozone policies. One place to start is with the ECB’s quantitative easing, which would benefit from her endorsement.