By William K. Black

Things are going badly in the eurozone – as they have for six years due to Germany’s demand that “there is no alternative” (TINA) to austerity as the response to the Great Recession. Austerity caused a gratuitous second Great Recession throughout the eurozone and threw nations with one-third of the eurozone’s total population into Great Depression levels of unemployment. Austerity has now forced Italy into a third recession in six years and produced overall stagnation in the eurozone. Germany, whose budget surplus has produced economic stagnation, has found a solution to the latest crisis caused by self-destructive austerity – greater austerity. Better yet, as a Reuters column relates, Germany’s leaders are enraged that anyone would dare to question why it makes sense to reduce further already inadequate demand through austerity.

“BERLIN (Reuters) – A leading member of German Chancellor Angela Merkel’s Bavarian sister party criticised European Central Bank chief Mario Draghi on Saturday, saying he was turning the institute into a “junk bank” with his plans to buy debt rated as junk. In a stinging attack, Hans Michelbach of the Christian Social Union (CSU) said Draghi was endangering the stability of financial markets. ‘Draghi is increasingly transforming the ECB into a junk bank,’ Michelbach told Reuters. On Thursday, the ECB laid out plans to buy rebundled packages of debt and covered bonds, secured on solid assets such as property. It will include buying debt with a “junk” credit rating.”

This portion of the German attack on Draghi has some merit, but as I will show it isn’t the emotional core of their attack. There are four problems with Draghi’s junk bond plan. The obvious one, which the Germans ignored, is that it is yet another means of subsidizing bad banks for knowingly making bad loans. Germany ignores this problem because Germany has often bailed out German banks for their bad loans.

The second problem really upsets the Germans but cannot be admitted by them. The problem is that the ECB can buy vast amounts of bad bonds and nothing terrible happens – there is no inflation and the euro’s value doesn’t collapse. The non-result falsifies (again) the German monetary myths that underlie their assertion of TINA. Michelbach is one of the austerians who constantly claimed that deficits would lead to ruinous inflation.

The third problem with Draghi’s junk bond plan is one that Michelbach got at least overwhelmingly correct.

“He said the planned purchases of debt, which the ECB hopes will boost lending and so boost the euro zone economy, would mobilise ‘not one single extra euro of loans’ in the single currency bloc. ‘Draghi looks like he is at his wit’s end and he’s trying to cover it up by performing increasingly absurd pirouettes,’ Michelbach said.”

Both sentences contain important truths. Eurozone banks’ lending is suppressed for one overriding reasons – grossly inadequate demand in the eurozone. Corporations do not borrow to build new capacity to produce goods or services if consumers and other firms are not demanding those additional goods and services. Draghi’s junk bond plan is unlikely to produce new loans because it does not respond to the insufficient demand.

Draghi is the head of ECB. He has no power to supply the shortfall in private sector demand through increased government spending. Draghi has encouraged Germany to increase its governmental spending – and the Germans have refused for reasons that make no sense even for austerians. German is running such a large budget surplus that the German economy has stagnated. Germany spends far less on infrastructure – a key to future growth – than German experts consider vital. This is taking austerity to an entirely new level of self-destructiveness and pig-headedness.

Draghi is “at his wit’s end” because monetary policy, despite all the hype about quantitative easing (QE) is remarkably ineffective in fixing severe recessions. Draghi is in charge of monetary policy. He is not simply getting no help from the Germans; they are actively making his job ever more impossible through austerity and their demands that the workers of the eurozone should be forced to suffer. The twin desires of German conservatives to use austerity to inflict decades of gratuitous misery on the non-Germanic peoples of the eurozone that they regularly deride as inferior and to force the parties of the left to commit political and economic suicide by leading a war on workers’ wages have nothing to do with economics.

The fourth problem is that Draghi’s real sin was daring to suggest that German policies are flawed. This violation of lèse–majesté is intolerable to the EU’s German masters. Worse, when Draghi urges Germany to increase public spending he implicitly demonstrates that France and Italy should be spending far more to stimulate the economy and alleviate suffering brought on by austerity-induced unemployment.

The German meme is that they are the heroes of a morality play in which they are smarter, harder-working, self-sacrificing, and uniquely virtuous while the European periphery and even Latins of the core (the French) are lazy, profligate, and undisciplined. Draghi’s comments violate that meme.

“With its ‘Draghi politics’, the ECB is helping countries that are not reforming, he said. ‘Draghi is ridiculing the people in Europe who have taken burdens upon themselves to shore up the future of their countries by means of reforms,’ Michelbach added. ‘The ECB needs to change its policies so that they come back within the terms of the treaties.’”

It is the second sentence that epitomizes the emotional core of the German conservatives’ cri de Coeur responding to Draghi’s urging them to increase infrastructure spending. Note the hilariously over-the-top self-love and self-pity. I’ll begin with Michelbach’s “ridiculing” claim. Draghi has said and written nothing that comes remotely close to “ridiculing” Germans. He has consistently done the opposite.

Michelbach, however, is known for his zest in “ridiculing” the French and the people of the periphery and trying to create an alliance of EU nations with “AAA” credit ratings (“Bündnis der Triple-A-Staaten”) to stand against any effort by Spain and France, who he ridiculed as the “problem children” of Europe (Sorgenkinder),to oppose austerity and Germany’s demand for the suppression of workers’ wages. Michelbach is infamous for these comments in the periphery – and a cult hero among German conservatives for the same comments. German conservatives have adopted the English practice that Americans most despise – they do not simply insist on imperial rule – they demand that they be loved and praised for their rule over the benighted natives. In sum, Michelbach’s “ridiculing” claim is a hypocritical lie.

Second, German austerity represents a senseless “burden” that attacks rather than “shore[s] up the future.” In particular, by deliberately underinvesting in infrastructure Germany harms the economy of Germany and the entire Eurozone today and “the future” of the German economy. Similarly, the conservatives’ war on workers’ wages harms today’s eurozone economy and German workers. It is a very good policy for increasing the wealth and power of Germany’s elites. It is a policy that also harms the future of German and eurozone workers and the German and eurozone economies. Michelbach is an enemy of real reforms – the essential regulatory reforms to end the international financial regulatory “race to the bottom that allowed the bank frauds and abuses that drove the global financial crisis and the Great Recession. He is one of the eurozone’s leading opponents of creating effective financial regulation.

To Michelbach, Draghi’s unforgivable sin was succeeding in ending the bond vigilantes’ reign of terror against sovereign debt issued by eurozone nations. Michelbach has openly admitted that he welcomed these attacks because they gave Germany sufficient leverage to extort the periphery to adopt German conservative’s twin policies of austerity and wage suppression.

“The planned purchases of government bonds by the European Central Bank “are a continued violation of ECB rules” and hinder the euro region’s recovery because they take pressure off governments to change their policies….[quoting Michelbach]”

Germany conservatives want more austerity and the return of their allies, the bond vigilantes.