Either Mr Jean-Claude Trichet is more stupid than I am prepared to admit or he is deliberately avoiding discussion of the most important consequence of the ECB and its Governing Council decision to buy junk bonds issued by profligate and irresponsible Eurozone governments.
Mr Trichet continually attempts to distract the uninformed observer by insisting that the ECB has taken steps to neutralise the increased liquidity and inflationalry pressures created by such short-sighted purchases. Evidently, such a maneuver is technically interesting but it hardly addresses a significant or urgent problem. The current level of ECB's purchases of Greek junk bonds is not going to provoke immediate or significant inflation in the Eurozone.
The significant and most important effect of the ECB decison to purchase junk bonds issued by the PIIGS must, however, be addressed. Symbolically and in fact, the ECB's actions and new policy gave official encouragement and support to profligate and irresponsible deficit expenditures by the PIIGS. Expeditures over which the ECB had no effective means of control. Not only that, the ECB decision converted the Greek deficit problem, into a Eurozone crisis, by deliberately and unnecessarily placing the credibility of Eurozone institutions at risk. The ECB action also raised the suspicion of a gratuitous bail out for foolish German and French banks that lent rather too generously to the Greek government.
Little wonder that the financial markets reacted badly and magnified the Greek difficulties, and a possible restructuring of Greek debt, into a crisis threatening the stability of the whole Eurozone. Reasonably, markets started to seriously question the judgement, the rationality, and decision-making abilities of European 'leaders', and inevitably lost confidence in the euro and European financial institutions.
Ironically, the underlying economic realities should be supporting an appreciation of the euro in comparision with the dollar. The ECB and Euopean leaders are playing with fire when they lurch from indecision to panic regulation and largess. The secondary and unforeseen consequences of ECB and Council actions require steadier hands, more patience, and greater wisdom.
Most of all, Europe requires appropriate institutions, procedures, and effective penalties for financial irresponsibility. Their absence is the direct result of the deliberate decisions made by those who too often protected their own narrow interests despite styling themselves 'European leaders'.
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