The ECB's lack of success puts the euro in danger

In the United States, the Fed has decided to take unemployment by its horns. Europe is threatened by deflation and sick from its 19 million unemployed, yet the ECB remains inactive. Something must be done.

Do you know Dorine Poole, Jermaine Brownlee, and Vicki Lira? Neither do I, until Janet Yellen, the new chair of the American Federal Reserve, named them at a conference in Chicago, last Monday, whose theme was: “what the Federal Reserve is doing to promote a stronger job market”.

Despite a 6.7% unemployment rate while the American economy has created an average of 180,000 jobs per month for the last two years (2.2 million jobs created in 2013) and that the American Federal Reserve injected more than $4,000 billion into the economy, Janet Yellen estimates that this is not enough. To be sure, her mandate includes stabilizing prices and curbing inflation. But this is no longer the issue of the day, as “inflation is well below 2%, the long-term objective of the Federal Reserve.” The issue of the day, is the plague of unemployment, beyond the government statistics that underestimate (do not take into account those who have given up on finding another job) and are unable to illustrate the significance of the personal tragedy for millions. Thus, Janet Yellen, decided to put names and faces to the statistical unemployment reality, those of Dorine Poole, Jermaine Brownlee, and Vicki Lira. Theirs are very personal stories of social disengagement: regularly employed for 20 years then unemployment, instability, employers who turn down resumes with holes of a few months and then a few years, professional qualifications that become obsolete over time, the end of medical coverage, the need to take on an insecure job to survive, and sometimes sleep on the street.

Janet Yellen listed all the macroeconomic reasons that the Federal Reserve will continue its politics of money creation, because the 10.5 million unemployed Americans are a pressing human reality, not only statistical data. Thus, the dollar will continue to fall against the euro, American growth (2.8% expected in 2014) will be strengthened through the monetary dynamics and soon Dorine Poole, Jermaine Brownlee, and Vicki Lira will find jobs.

On this side of the Atlantic, Ms. Yellen’s European counterpart, Mario Draghi, the director and the Governing Council of the European Central Bank clearly do not have the same concerns. These unelected appointees are not attaining results, despite their exhaustive manner of work. In a euro zone with 19 million unemployed, 3.4 million of which are less than 25 years old, what is the ECB doing? A euro/dollar that exceeds $1.40 will accelerate job destruction, notably in manufacturing on the European continent, and transfer the jobs to dollarized countries. The risk of deflation is also materializing in the euro zone: last February the price increase was 0.7%- unseen since the aftermath of the 2009 crisis; in March the price increase slowed to an alarming rate of 0.5%. At this rate of unemployment and the absence of inflation, we will enter headfirst into a Japanese scenario, that of deflation.

Then, the decisions that they make together are not transparent. Contrary to the Fed, the ECB does not publish the minutes of its advisory meetings. There is ambiguous public communication and little follow-through. The ECB is “ready to act if necessary,” as “all the instruments authorized by the treaties are eligible for our action,” but there is not any “deflation” in a euro zone that is getting “better”. These are convoluted messages even for experienced traders, recalling Alan Greenspan’s phrase, “If you understood me, then I misspoke.”

Tomorrow, the Governing Council of the ECB is meeting. There are two possibilities open to them: They can choose to persist in this mistaken manner and do nothing significant. It is easy to imagine the result: confirmation of the deflationary spiral in the euro zone for the short-term and the bursting of the same euro zone in the medium- to long-term. Not a single economy, particularly the French (94% debt on GDP) nor the Italians (133% public debt on GDP), will withstand a prolonged period of deflation.

What is the other possibility? The Governing Council of the ECB corrects the problem quickly. It could start to buy obligations on the market, at the massive pace of the Bank of Japan or the Fed. Other ideas, include lowering its interest rate to 0%, sine die, for an unlimited period, and commit to achieve a target of 2% inflation in the zone by the end of the year. Not doing so would fuel those, growing in number, who believe that the euro was only an intellectual construction of technocrats disconnected from reality, a deflationary trap to disappear in favor of a return to national currencies. Such a backward move would permanently disrupt the peace, the prosperity and the union among European nations. My recommendation this week is that Mr. Draghi calls Janet Yellen, spends a little time with the European Dorine Poole, Jermaine Brownlee, and Vicki Lira (today the only euro zone has 19 million unemployed), and that he pushes his council to act, instead of comment without being able to justify the procrastination of the institution he presides.