One of the biggest troubles with Europeans (besides them being increasingly economically irrelevant, pusillanimous to a fault especially against the Russians, and constantly hung up about World War II) is that they never actually get to the actual point in any discussion. Have a chat with a Frenchman or Italian and inevitably the conversation starts getting circuitous within a minute or so; and somewhere along the line the request for providing clarity on a discussion point would be met with a Gallic shrug and throwaway reference to some long dead author or another.

Nowhere is this lack of clarity more apparent than in the case of the European Central Bank (ECB) which has for the past five years fought a pitched battle against itself; an economic extension of existential angst if there ever was one.

Going through three presidents since the end of the last century when it was formed, ECB leaders have had to be – and there is no other way to say it, sorry – German thinkers without actually being German themselves. The now deceased Wim Duisenberg was the first president, followed by the most German of Frenchmen, J.C. Trichet; both of them kept a steady hand at the ECB wheel and focused entirely on fighting inflation as per their mandate. During their tenure, the euro which started at around 0.9 to the USD in 2000, rose to well over 1.5 by the beginning of 2008 before “crashing” to a still respectable 1.4 by the time their successor was announced.

The appointment of Mario Draghi on November 1, 2011 – the man I sarcastically referred to as the “Saviour of Europe” a while ago – came against stiff German opposition to the former Goldman Sachs manager who was pushed through by weaker economies within the euro such as Italy, Spain and others. In his first couple of years, Draghi remained true to the German mandate for preserving the credentials of the euro; since late 2013 though he has been pushing the quantitative easing mumbo-jumbo. Predictably, the euro which still commanded 1.4 U.S. dollars per euro in late 2013 has now crashed to under 1.1 U.S. dollars; and looks set to test the ‘parity’ level of 1.0 by end of the year.

Mr Draghi has been at the forefront of QE, much to the consternation of savers in Europe; the protester said later to Bloomberg:

“What’s very concerning to me is that Mario Draghi as ECB president is not actually serving the societies, but imposing rules on them – without ever being elected,” the 21-year-old said. “This press conference is the little, little bit of democracy that the ECB gave us. I used this opportunity to express my criticism.”

Wait – they still have 21-year olds in Europe? Okay, jokes aside, the above statement is a perfect illustration of what was discussed in the beginning of the article about Europeans getting to the point. In talking about democracy, rights, and imposing of vague rules (no idea what she is on about); the actual question is how the ECB has been effecting a wealth shift from older people to younger people. Puzzlingly, the young person in question above would have benefited from the ECB, but is instead protesting about other points.

Think about what the ECB has done – negative interest rates. These penalize savers and benefit borrowers. How did that happen? Well, Mr. Draghi has been printing a lot more euros for one thing; reversing the shrinkage of the ECB balance sheet in 2014. For context the ECB balance sheet went from 750 billion euros in 2000 to a high of 3 trillion euros by the beginning of 2012; it declined to just over 2 trillion euros in the middle of 2014 before Draghi reversed the trend and has been pushing up the balance sheet purchases which are now set to increase the overall size to over 2.5 trillion euros by mid year.

Coming as it did when the U.S. Federal Reserve started heading in the opposite direction, the euro naturally crashed to its current level once the QE plans became public. Despite the European economy’s deteriorating fundamentals – yawning structural deficits, declining productivity, falling economic growth, negative demographic trends – yields on government bonds have fallen into negative territory as the following table shows:

Select European government bond yields as of 16th April 2015:

Austria5 year-0.063%
Belgium5 year-0.059%
France10 year-1.063%
Germany5 year-0.151%
Italy10 year1.29%
Portugal10 year1.72%
Spain15 year1.77%

That’s right – you’d need to head to the countries in the southern part of Europe before you get any returns for your money, and even then have to purchase comically long-dated bonds to secure even that. This is thanks entirely to the $60 billion of bonds being purchased by the central banks every month.

European banks have now started paying borrowers for loans as the Wall Street Journal highlighted in its article earlier this week:

“Tumbling interest rates in Europe have put some banks in an inconceivable position: owing money on loans to borrowers. At least one Spanish bank, Bankinter SA, the country’s seventh-largest lender by market value, has been paying some customers interest on mortgages by deducting that amount from the principal the borrower owes. The problem is just one of many challenges caused by interest rates falling below zero, known as a negative interest rate. All over Europe, banks are being compelled to rebuild computer programs, update legal documents and redo spreadsheets to account for negative rates. Interest rates have been falling sharply, in some cases into negative territory, since the European Central Bank last year introduced measures meant to spur the economy in the eurozone, including cutting its own deposit rate. The ECB in March also launched a bond-buying program, driving down yields on eurozone debt in hopes of fostering lending.”

Alongside, they have also started charging savers to keep their money at the bank; as early as February this year, the Wall Street Journal reported:

“After the Danish central bank recently slashed its benchmark interest rate to well below zero, several of the country’s lenders have followed with highly unusual moves of their own. On Friday, FIH Erhvervsbank announced plans to charge retail customers to hold money in their deposit accounts, the first Danish bank to do so. “If people want to put their money with us in our deposit bank, we at least don’t want to lose money on it,” said Palle Nordahl, FIH Erhvervsbank’s chief financial officer.”

This is the inter-generational transfer of wealth I discussed above. Savers are being charged to keep their money at the bank, while borrowers are actually paid to borrow. Older people save, while younger people generally borrow.

Despite all this QE, growth rates in Europe remain stubbornly low; prompting further weakness as savers in the region dump their euros for more sensible currencies. Given the falling value of money as more of it is simply generated out of thin air, the obvious question that arises is why anyone would waste confetti on the ECB president.  I guess since it was a young person without much savings, she flung confetti – an older person with savings at the bank would have dumped some euros or European government bonds on Draghi.

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