Submitted by Taps Coogan on the 10th of January 2019 to The Sounding Line.

Daniel Lacalle, Chief Economist at Tressis Gestión, recently gave an interview with CNBC in which he warns that Mario Draghi’s successor at the ECB will face enormous challenges managing the Eurozone’s monetary policy.

 

Daniel Lacalle:

“The next head of the ECB is going to have an incredibly difficult position because, on one side, he is going to find himself with a massive stimulus. The ECB balance sheet is 41% of GDP of the Eurozone. Interest rates are at zero. Excess liquidity: 1.8 trillion euros. It’s insane. He or she will not be able to come up and say ‘look we are going to inject more liquidity, do more TLTROs.’ Everything has been done. And the Eurozone this year is likely to grow… 1% not 1.6%. The Eurozone is showing the evidence that all of these programs have not delivered… because the problem is structural. The problem is a massive level of government spending, very high taxation, and obviously demographics… So the next one (ECB President) is going to have to normalize… in a way in which he knows there will be negative consequences but maintaining the current policy is going to leave it without any type of tools.”

With regards to whether increasing government spending from Germany could help the Eurozone during such a transition:

“The German government has already tried it. It stopped its austerity program. It started increasing government spending. But you cannot solve the Eurozone situation by bringing Germany to do the mistakes that Spain, Italy, France, or Portugal do. It’s ridiculous. You have to get the Eurozone to do things correctly… There is no evidence that Germany is spending less than what they need, investing less than what they need, or consuming less than what they need. The evidence is that the rest are still spending way above their means and that is what’s not changing in the Eurozone. The Eurozone has put government spending at the forefront.”

As we recently noted, Southern Europe’s economy hasn’t grown since 2006 when adjusted for inflation. Meanwhile, its government debt has ballooned 70%. If deficit spending was the solution, Southern Europe would already be one of the fastest growing regions in the world. It is not.

There is more to the interview so enjoy it above.

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