The Billion Euro Man

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ECB Chief Mario Draghi’s mega-operation


In order to fight the ongoing crisis the European Central Bank is pumping the unimaginable sum of €1.1 billion into the eurozone. Where is this money to come from and precisely where will it go? And, above all, who decides these things? At the same time, social resistance to the institution is growing.

In March there were elections in the Netherlands, but in Germany it seemed more like war – or at least that was the case in Frankfurt-am-Main. An estimated 17,000 demonstrators descended on the city. Most were there to take peaceful action, but militant troublemakers made it into a battlefield, with burning police cars and barricades, wounded police, and countless arrests. The city’s nicknames, ‘Bankfurt’ and ‘Mainhattan’, give clues as to the bone of contention. Its already flashy image is today being burnished still further with the opening of the ECB’s new building, which cost a cool €1.2 billion. But the discontent of the demonstrators from Blockupy, an umbrella group which includes dozens of political parties and groups – is directed not only at the gaudy building, but against the policies of the ‘troika’ of ECB (whose central task is to maintain price stability in the eurozone), International Monetary Fund (IMF) and European Commission in their entirety. These are policies which in Blockupy’s view boil down to practising extortion against Greece and other member states, which force countries to dismantle their social provisions. They are policies which consist of giving money on condition that ‘reforms’ are carried out, or bringing pressure to bear by using aid as collateral. The fact that the demonstrators selected Frankfurt to be the target of their fundamental critique rather than Germany’s own seat of government, Berlin, tells us something about who in reality is pulling the strings.  

1,100,000,000,000 euros

Coincidence or not, scarcely a week earlier the ECB had set the wheels in motion on its biggest ever operation. ECB chief Mario Draghi wants to pump the sum of eleven hundred million euros into the European economy over the next eighteen months. A breathtaking figure: €1.1 billion, or €1,100,000,000,000. This works out at some 60 million per month for 18 months. The scenario is actually quite simple: by large-scale buying of state bonds, the ECB will be supplying fresh capital to the banks and institutional investors who will be doing the selling. This ‘new’ money can then be lent to members of the public and to firms, so that expenditure and investments will increase, giving the European economy a boost. Overall demand for goods and services will rise, and the price of these will increase accordingly. In the economic situation in which Europe finds itself, price inflation is, oddly enough, desirable, because as things stand the threat comes from the opposite direction, from deflation. The fact that prices, partly due to the declining cost of oil, are constantly falling, means that people postpone purchases and investments in the hope that they will become even cheaper. The ECB is looking to call a halt to this development, pushing up the euro. By flooding Europe with euros, the Bank will force the currency downwards in value, encouraging exports.

That is, in any case, the theory.

But is the practice just as elegant and logical? In other words, will all of this work as intended?


The massive buy up programme appears to raise just as massive a list of questions. The most basic of these is ‘how did the ECB come by that €1100 billion? Has the Bank usually got that much cash in its coffers?  The answer is no. The ECB is creating this money, in fact, from nothing. What happens is this: the national banks – in the Netherlands, the DNB – take over, under the supervision of the ECB, loans to national governments (the national debt, in other words) from banks and institutional investors. In this way a financial credit is exchanged for fresh capital. This is known to economists as Quantitative Easing (QE). In simple terms, get the money presses turning. A few years ago the SP was also advocating QE via the purchase of state bonds. Amongst other things, this offers the weaker eurozone countries a straw to clutch at. ‘At the time this was greeted by many as if we’d sworn in church,’ says SP Member of Parliament Arnold Merkies. ‘Yet now the ECB is daring to do it. That in itself is to be commended. It also shows how acute the situation is. But if you really want to tackle deflation it’s important that the money goes to the right place. To start with, you want to prevent more financial bubbles being created. So you have to design an operation in such a way that it will go directly into the real economy. Instead of increasing the prices of share, bonds and property, it will then boost spending. Demand will increase, employment will grow and small and medium-sized enterprises will flourish.’

Whether the ECB operation will succeed depends on a number of contingencies. First of all, the extent to which banks will actually be willing to sell their bonds is by no means certain. Dutch banks have already let it be known that they are not too keen on this. Secondly, it is in no sense guaranteed that the banks will really loan out this new mountain of money, in which case the billions will not flow into the real economy. Merkies points out that the policy ‘will then not lead to improvements in purchasing power or to more credit; the money will just hang around in the financial sector, and the risk of a new bubble will be enormous.’ The ECB has kept the interest rate low for years, its aim being to discourage saving and encourage spending and investments.  However, the rate has been so low that investment has become an attractive alternative to saving, and this, together with the prospect of the ECB billions, has meant that recently it has been party time in the stock exchanges. Hardly necessary to point out that those in higher income bands profit most from this, simply because as a rule they own more shares and similar paper than do others.  

Many people have asked whether it would not be more effective if the money were distributed directly to member states’ citizens. The problem with that, however, is the question of how it would be divided up. Every country would have its own ideas about that. Arnold Merkies would therefore prefer to see direct loans to the member state governments. ‘But with the manner in which the ECB is implementing this quantitative easing, you don’t buy up the bonds being issued by the member states’ authorities, but those which are in the hands of the banks. This will create a risk that the operation will turn out to be merely a support operation for those banks. The ECB must do all in its power to ensure that the money goes directly into the real economy and not to create bubbles in the financial markets.’

‘Finacracy’

Still, it’s strange: the European Central Bank’s influence touches everything from your purchasing power to your pension, from the space for investments available to a firm to the mood on the stock exchanges. This makes the question of who actually directs this supreme authority even more interesting. The answer is as simple as it is staggering: nobody but the ECB itself. The institution operates entirely independently, without any kind of democratic inconvenience. Mario Draghi is the lord and master of Europe.

The debate held earlier this year in The Hague, in which MPs grilled Finance Minister Jeroen Dijsselbloem regarding the buy-up programme, is therefore significant. The Labour Party Minister, however, gave in the main evasive answers and hinted that politicians shouldn’t interfere too much. Meanwhile the ECB is moving increasingly to take the place of elected representatives and control the economy’s switches.  

‘It’s odd on the one hand that the central banks interfere extensively in politics, yet on the other hand politicians don’t want to give their opinions of the policies of these central banks. This should surely be open to debate. The ECB’s mandate was established in the 1990s when the present situation could not be foreseen. The ECB needs to improvise a lot more often and take unconventional initiatives. These measures will have major consequences not only for the banks and for our monetary system, but also for our economy as a whole. For these reasons alone we must, as politicians, not shy away from discussing them.’

On Merkies’ initiative a debate on monetary policy will therefore be held shortly in the Dutch national Parliament. ‘It’s time that we as politicians stop merely looking on from the sidelines, but also give some thought to fundamental questions concerning our monetary system’ he says. ‘How should it be organised? And how do we monitor it? These subjects seem to have become taboo in the political arena.’

‘Democracy? Finacracy you mean!’ These are the words of the Dutch actor George van Houts in the television programme De Wereld Draait Door – a punning title which translates as both ‘The World Keeps On Turning’ and ‘The World’s Gone Mad’. Van Houts is one of De Verleiders - ‘Those who lead one astray’, or ‘the seducers’ - the theatre group playing to full houses with the show Door de Bank Genomen (‘Taken by the Bank’). This piece exposes in a hilarious fashion the way in which banks create money and formed the overture for the widely-supported citizens’ initiative Ons Geld (‘Our Money’). ‘As many signatures as can be gathered are needed if we are to lift the taboo on discussion of money creation’, says the Dutch citizens’ initiative website. ‘Creation of money by private banks does not serve the general interest, because they are always subject to debt.’ The initiative envisages opening the matter to debate and is hoping to see a monopoly on money creation returned to the public sector.

Arnold Merkies agrees that ‘it would be good to discuss the function of our monetary system,’ adding that ‘this also goes for advocating a greater role for the state. However, Ons Geld’s solution, to abolish interest, is one I can’t go along with. Interest is in real terms a reward for postponing consumption and also for taking a risk’, by which he means such activities as lending out money for investment. ‘Bringing the monetary system under the aegis of the state I certainly find an interesting idea, but then you’re basing your approach on an idealised picture which would not be as easy as 1-2-3 to realise. We should be taking a close look at measures we can take in the here and now.’ Despite these reservations, Merkies is at one with the citizens’ initiative in wanting to see a fundamental discussion of the monetary system. ‘The time is ripe,’ Merkies believes, for such a debate.  Part of any such discussion would be the question of the ECB’s mandate. ‘In my view this mandate should be altered to give the central bank also a duty to stimulate the economy and employment.’

Things can change in Europe. Until recently, all efforts were directed at combatting inflation, now ‘stimulating the economy’ is the slogan. Until recently, mentioning QE was akin to swearing in church; now it’s the ultimate medicine. And until recently every central direction of the economy was an embrace of the rejected ‘planning economy’. And now look…

Indeed, how long will it be before we see the development of a ‘Plan B’, advocated by the SP before the euro was up for debate, a plan which should consist of a controlled and considered unravelling of the eurozone, in which one or more of the ,member states would be able to quit the system. Now that the need is so great, an emergency plan can’t be far away.

Rob Janssen is a researcher and journalist with the SP monthly Tribune, where this article first appeared, in the original Dutch, in the edition of April 2015.