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ECB Should Push Issue of Refugee Bonds to Turbocharge EU Growth!

Useless factoid for the day: the European Central Bank (ECB) recently let it be known that it will likely start buying equities as part of its radical approach to quantitative easing. Apparently there aren’t enough bonds around for it to be able to buy. Mario Draghi, its head, really meant it when he said the ECB will take all steps to jumpstart economic growth in the Eurozone.

Hmmm, when it runs out of stocks to buy, will the ECB start buying houses? Where does it all end? Will it end up buying everything? Become the ultimate buyer of last resort?

Of course the ECB isn’t the only believer in NIR (negative interest rates). Several Eurozone central banks are keen followers (including Germany). Then there’s the Japanese. Since they are all led by ultra-smart economists there must be a good reason for all this right?

So what’s the reason? That it will spur economic growth. But guess what? The Eurozone has just announced that its tepid rate of growth has fallen to almost nothing again. So it isn’t working there. Same as Japan where NIR hasn’t brought about the gains in economic growth that were so confidently expected. Two strikes.

I’ve recently posted that there’s mounting evidence that NIR is having the opposite effect of that intended. Instead of people rushing out to buy things before they lose their savings, they are saving more. That’s because they take NIR as a counsel of despair so they lose confidence. If you can’t get a decent rate of interest on your savings, instead of having it compulsorily taken from you, better to just save whatever you have and preferably put it under a mattress.

NIR might have been a good innovative idea at the time. But they aren't working. Mario Draghi seems to be walking back a bit on doubling down on NIR. But the big problem is, if he doesn't do that, what DOES he do? The central banks have a problem; their radical nostrums haven’t had the desired impact but this was their one and only answer. Seems like they have no more arrows in their quivers.

So how can they get EU and global growth up to par again? Here’s an idea.

The fundamental problem in Europe is declining populations that are becoming older and more burdensome. That is leading to declining investment and creeping deflation. But there’s an obvious way to address that.

How about all those Syrian refugees? They could be the shot in the arm to reverse declining populations and to increase demand consumer buying and therefore investment! It’s so obvious it hurts!

What if the ECB told the governments of the EU that it will do a deal with them? They have to accept more refugees. In return they can issue a lot more bonds backed by the ECB whose proceeds would then be used to increase social allowances to both refuges and certain segments of their populations. This would involve giving prepaid credit cards to refugees for living expenses and the purchase of housing, either rental or by mortgage.

This would fuel massive increases in consume er purchases since the refugees will spend everything they get. You can be sure that the refugees won’t be socking away this windfall under their mattresses. No question of saving for them. They will spend it all, every last centime.

In turn this would stimulate massive investment: low-cost housing, public infrastructure for the new housing, and associated investment by the private sector to cater to this new and rapidly growing population. Expect huge increases in demand to be followed by glorious, soaring inflation and voilà, problem solved. EU gets uppity-like again.

Refugees are a massive growth opportunity just waiting to happen!

OK I get it. Why would governments do this when their peoples don’t want any more refugees? Why not increase social allowances as part of the deal so that existing citizens share in the bonanza? If they accept the refuges they also get paid like the refugees are.

Some of the bond proceeds would go to projects and infrastructure that would also support existing citizens and new projects. I would imagine it would hugely help Angela Merkel sell her refugee policies to her political partners and many voters. That’s good, she needs the support.

Wouldn’t this put even more pressure on the public fisc and raise national debt levels even further? Yep, but so are the existing policies. It seems to me that if you’re going to get the job done you’ve got to do it properly. That almost certainly needs a big bang of sorts. This would be it.

It’s trite to talk about comparisons with the Marshall Plan. But the central banks need to persuade their government colleagues tout this would be a new Marshall Plan for Europe that could get it off its rear-end. It would also help ease the likely mounting pain of BREXIT.

Japan could also use this strategy. It has the same problems as Europe, declining investment and populations and an increasing demographic problem with the dependency ratio with fewer young people supporting more seniors. It needs immigration too. Some more refugees would help it too.

It's time for the central banks to start thinking big. They should convince their governments to take the bull by the horns since in almost all cases the governments are not going to undertake the necessary restructuring to solve the problem. By doing what I suggest they could throw a lifeline to lawmakers who otherwise are paralyzed. Let’s give some real meaning and teeth to helicopter money.

It’s also a nice feature that it would be the right thing to do morally. Just don’t tell anyone about that though.

 

 

 

 

 

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Monday, 21 October 2019

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