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The ECB has created a debt bubble in Europe by pursuing a monetary policy that is far too loose for years. With the purchase of government bonds and private debt, the central bank has created an unprecedented mountain of debt, which is almost impossible to control. That's what former minister Hans Hoogervorst says in conversation with Paul Buitink of Holland Gold.
As a result, necessary reforms have not been implemented in countries such as Italy, and countries with structural budget deficits and excessive public debt have not been called to order. Hoogervorst cites the example of the Italian pension system, which is not covered by capital and on which the government spends 14% of its budget. This can only be maintained if interest rates on Italian debt remain low.
In order to restore fiscal discipline in the currency union, the ECB should continue to raise interest rates. In this way, it can bring down inflation and increase the pressure on countries with weak financial positions. Only then is there still a possibility that countries will finally reform and that the euro will become a stronger currency again, according to Hoogervorst.
To date, however, this has not been the case. For far too long, the ECB has pursued a monetary policy that is far too accommodative, while the corona fund offers too few opportunities to enforce fiscal reforms. In fact, a country like the Netherlands pays much more into this fund than it gets out of it. 'As the Netherlands, we have negotiated this in an unprecedentedly bad way', according to Hoogervorst.
Hoogervorst is not in favor of leaving the euro, given the vicissitudes he has experienced around the Brexit. He prefers to reform the currency union to bring back discipline, but he says that is not possible without having an alternative plan up his sleeve. In that sense, it is also important to think about an exit strategy, even though that is not preferable, according to Hoogervorst. Without an exit scenario, things can get completely out of hand. "What good is Europe with a kind of lira as its currency?"
According to Hoogervorst, if we want a strong Europe, we must have a strong currency with a sound fiscal policy and a sound budgetary and monetary policy. That is not the case now. In fact, according to Hoogervorst, we have already sunk so far that the central bank is buying up private debt and thus also keeping hedge funds afloat. "We are in the process of bailing out private parties that have withdrawn so much money from the system and made the most monstrous profits. It's indescribable."
According to Hoogervorst, there is a good chance that the ECB will continue to muddle through and tolerate a much higher inflation rate of 4 to 5 percent in order not to increase the pressure on the debts of southern countries too far. But the ECB will have to do more to restore its credibility. To do so, Hoogervorst says, it must continue to raise interest rates to bring inflation back to its 2% target. This requires strict discipline, and it also means that we must be prepared for a new debt crisis. "There's so much debt in the system that you never know where it's going to blow up."
