Just hours after Mario Draghi unveiled another €20 billion in monthly QE, bringing the total in “unconventional monetary policy” asset purchases to €80 billion per month, and entering the market for corporate bond purchases for the first time, the ECB released the text of an interview that was conducted with the Guardian on February 18, in which the central banker not only lamented youth unemployment but said he is “worried about increasing inequality.”
Here are the selected excerpts:
Are you worried about the position of young adults in Europe and is this an increasingly urgent issue?
Youth unemployment is a tragedy and prevents people from playing a full and meaningful part in society. If every second young person is out of work – as is still the case in some countries in Europe – it seriously harms the economy, because people willing to work cannot work and skills are not developed. And it threatens social harmony. Unemployment can lead in the long run to increased social problems and ill-health.
What might be the forces at work here – demographics / changing workplaces / fiscal-monetary policy – that mean that young adults appear to be receiving little of the rewards of two and half decades of average economic growth?
Nobody stays young forever. The crucial question is whether a person can participate fully in the economy over his or her life-time – get a good education, find a job, buy a home for the family. Income and wealth follow. What makes me worry is that increasing inequality might prevent people from doing that. This is an issue all our societies need to look at carefully. The ECB’s role in that is to maintain price stability, which prevents unfair redistribution. For example, our research shows that in the euro area too low inflation results in redistribution from younger, more indebted households to older households that are typically net creditors.
Naturally, what is particularly ironic about the head of the ECB complaining about inequality after doing everything in his power to make the rich even richer, is that one doesn’t have to read fringe websites to get to that conclusion. One just has to read a paper issued just a few days ago by none other than his “superior”, the Bank of International Settlements, titled “Wealth inequality and monetary policy” which explicitly states that monetary policy, i.e., more QE, is unambiguously responsible for the recent surge in inequality.
The highlights:
Our results suggest that the impact of low interest rates and rising bond prices on wealth inequality may have been small, while rising equity prices may have added to wealth inequality. A recovery of house prices appears to have only partly offset this effect… Since 2010, high equity returns have been the main driver of faster growth of net wealth at the top of the distribution.
Frost and Saiki (2014) study the impact of unconventional monetary policy on income inequality in Japan in a vector autoregression (VAR) framework. Using household survey data, they find that quantitative easing widened income inequality, especially after 2008 when policy became more aggressive. They identify capital gains resulting from higher asset prices as the main driver.
Yes, ironic, but we certainly expect Draghi to have even more heartfelt lamentations about how increasing inequality is preventing young people from getting an “education, finding a job, or buying a home for the family.” Courtesy of none other than Mario Draghi of course.
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