Eurozone collapse
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In early February, in a post titled "A Wounded Deutsche Bank Lashes Out At Central Bankers: Stop Easing, You Are Crushing Us", we showed just how vast the feud between Europe's biggest - and ever more troubled commercial bank - and the ECB had become. As DB's Parag Thatte lamented then, "ECB rhetoric suggests additional easing measures forthcoming in March. While a fundamental tenet of these measures, in particular negative rates, has been to push investors out the risk spectrum, we remind that arguably the impact has been exactly the opposite." And while the DB analyst has been correct, and now NIRP is widely accepted as a major mistake, the ECB proceeded to not only ease even more just one month after this first DB lament, but in what may have been a direct affront to DB, launched the monetization of corporate bonds, something which as we documented earlier today has now led to the complete disconnect between bonds and underlying fundamentals.

It was also led to daily record low yields for government bonds around the globe.

Last but not least, it has pushed the stock price of Deutsche Bank to levels not seen since the financial crisis as DB suddenly finds itself unable to make money in an NIRP environment.

Which brings us to today, when overnight DB's chief economist David Folkerts-Landau released a scathing report titled "The ECB must change", one which blows DB's February lament out of the water, and in which DB accuses the ECB of putting not only its future at risk, but the future of the entire Eurozone, with its destructive policies.


A quick read of the executive summary of this epic rant reveals just how shockingly bad relations between Germany's biggest bank and the former Goldman partner have now become.
Over the past century central banks have become the guardians of our economic and financial security. The Bundesbank and Federal Reserve are respected for achieving monetary stability, often in the face of political opposition. But central bankers can also lose the plot, usually by following the economic dogma of the day. When they do, their mistakes can be catastrophic.

Today the behaviour of the European Central Bank suggests that it too has gone awry. After seven years of ever-looser monetary policy there is increasing evidence that following the current dogma, broad-based quantitative easing and negative interest rates, risks the long-term stability of the eurozone.

Already it is clear that lower and lower interest rates and ever larger purchases are confronting the law of decreasing returns. What is more, the ECB has lost credibility within markets and more worryingly among the public.

But the ECB's response is to push policy to further extremes. This causes mis-allocations in the real economy that become increasingly hard to reverse without even greater pain. Savers lose, while stock and apartment owners rejoice.

Worse, by appointing itself the eurozone's "whatever it takes" saviour of last resort, the ECB has allowed politicians to sit on their hands with regard to growth-enhancing reforms and necessary fiscal consolidation. Thereby ECB policy is threatening the European project as a whole for the sake of short-term financial stability. The longer policy prevents the necessary catharsis, the more it contributes to the growth of populist or extremist politics.

Our models suggest that in its fight against the spectres of deflation and unanchored inflation expectations the ECB's monetary policy has already become too loose. Hence, we believe the ECB should start to prepare a reversal of its policy stance. The expected increase in headline inflation to above one per cent in the first quarter of 2017 should provide the opportunity for signaling a change.

A returning to market-based pricing of sovereign risk will incentivise governments to begin growth-friendly reforms and to tackle fiscal stability. Flagging the move should dampen adverse reactions in financial markets.

We believe that normalising rates would be seen as a positive signal by consumers and corporate investors. The longer the ECB persists with unconventional monetary policy, the greater the damage to the European project will be.
And just in case readers don't have a sense of what "great damage" from a central bank looks like, DB is happy to provide the imagery: think Weimar hyperinflation and even another Great Depression.