Recent EU growth data (0.2%) and inflation data (0.5%) have unleashed red alarms at the European Central Bank (ECB). That is why, at the beginning of June, it took two strong measures: the reduction of the official interest rate (0.15% historical) and the incorporation of liquidity into the European economy (EUR 500bn, the largest flow in history). Well, the benefit of this gigantic monetary expansion is virtually nil. Because it is impossible to change the economic situation in southern Europe if this expansion is not complemented by debt restructuring and debt cancellation and expansive fiscal policy.

The problem of the financing needed by consumers and businesses in southern Europe is not the lack of liquidity, but the insolvency of the whole economy. Companies prefer to pay off debt rather than finance, and companies with demand problems want their customers to increase their revenue to increase their spending. It is predictable that the ECB will not incentivise the economy by further extending the allocation to European banks, which is the first avenue that has been addressed, albeit to a lesser extent. Moreover, Mario Draghi himself, President of the ECB, has just acknowledged that bank balances are still very unbalanced. Therefore, despite the fact that liquidity is sufficient in this situation, private banks will not provide credit in the amount and interest rate that the European economy needs. On the contrary, public debt operations and their domestic provision will remain a priority. Private banks are known to continue to have polluting assets, along with moments of late payment and serious capitalisation problems. In this way, credits have few incentives for simplification and less at a time when credit demand with sufficient solvency is very modest. It should be noted that corporate debt is so strong that, in the short term, the IMF itself (IMF) has recognised the need for an orderly restructuring of the debt of small and medium-sized enterprises.

The mix of policies put in place by the troika in Europe is sterile. Nobel laureate James Tobin has long stated that economies cannot go ahead if on the one hand we take money and prices, and on the other hand budgets, taxes and production. In Europe, the troika has widened the gap between the two sides. Even though monetary policy is expansive, the short-term economic and employment benefits it may have are overturned when fiscal policy is restrictive and debt continues to increase, as is the case in southern Europe. In short, without growth and with a high degree of unemployment, the payment of private debt becomes impossible. For example, wanting to do that in the Spanish state means a rapid expansion of social inequalities in times of crisis, the fastest in the European Union according to ELGA (OECD).

This could be the announcement of a new bubble to increase the ECB’s liquidity. The explosion of the new bubble can occur when the solvency conditions of some state in southern Europe deteriorate further and the monetary entity itself alerts the risk. Providing the economy with liquidity and, at the same time, maintaining restrictive fiscal policy and the debt of the South, has neither feet nor heads. The announcement of the sharp cut in public spending and investment by France and the troika show the wrong way by ordering Spain to raise indirect taxes and lower wages even further.