Who can blame those who believe that the eurozone economy is being run by central bankers? Resolute political leadership in Europe seems to have vanished almost completely.
The fixing of a lethargic economy is now left in the hands of technocrats who have powerful – but often defective – tools to stimulate growth and thereby reduce unemployment.
The president of the ECB is undoubtedly one of the most capable central bankers in the current global economic scene. He may be the most influential person, staving off an even bigger economic slump in Europe in the last few years when he defended the euro with his now famous “I’ll do whatever it takes to save the euro”. This strategy was successful for a time as monetary policy was loosened to encourage growth and crack the hard core of unemployment.
But now there are increasing signs that new weapons are needed to stimulate economic growth and tackle the risk of deflation. The armoury of the ECB still has some monetary tools that it can use but the armoury is fast being depleted.
The latest tools used by the ECB aim to ‘exploit the synergies’ between asset purchases and ultra-low interest rates. But whether the new measures will favour pass-through from the banking system to the real economy is still very much in doubt.
On the one hand the ECB is encouraging banks to lend more, even offering them cheap and subsidised financing to do so. But on the other hand it is scrutinising the business models of many banks that fall under its direct supervision to ensure that they shy away from the risky lending that caused havoc in countries like Ireland, Spain, Portugal, Greece, Italy and Cyprus in the last decade.
The latest weapon used by the ECB (labelled with the ugly acronym of TLTRO) is an auction of cash for the value of as much as 30 per cent of a bank’s loan book: “At most banks will pay nothing on the four-year loans from the ECB, which they will not have to pay back until 2020 at the earliest. But if the banks lend more, than the ECB will pay them up to 0.4 per cent interest on the lenders’ loans with the central bank.”
There are increasing signs that new weapons are needed to stimulate economic growth and tackle the risk of deflation
An earlier version of this weapon was used a few years ago with little success.
The real problem is that entrepreneurs have lost their risk appetite as households fear for their future and are more inclined to save than to spend. The political problems that are engulfing most EU countries are not helping and many understandably are very sceptical about the chances of success of the latest measures taken by the ECB.
The political malaise in Europe is shaking the very foundations of parliamentary democracy as we have known it for the past five decades. Countries like Spain, Portugal and Ireland that had to administer bitter doses of austerity to their citizens are being punished by the electorate that no longer want to see their quality of life sacrificed on the altar of good fiscal governance.
Ireland’s economy is growing at the fantastic rate of over seven per cent. Yet the Irish did not think twice about sack the governing coalition that was the architect of this return to healthy growth.
The political leaders of the larger EU member states are no less at fault in making their citizens lose faith in their ability to lead their countries to success.
The ruling Conservative party in Britain is engaged in a fratricidal battle to decide whether the UK should remain a member of the EU.
The German Chancellor is facing a rebellion within her own party as the refugee crisis is increasingly being seen as a threat to the German way of life.
In Italy, the Democratic Party is putting spokes in the wheels of their pragmatic leader leaving the country to wallow in a state of economic inertia.
This will be a crucial year for the EU. The uncertainty about the UK’s future with the EU, the increasing socio-economic pressures brought about by the massive influx of migrants, the increasing threat of terrorism as Libya continues to act as a failed state, and the political fragmentation in countries like Spain, Italy and Ireland will undermine the chances of a return to normality.
The ECB on its own can never guarantee this normality. Monetary tools are powerful and useful, but what Europe needs most is strong political leadership.
johncassarwhite@yahoo.com