Although they’d never be so gracious as to admit it, there must be times when European finance ministers are jealous of George Osborne. Not just for Britain’s economic recovery, although that’s part of it: growth in the Eurozone has more or less stagnated this year. But also for the way that Osborne has been able to go about things. The Chancellor, you’ll remember, long ago outsourced his economic policymaking to the Bank of England. And they responded with one of the biggest policies in history: £375 billion of Quantitative Easing. Our economy could be some 3 per cent larger because of it.
Policymakers across the Eurozone will want a slice of that action, but will they get it? This question clings to Brussels like a death shroud, put there by the grim prospect of deflation. Prices in the euro area grew by only 0.3 per cent in the year leading to August, well below the European Central Bank’s target of just under 2 per cent. It hasn’t been that low for five years.
In some cases, such low inflation – or even deflation itself – isn’t anything to be feared. But, thanks largely to the indebtedness of its countries, business and people, the Eurozone is unlikely to be one of those cases. The problem is that deflation raises the real cost of debt. Interest rates that were signed off in expectation of a certain rate of inflation are more onerous now that incomes haven’t inflated by as much. Folk have to use a greater proportion of their revenues to service their debts, and reduce their spending on other items accordingly. That isn’t good for an economy’s health.
These fears have been aggravated by the ol’ switcheroo that’s taken place in Euroland. In the second quarter of this year, economies such as Spain’s and Portugal’s grew by 0.6 per cent. Whereas the economy of France grew by 0.0 per cent, which is to say not at all. The Eurozone’s second largest economy is now also one of its most defective. Springtime is a distant season in Paris.
All of which helps explain the actions of Mario Draghi, the President of the European Central Bank, last week. The ECB has already dabbled in some policies that will be familiar to Brits, including a Funding for Lending scheme that’s designed to loosen up credit. But now it appears to be further copying le style anglais. Draghi announced a bond-buying programme, as well as new cuts to Eurozone interest rates. The bonds that will be bought are private sector ones: asset-backed securities and covered bonds. Apparently, the ECB wants to spend its balance sheet back up to the 2012 level of €2.7 trillion. It is currently at €2 trillion.
This promise of €700 billion has already achieved something: the euro has fallen against the dollar, helping to make European exports a touch more competitive. But it is unlikely to achieve much else, as it remains little more than a promise. The difficult truth is that there aren’t many bonds of the sort that Draghi wishes to buy. One investor tells Bloomberg that it takes him three months to buy €1 billion’s worth of asset-backed securities. At that rate, €700 billion would take 175 years.
There is another option open to the ECB: Quantitative Easing proper. Many analysts believe that Draghi is now on a course to buying up sovereign bonds, and that he will reach his destination early next year. This was certainly suggested by his impromptu claim, in a recent speech, that “The Governing Council will… use all the available instruments needed to ensure price stability”.
But words are just words, in the same way that promises are just promises. Draghi’s true convictions remain mysterious. In the same speech, he also called for “a policy mix that combines monetary, fiscal and structural measures at the union level and at the national level”. Some observers regard this as a firmer set of barriers to QE. Countries will have to stimulate themselves, so to speak, before the central bank steps in.
Whatever the case, there remains a massive, 137,847-square-mile impediment to QE in the Eurozone. And that is Germany. As soon as Draghi announced his asset-purchasing plan, one of Angela Merkel’s allies voiced his – and probably her – disapproval. This isn’t just a matter of economics for many Germans, it’s a matter of history: policies that stoke inflation are a horrible reminder of the Weimar era and all that followed. And it doesn’t help that Berlin’s political class currently has a UKIP-style insurgency to contend with. The ‘Alternative für Deutschland’ is gaining support for its anti-euro stance. One of its policies is all-out resistance to bond purchases, on the grounds that they would be a form of stealth bailout for less solvent countries.
Stealthy or no’, there are plenty of unresolved questions about QE. One is how it would work: anything that seemed to privilege one country above another would probably be challenged in the courts. Another is whether it would work at all: the yields on many bonds in the Eurozone are already at record lows. Flushing Europe with cash could just be an expensive way of letting France and Italy off the hook with their own reforms.
Sadly, these are not moot considerations for Britain. The threat of Euro-breakup may have subsided – as few countries appear to have the stomach for it – but the threat of Euro-decline remains. And what would that mean for our economy, particularly when it comes to trade? If the ECB tries to weaken its currency to strengthen Eurozone exports, British merchants may suffer. But if nothing is done, and our largest trading partner continues to slump, then the outcome could be worse. The Continent’s illnesses have already infected our trade balances.
And that’s before we consider what most afears the markets: the potential for conflict between Russia and Ukraine. The debate over Quantitative Easing is a sign that many Eurozone countries can barely stand by themselves, let alone stand up to a shock. Not even Osbornomics will spare them if it comes to war in Europe.