How to deal with Europe’s ail­ing econ­omy

Financial Mirror (Cyprus) - - FRONT PAGE -

There has been a lot of dis­cus­sion lately in Europe and es­pe­cially at the Euro­pean Cen­tral Bank for the need (or not) of non-con­ven­tional mon­e­tary tools to re­vive Europe’s ail­ing econ­omy, such as quan­ti­ta­tive eas­ing (QE).

On the one hand, you have ECB pres­i­dent Mario Draghi feel­ing the need that the ECB must act strongly to help the strug­gling euro econ­omy, and on the other you have coun­tries such as Ger­many op­pos­ing th­ese moves fear­ing that it can lead to reck­less state bor­row­ing and long-term in­fla­tion. They also ar­gue that it might lead to a halt in the adjustment pro­grammes and struc­tural re­forms that many Euro­pean coun­tries need to go through.

Europe is go­ing through a tough pe­riod, with high lev­els of un­em­ploy­ment (at 11.5% and 10% in Oc­to­ber for the euro area and EU-28, re­spec­tively, ac­cord­ing to Euro­stat), and es­pe­cially high lev­els of youth un­em­ploy­ment (un­der 25).

Ac­cord­ing to the lat­est fig­ures, youth un­em­ploy­ment was at 23.5% and 21.6% for the euro area and EU-28, re­spec­tively. Fur­ther­more, the con­ti­nent is suf­fer­ing from low lev­els of in­fla­tion (even fears of de­fla­tion in the near fu­ture), bud­get deficits across many coun­tries, and slug­gish growth. Ac­cord­ing to the lat­est flash es­ti­mate re­leased by Euro­stat, the in­fla­tion rate is ex­pected to be 0.3% in Novem­ber, well be­low the ECB’s tar­get of 2% that it wants to main­tain in the medium term. Sea­son­ally-ad­justed gross do­mes­tic prod­uct (GDP) rose by only 0.2% in the euro area (0.3% in the EU-28) dur­ing the third quar­ter of 2014, from the pre­vi­ous quar­ter.

The un­der­ly­ing prob­lems that Europe is fac­ing are many, and in­clude the loss of com­pet­i­tive­ness, es­pe­cially from among south­ern Euro­pean coun­tries to other ar­eas in the world, ex­ces­sive and un­con­trolled gov­ern­ment spend­ing that leads to con­tin­u­ous bud­get deficits and in­creases in pub­lic debt at faster rates than GDP growth, as well as low Euro­pean birth rates, cou­pled with in­crease in life ex­pectancy that raised the pen­sion and health costs.

At the same time, there is no fis­cal union, a bank­ing union that only re­cently has been put in place, and a mon­e­tary union that pre­vents mem­ber states to de­value their cur­rency to tackle the cri­sis.

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