How to deal with Europe’s ailing economy
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.