Mere sur­vival not suf­fi­cient to re­store euro-zone health

The Irish Times - Friday - The Ticket - - FRONT PAGE - Arthur Beesley

Euro­pean Cen­tral Bank chief Mario Draghi is in Brussels to­day for a lunch meet­ing with the lead­ers of the 18 euro-zone coun­tries, Taoiseach Enda Kenny among them. At is­sue is the bat­tle to re­vive eco­nomic growth, cre­ate mil­lions of jobs and pre­vent a de­fla­tion­ary spi­ral. On th­ese fate­ful and highly politi­cised ques­tions, how­ever, the lead­ers seem as di­vided as ever.

Two months have passed since Draghi sig­nalled a tacit shift in ECB pol­icy when he ad­dressed the Jack­son Hole sym­po­sium in Wy­oming. Not only was the Frank­furt­based bank ready to use all avail­able tools to tackle the threat of de­fla­tion, but Draghi also called for dis­cus­sion on the over­all fis­cal stance of the euro zone.

While this marked an im­plicit turn away from the ECB’s nar­row fo­cus on fis­cal rec­ti­tude, Draghi in­sisted gov­ern­ments must main­tain dif­fi­cult struc­tural re­forms as well.

Although he did not say so di­rectly, this was re­ceived as a quid pro quo. The ECB would in­deed act and gov­ern­ments should be given some lee­way to boost growth, but only if they kept up hard work to over­haul their strug­gling economies.

A new ECB ini­tia­tive to buy up as­set­backed se­cu­ri­ties quickly fol­lowed, tak­ing the bank one step closer to out­right quan­ti­ta­tive eas­ing in the mode of the Fed­eral Re­serve, the Bank of Eng­land and and the Ja­panese cen­tral bank. De­bate rages still as to what ex­actly the ECB might do next and when, with talk this week of a new plan to buy up cor­po­rate debt be­fore any scheme to buy sov­er­eign bonds.

Such moves by the ECB would be con­tentious, yet ECB ac­tion is but one part of the story. As Draghi made clear, the na­ture and scope of gov­ern­ment ac­tion is cru­cial too.

This brings us to to­day’s gath­er­ing, which takes place amid grow­ing squab­bles over bud­getary pol­icy in each of the big three euro zone economies and zero growth. Both France and Italy are threat­ened at the mo­ment with re­jec­tion of their bud­gets by the Euro­pean Com­mis­sion.

This marks the first big test of newly re­in­forced bud­get law which sup­posed to keep mem­ber states in good fis­cal or­der and pre­vent any re­peat of the sov­er­eign debt cri­sis. As for Ger­many, other coun­tries would love to see a plan to boost in­fra­struc­ture in­vest­ment and nudge its list­less econ­omy into life. Such de­mands do not go down well in Berlin.

New com­mis­sion

In the back­drop here is the elec­tion two days ago of the new com­mis­sion, which takes over next month un­der the com­mand of Lux­em­bourg’s for­mer prime min­is­ter Jean-Claude Juncker.

So where is it all go­ing? Sig­nals be­fore the gath­er­ing point to an ef­fort to­day to pa­per over po­lit­i­cal dif­fer­ences be­tween lead­ers be­fore a fur­ther ef­fort to set­tle a grand plan on eco­nomic growth at the next sum­mit, in De­cem­ber. Juncker has made great play of a ¤300 bil­lion in­vest­ment project to stim­u­late the econ­omy, but he does not take of­fice un­til Novem­ber 1st. Only then would work pro­ceed to fi­nalise the plan.

Juncker has in­sisted for many months that ma­jor in­vest­ment is cru­cial to re­store growth and cre­ate jobs. He says strict bud­get rules can­not be changed per se but can be im­ple­mented with flex­i­bil­ity.

This might just open po­ten­tial lee­way on the fis­cal front for Ital­ian prime min­is­ter Mat­teo Renzi and French pres­i­dent François Hol­lande, whose sub­mis­sion of bud­gets in breach of EU rules can be seen as a ne­go­ti­at­ing ploy.

(In the lo­cal Ir­ish con­text, their ac­tions raise valid ques­tions as to whether big coun­tries should be ab­solved for breach­ing sup­pos­edly strict bud­get rules when smaller mem­ber states such as our own im­ple­ment them to the let­ter.)

At the same time, sig­nals from Berlin sug­gest Ger­man chan­cel­lor An­gela Merkel is not spoil­ing for a con­fronta­tion at this junc­ture with Renzi and Hol­lande. That could eas­ily change, of course.

While Merkel has rigidly held the line for years on fis­cal dis­ci­pline, it should not be beyond the bounds of her con­sid­er­able in­tel­lect to re­alise and ac­cept that Europe’s present course is sim­ply not work­ing. EU lead­ers nar­rowly averted out­right catas­tro­phe by hold­ing the sin­gle cur­rency to­gether at the height of the debt de­ba­cle.

The present, ever-deep­en­ing malaise demon­strates, how­ever, that mere sur­vival is not suf­fi­cient to re­store health.

This is why Draghi’s in­ter­ven­tion in Jack­son Hole seemed so strik­ing, point­ing as it did to some kind of a way out of the mire. Bet­ter to act late than never but it’s very late al­ready. Quite how bad must things be­come be­fore an ap­pro­pri­ate re­sponse?

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