Mere survival not sufficient to restore euro-zone health
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.
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?