Last month Germany’s version of the Sun, Der Bild, ran a sensationalist attack on the outgoing president of the European Central Bank, Mario Draghi. Depicting the central banker as “Count Draghila”, replete with vampirish teeth and velvet collar, the article portrayed the ECB boss as a fiend sucking the bank accounts of German savers dry of billions of euros with low interest rates. A day later the tabloid interviewed the head of the German central bank to ram the message home under the headline “Is our money in danger?”. There is an undoubted perception across Europe’s largest economy that the ECB was penalising savers through easy money policies that have given populists a stick to beat mainstream politicians with. However, the release of the latest economic data shows that Mr Draghi was right and German sentiment was wrong.
It is increasingly clear the risk of recession in Europe is rising. Growth is sputtering while inflation is falling. The eurozone manufacturing sector suffered its worst month in seven years while inflation dropped to a three-year low. Mr Draghi has for years attempted to resuscitate the eurozone’s sluggish economy through monetary means. Last month the ECB lowered interest rates further into negative territory and restarted the ECB programme of buying bonds. Yet as one economist perceptively put it, the problem for the eurozone is that “weak credit growth is driven by the lack of demand from creditworthy borrowers rather than the supply cost of finance”. This can be solved in part by governments stepping up to boost demand in the eurozone. Mr Draghi is right to say it is no longer tenable to claim that monetary policy alone can deal with the entrenched problems of the continental economy. Instead he correctly called for fiscal policy to become the main economic instrument to sustain demand in the eurozone.
Nineteen countries in the European Union use the euro as their currency. Yet for all sorts of reasons Europe has denied governments the ability to use their budgets to boost demand. The diverging priorities of various parts of the euro area add to the dilemma: Germany has low levels of unemployment but a third of young workers are unemployed in Italy and Spain. While core economies are worried about cheap money fuelling runaway house prices, the ones on the periphery suffer from high borrowing costs. That is why Mr Draghi’s necessary call is provocative.
In the face of the threats to the EU there ought to be much more engagement with people’s angst and dislocation. Mr Draghi’s replacement, Christine Lagarde, says fiscal policy is required “to respond to the threat of populism”. In the EU, France’s Emmanuel Macron deserves credit for recognising two years ago that “Europe’s fiscal policy is too restrictive … and our jobless are paying the price”. Despite enacting painful reforms at home to win Germany over to his cause, Mr Macron unfortunately failed to get agreement for a eurozone fiscal capacity big enough to offer meaningful stimulus that would be funded by a share of taxation currently going to national budgets. Instead of a bazooka with hundreds of billions of euros in funding, in June eurozone nations could only agree a peashooter of a fund worth €17bn. Perhaps fiscal policy at the eurozone level ought not to be run along German lines. It would be better if onerous fiscal rules for nations on borrowing and debt were relaxed. Since 2008 there has been a growing political divide. To bridge this requires a shift in the balance of power and thinking within Europe to promote cohesion and solidarity. Politicians must seize an opportunity from the continent’s ongoing economic trouble.
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