The future of Europe is going through a rehabilitation of its experts
Growth since 2009: China +139%, India +96%, the US +34%, Europe –2%.
These figures tell the story of the European Union’s spiralling macroeconomic decline. The lack of reactivity of our public policies, in the aftermath of the financial crisis, led to a reduction in imports, with the most hard-hit eurozone countries seeing their balance of payments go into surplus while the Union itself was in deficit precisely because of their imports. These surpluses underpin the value of the single currency that is stifling growth… The fact is that quantitative easing has had little effect on Europe’s growth. In reality, the ECB’s monetary policy hasn’t really had the effects anticipated because Europe has China to thank for its few healthier statistics. Europe’s growth didn’t react as anticipated in 2015 and 2016 – the first two years of the QE programme – because global trade grew at the anaemic rate of 3%. Since Europe’s survival is greatly dependent on its exports, it is only with help from the Chinese stimulus packages that its growth was able to balance itself out again to decent levels in 2017, and with good reason because global trade grew by 5% that same year. In other words, while it is tempting to attribute Europe’s improved growth in 2017 to QE, it is to the beneficial effects of the uptake in world trade that our continent owes its progress. All other things remaining equal, it’s China’s deleveraging and the pain of its financial system’s extreme vulnerability that now weigh heavy on world trade and that are consequently slowing down our own already-weak growth rate.
With this backdrop, the end of QE announced by the ECB will have as a consequence an increase in interest rates that the nations of Europe won’t be able to afford because of the high real rates that they are already suffering, the weak productivity, and finally because of a euro that will go on appreciating while its real level is now higher than when the QE programmes were launched..! The most fragile countries in the eurozone will again become dependent entirely on financial markets to fund themselves, beginning this year, during which the ECB’s special programme will end. Mario Draghi may well assure us that his institution has the “instruments” to combat a possible umpteenth recession, but the fact remains that – in its current form – the euro is the direct successor of the gold standard. The downfall of the euro’s genetic make-up is that the Union is all but paralysed because it has no Plan B for when its stance of monetary policy is barely effective or not at all. Since the ECB’s firepower seems to have had only limited effects for various reasons that we won’t go into here (too little, too late…), logic would have it that it’s budgetary and fiscal policy that take control of the reins…but that’s not taking into account this phobia of deficits that is literally crippling Europe’s leaders.
The theory states that a high level of public deficit neutralises private investment by exerting upward pressure on interest rates and should in fact not be taken into consideration during times in the zero lower bound, like the zero rates we see today. And it’s possible to act on restoring consumption, which can propel private investment with great effect. In short, the legitimate macroeconomic concerns relating to high public deficits are no longer valid when the rates hit 0, because any good budgetary and fiscal stimulus package is by definition temporary. Besides, this intransigent position on deficits is barely comprehensible when public debts are issued with the borrower’s money, or, put another way, when the country is truly sovereign because it can freely issue its own currency, like the European Union, the UK, or Japan. Unless this approach that targets perfect budgetary balance is just another attempt at further shrinking the prerogatives of the state?
The different governments of Europe are washing their hands of it and seem to be relying almost entirely on the ECB to get them to reach inflation levels compatible with healthy and lasting growth. It’s as if they had delegated their powers to the ECB, that is at best able to smooth out and alleviate recessions as central banks are only rarely able to restore growth solely by changing their rates. Monetary policy, an extremely powerful instrument that we can’t do without, is however not powerful enough to act alone effectively, that is to say in the absence of reinforcements and support from budgetary policies. Automatic stabilisers, reduced unemployment and better financial regulation are more effective than a monetary policy stance applied by a central bank. It is also undeniable that our banks’ monetary policy – that have de facto been the only real adjustment variable these last few years – has greatly contributed to the creation of a new monster, to the same extent that stock market prices are unrealistic! In doing so, the central banks have made winners and losers, which is normally the exclusive right of politicians. It’s only political leaders, therefore, who are responsible for this situation that is as unprecedented as it is deplorable, where the West’s interest rates are pushed beyond zero – into negative territory – in order to placate the deficiencies of timorous policies. Monetary policy has therefore taken over politics – real politics – because the central bankers had no other choice. The current almighty power of the central banks therefore reveals only the obvious failure of our politicians, just like it also shows the financial markets to be incapable of going without shooting up their now-regular dose of monetary injection.
In summary, the central banks have been forced to appear from the shadows to assume responsibilities that it never asked for but that others have been stripped of. Once lenders of last resort, the central banks have become lenders of first resort! The fact remains that our central banks have handled themselves well during the financial crisis – I mean in light of theirtotal solitude – and in the absence of support from suitable budgetary policies. However, as our democracies can no longer satisfy the omnipotence of non-elected figures, our political leaders must accept their responsibilities. Whatever the case, living now at a time when populists repeatedly stigmatise experts, it’s really them and the ECB that the nations of Europe have to thank for their violent turbulence during the financial crisis, despite not quite going down. The direct recourse to the people has clearly shown – sometimes to the absurd – just how problematic it is to organise referendums on such technical subjects. It is thus time to rehabilitate the experts.
Extracts from my remarks during a private discussion on the future of Europe on 8th March, organised by the University of Geneva, together with Jean-Claude Trichet and Jean-Pierre Roth, former presidents of the European Central Bank and Swiss National Bank.