In France it was 2006. In Ireland and Spain it was 2003. In Greece it was 2001. In Portugal and Cyprus 2000, in Italy 1997. That’s how far back you have to go to find a year when living standards peaked for these countries. Note that the worst performance has not been in a country bailed out since the eurozone debt crisis, but in Italy, now in the final stages of not one but two lost decades.
Little wonder, then, that the Italian in charge of the European Central Bank, Mario Draghi, called for more growth-friendly policies in his speech at the Jackson Hole symposium last Friday. Draghi drew an unfavourable contrast between the eurozone and the US. In both, unemployment rose by five percentage points due to the “great recession” of 2008-09; in the US, subsequently, it has fallen by four percentage points but in the eurozone it is still more than four points higher.
This year, growth in the US is picking up after a weather-affected winter; in the eurozone activity is at a standstill and deflationary pressures are growing.
The speech of Janet Yellen, chair of the Federal Reserve, was pored over for clues as to when the US central bank might raise interest rates, while observers wanted to know what additional stimulus the ECB could offer.
The threats to the eurozone – or at least the most vulnerable parts of it – are both economic and social.
The economic risk is that prolonged stagnation, coupled with very low inflation or even outright deflation, puts pressure on already stretched public finances. Inflation eases the burden of debt; deflation increases it. For countries like Italy, which already have national debt well in excess of 100% of annual national output, keeping up interest payments could become unsustainable.
The social threat is that high unemployment leads to the sort of social unrest seen in Ferguson, Missouri, over the past two weeks. Inequality levels are not as pronounced in Europe as they are in the US but they might become so over time. Double-digit levels of unemployment, stagnation and higher concentrations of wealth are not a recipe for social harmony.
What then is to be done? One option is to do nothing apart from sort out Europe’s structural problems. Those who favour this approach say that, in part, demographics explain why the eurozone has a slower growth rate than the US: America has a rising population, Europe does not.
But Europe also has too many impediments to growth: over-restrictive labour laws, too much bureaucracy, too many protectionist tendencies that prevent the full implementation of the single market.
As far as Germany is concerned, austerity has been a useful tool for forcing unwilling governments in southern Europe to embrace structural reform. Berlin would dearly like France to swallow a dose of the same medicine.
Draghi’s comments at Jackson Hole suggest, though, that the Germans are becoming isolated. Austerity is not lubricating structural reform; rather, as the economist Vicky Pryce has noted, it is turning Europe into a gigantic debtor’s prison.
The ECB now accepts it would have been better for Europe to have followed the American approach, which seemed to involve getting the economy back on its feet before worrying too much about how much money the Federal Reserve was printing or the size of the budget deficit.
This is not an entirely accurate portrayal of events in the US, since ideological differences between the Republicans and Democrats in Congress involved tightening fiscal policy – raising taxes and cutting spending – well before the economy recovered.
But Draghi is right in his analysis. Europe’s economic woes are not just to do with an ageing population; they are also due to fiscal policy being too tight for too long, and to the ECB being slow and, unlike the Fed, Bank of England and Bank of Japan, unwilling to try something different.
If history is any guide, Europe will continue to move in baby steps rather than go for a bolder approach. Budget rules will perhaps be relaxed temporarily so that countries can run deficits of more than 3% of gross domestic product without facing the possibility of sanctions. State finances will be jiggled so that money goes to where it is thought good for growth, such as infrastructure spending. The ECB will, once the Germans have been won over, announce a modest quantitative easing programme, buying bonds from the banks in exchange for money in the hope that this will lead to increased flows of credit around the eurozone economy.
Will this work? It certainly won’t do any harm, but it falls a long way short of being a full answer. Central to Europe’s economic malaise is that its banks are in poor shape. They were even more badly run than their British and American counterparts during the years leading up to the crisis, and have been slower subsequently to raise capital and repair their balance sheets.
QE has not worked especially well in the US or UK, where the banks are in better shape. The cash the banks have received in exchange for bonds has either been hoarded or recycled through the financial markets to fund purchases of a range of assets. An ECB QE programme would be even less effective given the fragility of the banks.
Mark Blyth, economics professor at Brown University, and Eric Lonergan, a London-based hedge-fund manager, have come up with an alternative: print the money but cut out the middlemen and hand the cash straight to the people instead.
In the US magazine Foreign Affairs, Blyth and Lonergan write that instead of pursuing policies that ramp up asset prices and make the financial system less stable, central banks should write a cheque to every household – or, if they wanted to tackle growing inequality, just to the poorest 80% of households.
Unlike the banks, consumers, especially the hardest pressed ones, would spend rather than hoard.
The ECB, in other words, could learn from the QE programmes in the US and the UK and become the guinea pig for what Milton Friedman called helicopter drops of money. Higher interest rates could be used to counter any inflationary pressure, Blyth and Lonergan say.
Germany, clearly, would try to strangle such a plan at birth. For Angela Merkel, it is redolent of the hyperinflation of 1923. But the numbers do not lie. France: 2006. Spain: 2003. Greece: 2001. Italy: 1997. The eurozone is an economic disaster area.
Draghi knows that pressure for a different approach is becoming irresistible, which is why he is preparing more unconventional measures. So, say Lonergan and Blyth, why not try something unconventional that might actually work?