“We have shown today that we’re not short of ammunition,” said Mario Draghi. The President of the European Central Bank, though, used the bullets he had to shoot himself – and what remains of the global economic recovery – in the foot.
On Thursday, the ECB fired its “big bazooka”. Central bankers in Frankfurt, in yet another bid to get the moribund Eurozone economy moving, created even more virtually-printed money while pushing already negative interest rates down further.
The ECB’s main refinancing rate was lowered from 0.05pc to zero, while the deposit rate dropped from -0.3pc to -0.4pc. So Eurozone commercial banks will be charged more to lodge excess reserves at the central bank, apparently encouraging them to extend loans to firms and households.
Europe’s already aggressive quantitative easing is to be expanded. The ECB will conjure up more money-from-nothing to buy €80bn rather than €60bn of bonds monthly, with the money-printing programme, already a year old, extending to at least March 2017.
If you think that all sounds ridiculous, I agree with you. The Eurozone economies need to get their public finances under control, impose labour market reform and make themselves more competitive. That’s practically impossible for many of them, of course, as they’re locked in the merciless high-currency strait-jacket that is the euro – the value of which is low enough for German exports to sell like billy-o but far too high for the likes of Greece, Italy and Spain.
Europe’s banking sector, meanwhile, remains buried up bad loans. The smoldering, non-performing debt pile amounts, on the latest official figures, to €1,000bn-plus, twice as much as in the US. Rather than insisting banks write down such losses, enduring the necessary purge of restructuring, the ECB helps them remain in denial – pumping bank share prices with QE while allowing them to offload onto taxpayers ever more of their rancid mal-investments.
The Eurozone isn’t unique in this regard, of course. The UK, US and Japan have all engaged in huge QE over recent years – not only to shield badly-run banks but also keep downward pressure on their currencies, “stealing competitiveness” from elsewhere. Draghi’s blunderbuss was off-target to such a degree last week, though, that these fresh holes in market confidence could go beyond Europe, the collateral damage spreading wider.
It was all going so well, prior to Thursday and the ECB’s long-awaited press conference. Oil looked firm, up 45pc since the start of the year – not least on growing expectations of a Saudi-Russia production-freeze agreement. In normal times, dearer oil is bad, of course. In the hall of mirrors that is today’s policy-making environment, higher crude not only lowers deflation risks, but makes it less likely deeply-indebted US shale producers will blow up, so making it less likely their credit risk sparks market mayhem, like a repeat sub-prime crisis.
As Draghi unveiled his latest wave of monetary shock and awe, everything went to plan. Investors rejoiced, stocks and bonds rallied and the euro shed over a cent and a half against the dollar. As the press conference ended, though, the ECB supremo suggested this latest bout of rate-cutting and money-spraying could be the last. Perhaps, possibly, one day, the ECB may have to admit rates can’t go even lower, the “funny money” tap needs to be shut off and “whatever it takes” must end.
Merely that suggestion, that slightest nod towards some kind of policy normality – not now, not even soon – provoked an impetuous market volte face. Shares plunged, yields soared and the euro spiked, going far higher than before Draghi had unveiled his ultra-loose monetary package in the first place. The ECB, then, went Japanese in an instant, joining that unenviable club of central banks so grotesquely mismanaged that, as monetary policy gets looser, their currency goes up. All at once, Super Mario lost his mojo, Draghi flicking from all-powerful to impotent in the blink of an eye.
It had been the migrant crisis. Then it was the collapse of the Schengen agreement on free movement and the threat of Brexit. Draghi last week trumped all those potentially seismic events to ensure that the ECB’s latest desperate attempt to boost growth is now the greatest danger facing not only the European, but also the British economy.
I had wanted to devote this weekend’s column entirely to George Osborne’s budget this coming Wednesday. Likely to be his toughest since the 2012 “omnishambles”, the Chancellor approaches budget day not only short of cash, but with his pledge finally to register an annual budget surplus by 2019-20 looking decidedly shaky.
Having backed away for now from his planned pensions overhaul, for instance, Osborne now can’t rely the related shift of future tax revenues closer to the present – a fiscal sleight of hand that would have virtually guaranteed his surplus target.
Before Draghi’s blunder, I’d planned to write mainly about the “Northern Powerhouse” – and why Osborne should use his Commons set-piece to promote this important initiative, now almost two years old, to catalyze growth and prosperity beyond the UK’s fast and furious south-east.
Transport for the North, the body commissioned by the Tories to draw up plans to transform transport in northern England, last week published a thumping report. Setting out proposals for projects including a high-speed trans-pennine rail link to slash north-west to north-east journey times, and a road tunnel connecting Manchester to South Yorkshire.
Better transport connections are clearly vital if our Northern towns and cities are to combine, as they should, to compete on the world stage. The report rightly promoted a “more integrated economy”, with a “focus on planning and decision-making to enhance the economic potential of the North” – not just to better transport, but more housing and better access to new technologies and specialist skills.
Under one scenario, a Northern growth surge could generate over £56bn of value a year by 2040 in today’s prices, adding 1-2pc to the size of the national economy. There is surely no reason why, through of combination of advanced manufacturing, energy generation and storage (including low carbon technologies) as well as services, the North can’t once again become a global growth centre. Given the potential in higher education, creative arts and science, this iconic region has every chance to shine again.
Years of stagnation in some areas, and the stigma of depravation, mean big, bold decisions are needed. I’ve long argued Osborne should bring forward HS3 – the informal name for linking-up trans-North rail routes – so it happens before the vanity- project that is HS2. Spending £15bn or so creating a second world-class British growth hub makes so much more sense than squandering £50bn (and counting) to shave time of the London-to-Birmingham route, a project that will anyway make the UK even more London-centric.
Next week’s budget will be tough. Government spending cuts averaging over 1pc of GDP are already in the pipeline. That’s before the Chancellor is forced to rein-in the optimistic growth assumptions he made during his last autumn statement, making the public finances look weaker still.
I worry though, such details will be missed. I’m concerned vital debates on UK fuel duty and VAT will be put on the back-burner. Even if Osborne can win over the skeptics, by putting government money where his mouth is, the Northern Powerhouse may not get the attention it deserves.
That’s because next week’s budget could easily be over-shadowed by global market fall-out, and the resulting loss of economic confidence, stemming from the ECB latest bout of monetary madness.
Follow Liam on Twitter @liamhalligan