Last weekend, Angela Merkel debated her opposite number Martin Schulz on television, ahead of this month’s election. What was billed as a ‘duel’ between the German Chancellor and her Social Democrat challenger, was actually more of a ‘tea dance’.
Largely agreeing with Merkel throughout, Schulz made little impact. With a fortnight to go until the 24 September election, it’s now almost certain the Christian Democrats will prevail. Having led her party since 2000, and Europe’s largest economy since 2005, Merkel is set to win another term.
The end of summer, for economists at least, is marked by the Jackson Hole symposium. This annual central banker summit, set in the picturesque Wyoming mountain resort, is generally of interest only to faceless financial investors and policy wonks. This weekend’s gabfest, though, is likely to attract more attention.
One reason is that this could be the last hurrah for Janet Yellen. The diminutive Federal Reserve boss, the only woman ever to hold this vital post, could soon be replaced. Her first term expires in February – and President Trump could decide not to reappoint her.
You might think the “euro-crisis” is solved. After all, the economy of the 19-country eurozone expanded at an annual rate of 1.8pc during the first quarter, outpacing Britain and the US. Surveys show French and German growth at a six-year high.
All that fuss about Greece, Portugal and Cyprus going bankrupt, and spreading “financial contagion” across the world, seems over. And Yanis Varoufakis, that dashing Greek academic-turned-finance-minister, who grappled with the German paymasters, has just published his memoirs.
Over six weeks have passed since David Cameron confirmed the date of the UK’s historic referendum on European Union membership. And it’s now less than twelve weeks until 23rd June.
As a card-carrying economics nerd and news junkie, I follow the increasingly febrile debate on British EU membership very closely. Doing so involves countless conversations with politicians, business leaders and strategists about the referendum – and the aftermath of a potential Brexit vote.
While political insiders obsessively trade the pros and cons of the EU, though, most voters currently feel, if anything, frustrated and confused by a discussion long on arguments and insults but short on facts. So, here’s a column making a series of points about the upcoming referendum which, while vital to understanding what’s happening in my view, are rarely stressed in print.
“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.
Mario Draghi is being hailed, once again, as a rhetorical wizard. The president of the European Central Bank has done it again. After the October meeting of the ECB’s Governing Council, Draghi dropped hints the Frankfurt-based bank would soon be unleashing yet more quantitative easing across the Eurozone, further lowering interest rates, or both.
No matter that the ECB has been churning out €60bn of virtually printed money a month since March and is committed to do so until September 2016. That’s a Euro-QE programme of €1,100bn – an astonishing 8% of the Eurozone’s annual GDP. No matter, also, that the ECB’s benchmark interest rate is 0.05%, with the central bank deposit rate at minus 0.2% – both record lows – or that Draghi has previously said such rates were at “their lower bound”. The ECB is now “vigilant” – a trigger word previously pointing to imminent policy action.
It’s all about the V-word, apparently. That’s a nod not to Winston Churchill, but a rather different character – namely Mario Draghi, President of the European Central Bank. It would appear a eurozone quantitative easing program running to €1,100bn (£795bn) isn’t enough. Having churned-out €60bn of virtually-printed money a month since March, and committed to maintaining that pace until September 2016, Draghi has now signaled there’s likely to be even more.
“The degree of monetary policy accommodation will need to be re-examined at our December meeting,” he said last week, following the latest gathering of the central bank’s Governing Council in Malta. The “size, duration or composition” of eurozone QE could be adjusted, Draghi continued, with the monthly amounts getting bigger or the schedule extending into 2017 and beyond.
“There needs to be a certain credibility,” opined Mario Draghi, President of the European Central Bank, as he launched outright Eurozone quantitative easing last Thursday. “Today, we’re showing that such credibility is deserved”. When used by an economist, “credibility” is indeed a very important word. But I’m afraid I take issue with Signor Draghi’s usage.
When I began studying the dismal science – some 30 years ago, I’ve just realised with anguish – central bankers gained “credibility” by implementing policies which were tough over the short-term but ultimately constructive for the longer-term health of the economy.
“I wouldn’t hold French shares,” said Nigel Farage with a wink, belying his previous life as a stockbroker. “The country is in real trouble,” the Ukip leader told me at an investment conference in London last week. “As someone who loves France, it gives me no pleasure to say that”.
While Farage casually dishes out advice to sell French stocks, he knows only too well that, for all his admiration of Gallic gastronomy and tabacs, the singular weakness of the French economy, and related political fall-out, is playing into his hands.
How is the Eurozone economy doing? Given that the 18 countries sharing the single currency comprise the UK’s biggest trading partner, accounting for around half our international commerce, this is a question of major economic and political importance.
Whether the Eurozone stages a meaningful recovery over the next 12 months, stagnates, or collapses amidst a fully-blown melt-down – which remains depressingly plausible in my view – will significantly influence the UK’s economic path, determining the backdrop against which the 2015 general election is fought.