The writer is the former European economics editor at The Economist.
From Prospect Magazine, August 16:
The eurozone is showing the perturbing symptoms first diagnosed in Japan, but ever-looser monetary policy is not the answer
Two decades ago as Europe was preparing to launch the euro, something rather odd was starting to happen on the other side of the world. In the late 1990s, Japan began to experience deflation, a condition thought to be banished in the buoyant post-war era of global expansion. Both short-and long-term interest rates fell to historic lows, even turning negative in some parts of the money market. At the time the phenomenon appeared to be specific to Japan, reflecting a wrenching economic slowdown and a prolonged banking crisis. But now the exception is fast becoming the rule as “Japanification” spreads around the world, above all in the euro area..... MORE
Along with Donald Trump’s trade wars, Japanification explains much of what is happening in the global economy at the moment. Take the Federal Reserve’s decision to cut interest rates at the end of July, even though that month marked the longest ever economic expansion in America on records going back to the 1850s. One reason was that the US central bank felt compelled to protect American businesses from the backwash arising from Trump’s tariff follies. More fundamentally, however, the Fed was responding to the fact that its preferred measure of headline inflation is, at 1.4 per cent, uncomfortably below its 2 per cent target even though unemployment (currently just 3.7 per cent of the work force) is at its lowest in almost 50 years.
Even more so than America, the euro area is feeling the pain from Trump’s wrecking ball and a slowing Chinese economy. The 19-strong monetary bloc is much more exposed to trade headwinds than the US. The eurozone’s hub economy, Germany, is in trouble as its export-reliant manufacturing sector has gone into reverse. German GDP contracted by 0.1 per cent in the second quarter, curbing growth in the euro area to just 0.2 per cent, well below potential.
The setback is all the more worrying because Europe has a much more serious case of Japanification than America. The currency union, set up with such high hopes 20 years ago, is showing many of the gloomy symptoms once thought to apply only to Japan. Headline consumer-price inflation in July was a low 1.1 per cent according to Eurostat’s initial estimate. Core inflation, which strips out volatile components including food and energy prices, was just 0.9 per cent. Both were well short of the European Central Bank’s longstanding goal of a little below 2 per cent.
That will prompt the ECB to follow the Fed and ease monetary policy when its governing council meets on 12th September. But whereas the Fed has cut rates after a period of increasing them (between late 2015 and the end of 2018), the ECB has not raised rates since 2011 and now looks set to cut them further. And whereas the Fed has run down some of the assets purchased through earlier quantitative easing, the ECB has not and now appears poised to crank up its QE machine again, only nine months after turning it off.
The biggest contrast of all between the world’s two main central banks is in the starting point for their interest rates. The Fed cut by a quarter of a point, from a (not very) high of between 2.25 and 2.5 per cent. That peak might have been modest but at least it was positive. By contrast if the ECB cuts rates again, it will push them deeper into negative territory, lowering the deposit rate from a once unthinkable minus 0.4 per cent (reached in March 2016). That will put pressure on neighbouring central banks to cut rates that are already lower (in Sweden the deposit rate is minus 1 per cent)....
*As happened a week ago with "BlackRock's "5 key investment themes for the remainder of 2019"" and the line "A growth conundrum haunts Europe" I can't read that damn bit of Marx without thinking:
Which of course reminded me of one of the greatest financial innovations of all time.
I'm not sure if it says anything about our readers but the most popular links we've ever had were
"UPDATED--'The Karl Marx Credit Card – When You’re Short of Kapital'":
Is it a tragedy? Is it a farce? In the land once called East Germany, in a town once called Karl-Marx-Stadt, a bank called Sparkasse Chemnitz ran an online poll letting customers vote for images to place on their credit cards. And the hands-down winner was Karl Marx, an ironic pick given that … well, you don’t need me to explain why.And
In response to this selection, Planet Money has encouraged readers to post a tagline for the card on Twitter, using the hashtag #marxcard. Here are a few of our favorites so far:
- There are Some Things Money Can’t Buy. Especially If You Abolish All Private Property.
- From each according to their ability, to each according to his need. For everything else, there’s
#Marxcard.- The Marx Card – Because Credit is the Opiate of the Masses.
- The Karl Marx MasterCard – When You’re Short of Kapital
Okay, The Second Time Is Farce: Some Additional Taglines for the Karl Marx Credit Card
It's Everywhere You Want To Be But Can't Go Due To Internal Travel Restrictions #marxcard
A spectre is haunting Europe - the spectre of cash back and low, low interest rates. #marxcard...MORE
