The ECB is out of ideas

It has no credible answer to the Eurozone’s woes.

Tom Bailey

Topics Politics World

Europe’s economy is in a bad way. While in the past 10 years the US economy has gradually picked up steam, with unemployment reaching a 50-year low, Europe has continued to experience dismal growth and persistently high unemployment. Joblessness in countries like Spain and Greece is well above 10 per cent, while in France it sits at almost nine per cent.

Added to these woes, slowing global economic growth is starting to weigh on Europe’s powerhouse, Germany. Euro-area growth is now expected to come in at a dismal 0.2 per cent in the second quarter of 2019, with both headline and core rates of inflation down nearly one per cent.

The European Central Bank recognises this bleak outlook for Europe. Speaking at the end of July, ECB president Mario Draghi was unusually candid for a central banker, saying: ‘This outlook is getting worse and worse. It’s getting worse and worse in manufacturing, especially, and it’s getting worse and worse in those countries where manufacturing is very important.’

So, what to do? Unsurprisingly, the answer from the bank seems to be more of the same. The ECB is now expected to make more interest-rate cuts and start a new round of quantitative easing (QE), whereby the bank buys up bonds in a bid to stimulate the economy.

The problem is that this has not worked too well so far. Over the past decade the ECB has spent over two trillion euros on QE, the most recent round ending at the end of 2018. Meanwhile, the ECB has entered into the once-thought-impossible world of negative interest rates, with its various rates sitting between 0 per cent and -0.4 per cent.

You could argue that without this stimulus from the ECB, Europe’s economy would be in much worse shape, which may be true. But either way, more of the same increasingly looks like it is not going to achieve much. It is clearly not encouraging consumers or businesses to spend or invest on the scale needed to revive the continent’s flagging economy.

Added to this, it is not clear how much longer the ECB can carry on buying up bonds. As Merryn Somerset Webb has pointed out, ‘Germany is running out of Bunds (government bonds), thanks to running a budget surplus, and ECB buying has to be proportional to the size of its constituent countries’.

For the ECB to continue buying bonds, Germany would need to start spending more and run a deficit (fat chance) or allow for the creation of Europe-wide bonds guaranteed by Germany (meaning further financial integration for the EU, for which there is little desire among European electorates).

So, clearly, some new ideas might be needed to spur growth in Europe. Unfortunately, the most attention-grabbing proposal so far has been to extend the logic of QE and central-bank stimulus to the stock market: that is, that the ECB should start buying stocks.

This call was most loudly made by BlackRock, the world’s largest asset manager – first by CEO Larry Fink, and then by Rick Rieder, a chief investment officer at the company. Rieder recently wrote an op-ed in the Financial Times making the case.

According to Rieder, Europe has done all it can to reduce the cost of debt through rate cuts and QE. This has failed to encourage businesses to invest, resulting in Europe’s poor growth. Now, Rieder says, the ECB should target the other means through which companies raise cash to invest: equity. The cost of equity in the Eurozone remains relatively high, he points out. The ECB purchasing shares in certain sectors (such as technology) should boost share prices and lower the cost of equity, compelling companies to invest, growing the economy.

Essentially, the ECB would become an owner of European companies listed on stock exchanges, an effective part-nationalisation of certain companies. That has led to all sorts of fears about the potential market distortions, especially considering the strange effects loose monetary policy has had on bond markets (Austria recently issued a 100-year bond with a yield of just 1.2 per cent, for example).

But the ECB wouldn’t be the first central bank to embark on a programme of buying equities. For the past decade, Japan’s central bank has been buying up its own country’s shares via index-tracking funds. It now owns just under five per cent of the entire market, and is a Top 10 shareholder in 40 per cent of listed companies. While this has caused some jitters, there has been little clear negative impact, as of yet. But central banks around the world buying up shares is sure to have some undesired consequences down the road.

The main problem with all this is that there hasn’t been much of a positive impact for Japan, either. Japan is still suffering slow growth, sluggish business investment and absent inflation.

Indeed, as FT Alphaville’s Jamie Powell points out, the logic of lowering the cost of equity to stimulate investment does not make complete sense. If growth and consumer demand in the Eurozone is poor, businesses will still have little incentive to invest in new projects.

At the same time, with debt as cheap as it is, most companies should have opted for debt to fund investment. As Powell writes: ‘A business is unlikely to use equity finance for a project if debt is cheap, given the dilutive effects of equity issuance. Only a high-growth loss leader, or a financially distressed business, would choose to use equity instead of debt financing in such circumstances.’

But such a business, he notes, could very well be excluded from purchase by the ECB due to the potential risks of owning equity in such a firm.

Maybe Draghi is aware of this and will ignore the calls for an equity-buying programme. He, as of yet, has neither confirmed nor denied that the bank will press ahead with this plan. But it is clearly on the cards.

This sorry state of affairs is emblematic of central banks becoming ‘the only game in town’, to use Mohamed A El-Erian’s phrase. While central banks and loose monetary policy provided much-needed relief following the economic crisis, Western economies appear to have become overly reliant on central-bank policy. This path appears to have become exhausted in Europe.

Extending central-bank policy to the purchase of equities would be an admittance that economic growth on the continent has somehow become impossible without an endless expansion of the ECB’s balance sheet.

Tom Bailey is a financial journalist based in London. Follow him on Twitter: @tBaileyBailey

Picture by: Getty.

To enquire about republishing spiked’s content, a right to reply or to request a correction, please contact the managing editor, Viv Regan.


Jim Lawrie

1st August 2019 at 7:46 pm

We don’t need government money. We need them to stop taking ours.

Kimberly JGallion

1st August 2019 at 5:28 pm

I get paid over $90 per hour acting from home with two children reception. I ne’er thought i would be able to hump however my succor earns over 10k a month doing this and he or she convinced American state to undertake. The potential with this is often endless. Heres what i have been doing

Ven Oods

1st August 2019 at 1:03 pm

What was that saying about doing the same thing repeatedly, while hoping for different results?

matt faizey

1st August 2019 at 12:22 pm

I find the whole thing baffling. Every economy relies upon the consumer to generate the growth. Not the entities creating/manufacturing the product.
Absolutely nothing has been done via QE to stimulate consumer demand. It’s crazy. Moreover to operate the logic that a distressed company would choose further debt rather than own cash to fund expansion is insane.
Firms when in a low growth environment or in a depressed economy will NOT choose debt over own cash to expand. Debt is a last resort in such circumstance. It’s cheaper to lose own generated cash on a failure than debt. Moreover in success (during uncertainty) own cash generated expansion means lower operating costs and more secure finances.
The logic from the ECB is non existent.

QE needs to go direct to the taxpayers through reduced income taxation if you want to spur demand.

The scary thing is if demand will never be there. In the short run however tryi g to spur growth by getti g firms to produce more stuff people don’t want to buy won’t bloomin help.

Rocket science it isnt

matt faizey

1st August 2019 at 3:21 pm

P.s if all the central banks/planners would just sit down and STFU and allow the corrective recession that began circa 07 to play out instead of trying to bring the zombie back to life we could all get ahead quicker.

We wouldn’t be having these decades now (and it will be) and anemic activity mixed with low growth and stagnation if they had just allowed the affected economies to correct.

Yes, I’m aware it would have been utterly horrible, but it would likely have been short (and economically cleansing)

Paul Robson

2nd August 2019 at 9:22 am

“We wouldn’t be having these decades now (and it will be) and anemic activity mixed with low growth and stagnation”

I think we’ll be very lucky if we get that.

We never really had what you call “the corrective recession” and I call “paying for” 🙂 ; all the whinging about austerity, I don’t really see it. Not being able to afford a new iPhone isn’t austerity or poverty. Much of this cost is hidden on bank balance sheets ; they are companies (much of the High Street I suspect) that really should have gone bust but are kept alive by basically free loans at 0% interest. Banks can pretend these loans will be repaid but they won’t be.

This combined with the two gifts from the ECB ; the Sovereign bond rating issue (2019s version of Subprime) and the fights over the Target 2 “transfers” I think will cause a recession that makes 2008 look like walk in the park, and it’ll probably be before the end of 2020.

Jim Lawrie

1st August 2019 at 7:45 pm

Economic growth depends on creating new markets, as has been the case with over the last last 30 years with the innovations in IT.
The government take from any EU based new business smothers new ideas at birth.

Setting up a new business in Greece, for example, is not on, as the tax collectors want paying in advance.

VAT is a bigger burden than income tax for many of the population.

Philip Humphrey

1st August 2019 at 12:09 pm

All the more reason for the UK to leave. Being shackled to the European economy is not good for our future prosperity.

Paul Robson

2nd August 2019 at 9:26 am

Makes no difference. The damage is done, the debts are incurred. When the whole thing falls apart we will have the option of helping save the entire European banking system or letting it collapse, in which case it will drag it down with us.

This is why the veto stupid Remainers keep wattering on about is irrelevant, we will volunteer.

Two things matter ; the UK’s sociopolitical position and what structures exist after the mega-recession. The EU, obviously, want a USA construct (Van Der Leyden’s not doing this for personal wants). Most people will want a loose federation without a common currency.

Remainers will blame Brexit, as ever, and they’re sort of right in the same way that Lefties blame bankers for 2008. They don’t understand the difference between the *trigger* and the *causes* of these things. The trigger could be almost anything, though a no-deal Brexit would be a big poke. The *causes* are the ECB and the EZ. If we were to Remain, it will still blow up, there’ll just be a different trigger.

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