Now the ECB must save Europe's poor
The European Central Bank has washed its hands of any further responsibility for the 27 million people across the eurozone listed as unemployed or classified as discouraged workers.
The Governing Council thinks nothing more can usefully be done to lift the region out of double-dip recession, a relapse that it failed to foresee and to a great extent caused by allowing the money supply to contract in mid-2012.
It will not take fresh action to offset fiscal tightening this year of 2.3 per cent of GDP in Spain, 2 per cent in France or 1.2 per cent in Italy - and more cuts in the indentured trio of Greece, Portugal and Ireland - or to cushion the shock of reforms. The US Federal Reserve stands ready to inject stimulus until America’s jobless rate falls to 6.5 per cent.
Yet the ECB professes itself helpless in the face of 11.8 per cent unemployment, a post-EMU record and rising each month. The ECB’s Mario Draghi said there is ‘‘not much’’ that monetary policy can do to fight structural unemployment. If it really was ‘‘structural’’, his plea might convince. But is it?
Ireland has famously flexible labour markets yet its jobless rate has risen from 4.6 per cent to 14.6 per cent, and that includes the safety valve of a massive job flight to the UK and the US. Spain’s rate has jumped from 7.8 per cent to 26.6 per cent in four years, or 55.8 per cent for youth, precisely because it is easy to sack Spanish workers on short-term contracts.
The European Commission’s 400-page report last week on the jobless crisis quietly demolishes the claim that labour rigidities caused the social tornado sweeping half of Europe.
It dutifully lists things that can be done to help: Nordic flexi-security, or a lower ‘‘tax wedge’’ on labour. But it leaves no doubt that a ‘‘demand shock’’ is the real culprit. All else is ‘‘less relevant’’. The report subverts the central claim of Europe’s austerity mandarins that labour reform will deliver recovery.
Greece’s unemployment has reached 26.8 per cent. Italy looks low at 11.1 per cent but a further 12 per cent have dropped out of the data. Italy’s combined rate is 23 per cent.
The share of those out of work for a year or more - 2 million in Spain alone - has jumped from 33 per cent to 43 per cent. A fifth have never had a job in their lives. The longer this goes on, the more hopeless it becomes.
According to the report, a ‘‘new divide’’ is emerging between EMU core countries and those ‘‘that seem trapped in a downward spiral of falling output, fast rising unemployment and eroding disposable incomes. The wave of austerity policies raises important questions about the viability of Europe’s welfare states’’.
The Economist poll of forecasters expects the eurozone to contract 0.2 per cent this year, with scant growth in 2014. By then millions of people will have fallen into an ‘‘enormous poverty trap,’’ in the words of EU jobs chief Laszlo Andor.
Gustav Horn - head of Germany’s IMK Institute and one of the country’s five ‘‘Wise Men’’ - called for an end to the contractionary horror show last week.
‘‘It’s a vicious circle. Excess austerity is not reducing debt, it is causing debt to rise,’’ he said. The only way out is an inflationary boom in Germany with 4 per cent wage growth for a while. He is right.
By any measure half of Europe is now in a great depression, less acute than the early 1930s but more protracted. Large numbers of people in the Baltics, Slovakia and the Balkans are in dire distress - the human sacrifice of ruling elites determined to defend EMU membership or euro currency pegs at all costs.
‘‘Severe material deprivation’’ has surged to 31 per cent in Latvia and 44 per cent in Bulgaria. The great majority of those in their fifties in Latvia, Lithuania and Estonia who lost their jobs in the crisis have not found another job and have little chance of doing so ever again in their own countries. They are the forgotten residue.
Former ECB governor Athanasios Orphanides - a world expert on deflation - has broken loose, rebuking his ex-colleagues for standing ‘‘idly by’’ as Europe’s socio-economic disaster unfolds. ‘‘We are in the middle of a policy-induced recession and monetary policy can do more to contain it, without compromising price stability,’’ he said.
Jacques Cailloux from Nomura says money is still ferociously tight for a string of countries. Sovereign bond yields may have fallen far but not far enough to keep pace with the slump. Nor have the gains fed through to the economy. Italian and Spanish companies still pay twice as much to borrow as German rivals. The North-South gap is becoming hard-wired into the system.
He calculates that a string of states will need drastic rate cuts this year under the classic ‘‘Taylor Rule’’ or shortfall in potential output: 150 basis points for France, 230 for Holland, 240 for Ireland, 330 for Portugal, 350 for Spain and 400 for Italy. For Greece, ‘‘no amount of easing would appear sufficient’’.
You cannot cut below zero. That is why you do quantitative easing, a crude proxy. The victim states need dollops to survive. But the ECB is betting instead that a fresh cycle of global growth and the ‘‘positive contagion’’ from surging asset prices will lift Europe off the reefs later this year. History may judge this to be a tragic policy error.
I do not wish to criticise Mr Draghi. He has played a weak hand with skill. By securing German assent for his plan to backstop the Spanish and Italian bond markets, he has defused the financial crisis at a stoke. But it is worth remembering how we got here, and what this rescue implies.
The Germans were not shaken out of their complacency until the Spanish banking system went into meltdown in July 2012 and Latin bloc leaders finally rebelled.
Some like to claim that the ‘‘Draghi Put’’ vindicates EMU crisis strategy. In fact, the EU resorted to drastic measures because all else had failed.
I might add that ECB bond purchases amount to fiscal union by stealth, outside democratic control. The Bundesbank’s Jens Weidman is right to warn that this will come back to haunt Europe.
At the end of the day, Europe’s crisis strategy is to break the back of labour resistance to pay cuts by driving unemployment through the roof. That is how an ‘‘internal devaluation’’ works. The ECB chooses to make this harder.
Mr Draghi deserves his accolades, but his job is not yet done. He has saved the rich. Now he must save the poor.
The Telegraph, London