I have some good news and some bad news. The Spanish economy is doing a little better than expected. The economy is nudging up a smidgen boosted by growth in exports, while unemployment is creeping down, although it does remain scandalously, cripplingly high at nearly 25%.
The bad news is that the Eurozone’s big hitters are struggling. Downturns in demand across the bloc have led the mighty German economy, Europe’s backstop, into a 0.2% contraction as demand for manufactured goods slumps and cheaper competition from the Far East ups its offering. Italy has officially dipped back into recession for the third time as its national debt climbs over €2 trillion, and the French economy begins to face the reality of serious economic woes as their growth forecast is slashed and it admits it is not likely to come close to it’s debt reduction targets.
Meanwhile prices for goods continue to stagnate as deflation across the Eurozone, and in Spain in particular looks like a real possibility. The situation is likely to worsen imminently as sanctions and counter sanctions against Russia for its aggression in Ukraine hit the German and Italian economies in particular. The problem is that while sectors of the economy have been recovering, the population as a whole are still cash poor, or if they have any they are not inclined to spend much of it. If people aren’t spending, any recovery you may generate is likely to be short lived.
The ECB like many economies have been using the standard box of tricks for dealing with this. austerity, and cutting interest rates to virtually zero, or even minus numbers in order to ensure that the people are discouraged from saving and encouraged to borrow by cheap loans to get the maximum amount of cash sloshing about in the economy. It hasn’t worked. The banks are not lending, and who can blame them. They rightly copped the lion’s share of the blame for the financial crash for lending to people who didn’t have any money, we can hardly criticise them for not doing it now.
There is another tool that is available in these desperate times, namely Quantitative Easing, QE. printing money to you and I. Basically the central bank buys it’s own bonds with money it has created, sending new money into the economy. In the US and UK this has been tried on a few occasions and has had the desired effect more or less as their economies are showing positive signs of life. It’s not the same as a ‘real’ recovery, but better than the alternative.
The catch is…and there always seems to be one when we talk about the Eurozone, that it is isn’t quite so easy when you have one central bank, the ECB, and 18 different countries all issuing bonds. Whose bonds does it buy?. EU rules expressly forbid the ‘propping up’ of one or more member states, buying Spanish or Italian bonds for instance instead of French or German ones would constitute that. So again we have a bureaucratic nightmare. The Eurozone is running out of options, but urgent action is needed. More or less everyone agrees that QE is exactly what is needed, and many leading experts say it is looking very likely for 2015, but the EU will have to reinvent its own rules to accommodate what is likely to be a cobbled together half cocked version of it implemented too late.
Again indecision has paralysed the decision makers for far too long and they are already lagging behind other developed nations in the race out of the recession, held back by tethers of their own design.
Phil D Coffers
The Islander economics correspondent