Another central bank to the rescue? Or another central bank overextending itself? The European Central Bank broke new ground in its Jan. 22 decision to buy government and corporate bonds issued by the Eurozone’s 19 members. That move came only after a long and circuitous route that overcame legal challenges and strong opposition, especially from Germany.
At stake is the ability of policymakers to pull the Eurozone out of its flirtation with deflation and rekindle growth in one of the world’s largest economic areas. The ECB’s success (or failure) will have tremendous ramifications for the United States and other countries, due to our deep connections with Europe via trade, investment, and financial flows.
In taking this action, the ECB followed the path trod by our own Federal Reserve and by the UK and Japanese central banks. The question is whether the ECB will achieve its goal of raising prices in Eurozone countries and stimulating bank lending, exports, and economic activity. Some observers are skeptical.
One reason for skepticism is that elected officials in some key Eurozone countries have shied away from pushing politically unpopular but crucial policy changes in labor law, competition and other areas that might increase hiring, draw new businesses into the market, and induce existing businesses to become more efficient. No amount of central bank “pump priming” can overcome these underlying structural challenges.
Germans fear that by buying Eurozone government bonds, the ECB will simply reward those governments that have not taken the difficult steps needed to strengthen their own economies; and in fact, that ECB actions will take the pressure off them to do so. Germans also fear a resurgence of inflation, a scourge that many associate with the collapse of their economy in the interwar period and the rise of Hitler.
But some of the strongest headwinds to rekindling growth in Eurozone countries are social and political in nature.
The rise of terrorism in Europe, most notably in France but in other countries as well, risks deflecting leaders’ attention from the economy to security matters at a critical time. Terrorism and the resulting tightening of security also could dampen business investment and activity. Moreover, social backlash against rising levels of immigration and the attacks in Paris have strengthened the hand of anti-immigrant political parties, some of which also question continued European economic integration.
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Geopolitical tensions also hamper economic growth. Western sanctions in response to Russia’s annexation of Crimea and invasion of Ukraine hurt not only Russia’s economy but also European investors in Russia and the many businesses and farmers in Europe that export goods and services to their eastern neighbor.
Perhaps the strongest headwind gaining force in Europe is voter resistance to policies pushed by Germany, Finland and other fiscally conservative countries. This resistance was on full display in Greek elections on Jan. 25. Voters turned their backs on mainstream parties and voted in unprecedented numbers for a leftist party promising an end to austerity and economic pain.
Greece’s Syriza party, headed by 40-year-old Alexis Tsipras, made promises to voters that could put Greece on a collision course with the rest of Europe and with Greece’s biggest creditors, particularly the European Union and International Monetary Fund. After winning nearly half the seats in parliament, Tsipras was quoted as saying, “Greece is turning a page; it’s leaving behind five years of humiliation and misery.”
How other European countries respond to Greek demands for debt relief and an end to austerity and economic reform will determine whether or not the Eurozone holds together as it currently is structured and, if so, whether the current policy of fiscal discipline and economic restructuring prevails. Time will tell if the two sides can find a way to forge a compromise before Greece’s current rescue program expires at the end of February.
Forging a unified path on Eurozone policy is challenging when economies are weak and voters increasingly resist the chosen direction. Fissures are already evident between leaders in France, Italy and other countries facing tough reform choices at home; and leaders of Germany, Finland and other northern European countries pushing fiscal conservatism and economic reform. Anti-austerity parties in Spain, France and elsewhere hope to replicate Syriza’s success in upcoming elections.
If Eurozone governments can’t find ways to stimulate growth, and if more “anti” parties prevail in the polls, the ECB’s recent stimulus program will likely fade into history as another case of too little, too late. Let’s hope this story has a happy ending.
Joanna Shelton was Deputy Secretary General of the Organization for Economic Cooperation and Development (OECD) in Paris and held senior positions in the executive branch and Congress in Washington, D.C. She teaches at the University of Montana. Her column appears the first Sunday of each month. Shelton writes from Moiese.