Saturday 20 January 2018

Mario, the lawn is ok – but watch for slugs in the borders

There are green shoots in the eurozone but the ECB may need quantitative easing to stimulate growth

ECB President Mario Draghi
ECB President Mario Draghi
Justin Doyle
HEAD GARDENER: ECB president Mario Draghi has used his monetary toolbox to help the eurozone bloom

Justin Doyle

It's that time of year as the palpable fear of encroaching outdoor entertainment and life-threatening injuries to the offspring of family, friends and neighbours (never mind yourself) usually prompts one, at the very least, to give the back yard a once over.

I'm no Alan Titchmarsh but needs must and last Saturday I went at my modestly-sized outside space with some gusto.

After restraining a flight-prone trampoline, mumbling profanities at some obstinate ivy and a spot of lopping, chopping, raking and brushing I was pleasantly amazed, as I am most years, to discover a rather attractive space. Whilst sitting down to take in the fruits of my toil, I noticed the contrast of the large, monochrome expanse of lawn against the striking multi-colours of the border plants.

With the exception of a few soggy or worn patches, the core element of the garden, the lawn, is more often than not in decent condition. On the other hand, the peripheral border plants, some of which are quite delicate but surprisingly resilient, generally require substantially more TLC.

As I was tidying up towards the end of my day's work, it struck me that the similarities between the structure of the average Irish garden and the very fragmented eurozone economies are glaringly obvious.

It was in November 2011, directly following three contentious sovereign bailouts and billions of euro of debt added to the ECB balance, when the newly appointed ECB head gardener, Mario Draghi, strapped on his pesticide backpack. In July of 2012 after 18 months of hacking and snipping he delivered his pivotal performance.

He swore to do 'whatever it takes' to protect an extremely distressed eurozone economy and a beleaguered single currency from imminent implosion.

As newly appointed head gardener, in an attempt to save the entire space from destruction, he began to jimmy open his rarely used monetary policy toolbox with two LTROs and 0.50 per cent of rate cuts and took a secateurs to his unruly, maltreated border plants.

A frost blanket of austerity was strategically placed over the newly shorn plant life, tools downed and a vigilant eye kept out the kitchen window for any hints of pained growth.

As spiritually uplifting that a bit of sunshine and any viable signs of life tend to be, it's probably a bit too early to proclaim that the eurozone is on the verge of exiting its own deep, dark winter but, much to Mr Draghi and his team of greenkeepers' credit, a quick peek under the frost blanket is revealing some form of rejuvenation.

Considering where we were just two years ago, to witness reports that Ireland and Portugal have successfully exited their bailout programmes, Italian sovereign bond yields hitting all time lows and the continuing improvement of Spanish unemployment data must place a wry smile of pride on the faces of our ECB and Troika overseers.

Of more notable interest, however, has been the dramatic pick-up in the peripheral economy Purchasing Manager's Index (PMI) surveys of recent months. These surveys provide advance insight into the economic health of the private (manufacturing, services etc) sector and if the huge Irish PMI data published earlier in the month is anything to go by, all the routes are pointing to some type of recovery.

There are, however, some very obvious threats to the nascent recovery of the very diverse eurozone economies. The most apparent concern is the insidious slug-like creeper that is deflation and the other is the end product of the multi-year and record lows of most of the peripheral sovereign bond yields; massive foreign capital inflows; and the stubbornly high euro exchange rate that comes with them.

The improvement in economic data of late is fragile and must be protected and encouraged. With interest and deposit rates at all-time lows, the ECB is fast running out of options with its conventional monetary policy.

A massive US-style Quantitative Easing (QE) programme is the powerful fertiliser that the struggling peripheral eurozone economies need for the reasons outlined above. The US master class in stimulus of recent years demonstrates what positive knock-on effects it has had right across its massive economy.

I feel that in the event eurozone inflation dips below the previous March low of 0.5 per cent, which I think could materialise as early as late June, the ECB will act and act decisively.

Mr Draghi and his team will kick the shed door open, haul out some pretty strong fertiliser (QE), he'll mix it up with some slug pellets (refit rate cut and depot rate cut), and lay it thick and heavy right across his peripheral plants.

As the frost blanket of austerity is slowly pulled away we can all sit back in the sunshine and watch them bloom!

  • Justin Doyle is an economist with Investec Bank

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