Friday 14 December 2018

Pan-European investment plan is needed to kick-start growth

IT was said, perhaps apocryphally, that Liam Cosgrave, when Taoiseach, would inquire what was the favourite whiskey in a particular constituency; and would ask for that brand when on a visit – thereby impressing the locals with his taste and discernment.

On a somewhat grander scale, the president of the European Central Bank Mario Draghi set about impressing the locals in a recent speech at the Catholic Academy in Bavaria.

He started with the Catholic bit: after all, ex-Pope Benedict is a Bavarian. It was part of Catholic social doctrine, he said, to be against an economic model "that allows excesses to go uncorrected, which relies exclusively on self-regulation of markets, and in which individuals believe that 'anything goes'."

Economic philosophy

Then there was the Bavarian bit. Mr Draghi quoted Walter Eucken, the philosophical father of "ordoliberalism". That is the German economic philosophy – or at least a variation of it – which has been giving the rest of us so much trouble, but which is next to religion in Bavaria. Social market, yes: loose money, no; to sum up very crudely.

I cannot say whether Mr Draghi impressed the locals as a man of taste and discernment. But as the eurozone stumbles into yet another recession, the speech is of some significance.

The ECB's own forecasts are that the recession will be a longish one. It predicts a contraction of 0.5pc this year, after last year's 1pc decline. Output has now shrunk for five consecutive quarters.

The message, as usual, is mixed. After last week's meeting of the ECB's Governing Council, Mr Draghi's official line was that recovery was on track, with growth resuming later this year.

But he also warned that the risks were still great and echoed the words of the US Federal Reserve, if not its exact terms.

He said monetary policy would remain easy, "as long as was needed". The Fed has been more precise, saying it will keep rates near zero until US unemployment falls to 6.5pc, but the sentiments are similar.

The ECB, of course, has no mandate to tackle unemployment. On the other hand, inflation is now put at 1.6pc this year and falling, which is well below its target of just under 2pc. There is every justification for cutting interest rates.

But there was little doubt from the tone of his speech that Mr Draghi had output, not just prices, in mind – an impression bolstered by his impassioned attack on the scourge of unemployment.

Fine words butter no parsnips, though. Is the ECB going to do anything about it?

Interest rates

There were voices in favour of a cut in interest rates at last week's Governing Council meeting. Yet the Frankfurters have a point when they say there is not much more that monetary policy can do.

The American and British experiences are causing some to question the very theories behind monetary policy. There has been substantial creation of money and limited fiscal austerity, but the results are distinctly disappointing.

Not enough has been done, say some: they are doing the wrong things, say others. One might suppose that experts would at least agree on the nature of banking and money, but apparently not.

There was a whole conference on the topic in London last week. There are pressure groups arguing for a new definition of money-creation, based on bank lending.

Without getting into the mind-numbing details, part of the argument is that the money being supplied by central banks is the wrong kind of money, and not suitable for recycling into the real economy.

What is needed, they say, are borrowers, which would allow the banks create money from new loans. That presents an obvious difficulty, in a world already awash with debt. But could it present the glimmer of a solution?

Mr Draghi made a related point. The liquidity (loans) given to the banks by the ECB is used by the banks to lend to and borrow from each other. It does not automatically increase credit or even money in the economy.

The direct buying of loans by the Fed and the Bank of England ('quantitative easing') is supposed to make money available for credit but – whether it can or not – it does not seem to be doing so.

The ECB president stressed the need for governments to do more. But he emphasised changes which enhance growth more than he did austerity.

As we know in Ireland, it is a curious political phenomenon that governments find austerity not easy, but easier than reforms which make public sectors and private business more efficient.

Something will have to give. Some slackening of the austerity grip is already under way, but that will not be enough.

Abandoning austerity altogether is not an option for the indebted countries, but the current situation is not a viable option either.

The creaks and groans are particularly audible from France, where the latest statistics show unemployment at a four-year high of almost 11pc.

In the way of politicians, French or Irish, President Hollande promised to reduce unemployment during his election campaign. Naturally, he now has no idea how to achieve that remarkable feat.

But he will want to look as if he is doing something. There were strong words from the French industry minister Arnaud Montebourg.

"Europe and the eurozone are sinking. This is why the government is fighting for growth measures to be taken," he said.

But what are they to be? Germany will not countenance reducing its surpluses. France has no appetite for reducing its protectionisms. We know about Italy. The others, even Spain, can do damage but they can do little to make things better.

Things will have to change in the policies of the Big Three, but more will be required. Two options stand out.

Dramatic action

One is dramatic action on the euro question. It is hardly special pleading to say that the Germanic refrain that European assistance on Irish bank debt threatens credibility is nonsense on stilts. The effect is more likely to be greater credibility for the single currency, rather than less.

The second option would be a bold attempt to marry the problem of money supply with the tenets of ordoliberalism. This would involve creating bank loans for a huge pan-European investment programme.

The borrower would have to be the eurozone itself, but the investments could favour the slowest-growing economies.

One is well aware of the dangers of bridges to nowhere and political pork-barrelling, but some waste could be tolerated, provided it was kept to a reasonable minimum.

Planned properly, such investment is not deficit spending per se, nor is it classic money printing. The model is that of German post-war reconstruction, social-market economy and all. Even popes, both late and former, could approve.

Irish Independent

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