Writing for European Voice, Fleming says that Mario Draghi has made a positive impact as head of the European Central Bank, but it may not be enough to save the eurozone.
On a recent visit to London, Lawrence Summers, a pugnacious former US Treasury secretary who is regarded as one of the leading academic economists on the planet, came close to dismissing what further quantitative-easing monetary policies could do to get growth going. “Far and away the most important thing that can be done to drive...recovery is a substantial expansion through fiscal policy”, he said. Taking this view, it is tax cuts and carefully targeted increases in government spending that are urgently needed. Monetary interventions aimed at trying to lower longer-term interest rates from levels of around 1.5-2 per cent are, as the economist John Maynard Keynes once suggested, likely to be as effective as “pushing on string”.
Whatever the economic theory, in the real world the question is this: if the ECB had not helped to engineer a bond-market crisis in Italy last week, would Berlusconi's regime have toppled? If the ECB had bought up many more billions of euros of Spanish, Irish, Portuguese or Greek bonds, would these governments be committed to economic reform (in the case of Greece, under the leadership of former ECB executive board member Lucas Papademos)? Would Nicolas Sarkozy, France's president, have last week brought forward yet another ‘austerity' budget, the second since the summer, if the ECB had been buying billions of euros of French bonds? Draghi's refusal to resort to the ‘silver bullet' is having beneficial effects.
Unlike in the 1980s, Europe has no giant neighbour ready to drive recovery. On the contrary, the stumbling US economy is struggling with the same sort of unresolved public- and/or private-sector debt burdens as Europe. Short-sighted US and British politicians and economists are trying to rewrite history and deflect attention from their own countries' vulnerabilities, by blaming the euro for our current woes. That is to ignore that today's financial crisis began four years ago in the US, with the sub-prime mortgage debt meltdown, which is still unresolved.
The G20 summit in Cannes earlier this month broke up amid disarray and finger-pointing. What is needed instead is, as happened in the 1980s, the active financial involvement of the IMF. This could strengthen Mario Monti's reformist hand in Italy and increase the resources of Europe's own, struggling, bailout fund, the European Financial Stability Facility. It might also boost international confidence in the ability of the transatlantic economies to work together to tackle the mess that they have created.
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