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For five years, the European Central Bank has resisted calls for it to engage in quantitative easing. Is it time to break this final taboo? Last week's eurozone third-quarter gross-domestic-product data offered something for both sides of this increasingly polarised debate.
For the ECB's critics, the data merely underlined the feebleness of the recovery: GDP grew by just 0.1% in the quarter, down from 0.3% in the second quarter and well below levels in the US, Japan and UK. Particularly worrying was a surprise 0.1% slide in French GDP. At the same time, the European Commission warned that Italy and Spain were unlikely to meet their budget deficit targets in 2014.
For many, this is proof that the eurozone's crisis response, centred on fiscal austerity and structural reform, has failed. They insist that the core problem is a lack of demand that policy-makers have a responsibility to address either by borrowing and spending themselves, or by printing money to drive down borrowing costs to encourage the private sector to borrow and spend instead. They argue that growth will beget growth as confidence spreads and underutilised resources are brought back into productive use. They offer the recoveries in the US and Japan, which grew at annualised rates of 2.8% and 1.9% in the third quarter, as proof that aggressive stimulus works.
The alternative view is that it is simply too soon to tell whether all this stimulus will bring long-term benefit.
The eurozone's core problems lie not on the demand side but the supply side. Growth has been hampered by structural rigidities that have prevented resources being reallocated to where they can earn an economic return. These rigidities include restrictive labor rules, overgenerous welfare provisions, broken banking systems, inefficient bureaucracies, failing education systems, unbalanced tax systems or flawed justice systems that can't guarantee the timely and transparent exercise of contractual rights.
Unless these rigidities are addressed, a fresh borrowing binge risks fuelling a further misallocation of resources and may make debt problems worse. The only long-term solution is radical reform of the sort that much of Southern Europe ducked for decades.
But even if the ECB has good reasons to resist pressure to launch a bond-buying programme now, it is perhaps not surprising that Executive Director Peter Praet specifically mentioned it as a possible future policy tool in an interview with The Wall Street Journal last week. With interest rates already at rock bottom and inflation well below target, two risks in particular loom large that could yet tempt the ECB to act.
The first comes from Italy, where dysfunctional politics have prevented any meaningful reform, even as government debt has risen to 130% of GDP. Many Italian business leaders now despair of the current coalition government, which appears more concerned with its own preservation than delivering any real change. Italy is the only Southern European country where all relevant measures of productivity and competitiveness have deteriorated since 2008. Unless a political consensus swiftly coalesces around a program for reform, the eurozone's third-biggest economy will continue to represent a significant risk to the recovery.
The second risk is external: The longer other countries persist with their aggressive stimulus policies, the stronger the euro remains, undermining the eurozone recovery. Some European officials are privately scathing of what they regard as beggar-thy-neighbour money-printing by the US and Japan. Indeed, this month's surprise ECB rate cut can be partly seen as a response to the unwelcome strength in the euro. The foreign exchange market may yet be the battlefield on which the next phase of the euro crisis is played out.