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[this week] The focus was on rumbles in China and global markets and what it all meant for the US Federal Reserve. But Europeans should not be under any illusions: recent developments in Asia pose, if anything, an even bigger headache for the ECB. They also highlight the limits to what even a more aggressive central bank can achieve. Much has gone right in Europe in the past 12 months. But the eurozone still has a problem with inflation, and with the level of demand.
This time last year Mr Draghi pointed to the decline in market measures of inflation expectations as an urgent reason for the ECB to act. Today those same measures show expectations have fallen back to where they were at the start of the year. This is a reflection of falling commodity prices and an unwelcome rise in the value of the euro — both linked to recent developments in China. But it is also a reflection of what are perceived to be the limits of the ECB’s effectiveness. [...]
In other respects the eurozone is much stronger today than it was a year ago. The strength of lending demand is especially encouraging. Borrowing costs for ordinary businesses and households in countries such as Italy and Spain have carried on falling, even during the spring and early summer, when ructions in bond markets pushed up interest costs for governments. Business and consumer confidence have also held up well. The ECB can take some credit for this, but it is also thanks to the effects of cheaper oil. Surprisingly, perhaps, Europeans appear more willing to spend the money saved on their energy bills than do their US counterparts.
All of this is good news and a welcome improvement on a year ago. But it is not enough. Eurozone economies are still carrying very high levels of public and private debt and indebted countries, like businesses, need decent cash flow to get out from under that burden.
The cash value of the eurozone economy — real growth plus inflation — has risen by less than 6 per cent since the start of 2011 and the crisis economies have actually shrunk. Using the same measure the UK and US economies have each grown by more than 15 per cent. This means they have put the immediate threat of debt crisis behind them, even with relatively high levels of private debt. Despite the improving growth picture, the eurozone has grown by less than 2.5 per cent in cash terms in the past year, much slower than the US and UK. With inflation heading back down again and growth in the 1-1.5 per cent range it will struggle to do much better than that in 2016.