This morning has seen the first set piece speech of the new ECB President Christine Lagarde and it would not be her without some empty rhetoric.
The idea of European renewal may, for some, elicit feelings of cynicism. We have heard it many times before: “Europe is at a crossroads”; “now is Europe’s moment”. Often that has not proven to be the case. But this time does in fact seem different.
To her perhaps, just like the Greek bailout was “shock and awe” which I suppose in the end it was just as a doppelganger of what she meant.
We also got some trolling of Germany.
Ongoing trade tensions and geopolitical uncertainties are contributing to a slowdown in world trade growth, which has more than halved since last year. This has in turn depressed global growth to its lowest level since the great financial crisis.
These uncertainties have proven to be more persistent than expected, and this is clearly impacting on the euro area. Growth is expected to be 1.1% this year, i.e. 0.7 percentage points lower than we projected a year ago
A lot of the reduction and impact has been on Germany but what Christine does not say is that this has become a regular Euro area issue where economic growth has been downgraded or poor or both. Briefly around 2017 we had the Euro boom but that required the monetary taps to be wide open. Missing here in the analysis is the fact that the stimulus was withdrawn into a growth slowdown.
Did I say there was some trolling of Germany?
At the same time, there are also changes of a more structural nature. We are starting to see a global shift – driven mainly by emerging markets – from external demand to domestic demand, from investment to consumption and from manufacturing to services.
Then we move onto rhetoric that is simply misleading.
The answer lies in converting the world’s second largest economy into one that is open to the world but confident in itself – an economy that makes full use of Europe’s potential to unleash higher rates of domestic demand and long-term growth.
She is setting policy for the Euro area and not Europe and the ECB itself tells us this about the Euro area.
Compared with its individual member countries, the euro area is a large and much more closed economy. In terms of its share of global GDP, it is the world’s third-largest economy, after the United States and China.
It is revealing that the next section was titled “resilience and rebalancing” words which these days send a bit of a chill down the spine. This chill continues as we see a call for this.
And when global growth falls, stronger internal demand can help protect jobs, too. This is because domestic demand is linked more to services – which are more labour-intensive – while external demand is linked more to manufacturing, which is less labour-intensive.
We are seeing that shield in action in the euro area today: the resilience of services is the key reason why employment has not yet been affected by the global manufacturing slowdown.
The word “yet” may turn out to be rather important. Also there is a catch which is sugar coated..
In the euro area, domestic demand has contributed to the recovery, helping to create 11.4 million new jobs since mid-2013.
But then reality intervenes.
But over the past ten years, domestic demand growth has been almost 2 percentage points lower on average than it was in the decade before the crisis, and it has been slower than that of our main trading partners.
In addition there is a problem.
The ECB’s accommodative policy stance has been a key driver of domestic demand during the recovery, and that stance remains in place.
This is highlighted if we think what Euro area domestic demand would have been without all the ECB stimulus. Her predecessor Mario Draghi suggested that this was in the area of a 2% boost to both GDP and inflation. I guess Christine left that out as it would be too revealing, or it could be that she is simply unaware of it.
A Double Play
The space for monetary policy is limited as Mario Draghi in what I think was a revealing move tied the new ECB President’s hands for a bit by resuming QE ( 20 billion Euros a month) and cutting the deposit rate to -0.5%. So we are left with what some might call interference in politics.
One key element here is euro area fiscal policy, which is not just about the aggregate stance of public spending, but also its composition. Investment is a particularly important part of the response to today’s challenges, because it is both today’s demand and tomorrow’s supply.
The problem is defining what investment is and which bits are genuinely useful. For example I recall in the Euro area crisis the example of new toll roads in Portugal which were empty because people could not afford them.
However as with some many central bankers these days Christine firmly presses the climate change klaxon.
While investment needs are of course country-specific, there is today a cross-cutting case for investment in a common future that is more productive, more digital and greener.
There is a clear problem below if we look at growth prospects in the light of this speech alone.
But a stronger domestic economy also rests on higher business investment, and for that raising productivity is equally important. Firms need to be confident in future growth if they are to commit long-range capital.
Because as even Christine is forced to admit the US has done better in this area.
Though all advanced economies are facing a growth challenge, the euro area has been slower to embrace innovation and capitalise on the digital age than others such as the United States. This is also reflected in differences in total factor productivity growth, which has risen by only half as much in the euro area as it has in the United States since 2000.
How do we deal with this? Well she is a politician so bring out some large numbers that most will immediately forget.
And the projected gains are significant: new studies find that the full implementation of the Services Directive would lead to gains in the order of €380 billion], while completing the digital single market would yield annual benefits of more than €170 billion.
The most revealing part of all this is below as you know you are in trouble when politicians start talking about opportunities.
We have a unique possibility to respond to a changing and challenging world by investing in our future, strengthening our common institutions and empowering the world’s second largest economy.
Maybe by the next speech someone will have told her it is the third largest. Also what growth and why has it not be tried over the past 20 years?
In this way, we could tap into new sources of growth that would otherwise be suppressed.
Let me switch tack and welcome a new female head of a central bank but if we look at the other main example we see yet another problem. Here is Janet Yellen on CNBC.
“Some of the most disturbing notes came from people who said, ’I work and I played by the rules and I save for retirement and I have money in the bank, and you know, I’m getting absolutely nothing,” Yellen recalled. “Savers are getting penalized. It’s true.”
This is even more true in the Euro area as we looked at on Tuesday but Lagarde just skates by.
fewer side effects
The problem has been highlighted this morning by the Markit PMI business surveys.
The eurozone economy remained becalmed for a
third successive month in November, with the
lacklustre PMI indicative of GDP growing at a
quarterly rate of just 0.1%, down from 0.2% in the
Another nuance is that you can read the speech as in essence the French trolling Germany which seems to be a theme these days and a source of Euro area friction.
Also if we look at money markets there may be trouble ahead.
SPIKE IN ECB’S NEW OVERNIGHT RATE ESTR THIS WEEK SPARKED BY REGULAR CONTINGENCY PLANNING BY FRENCH BANKS – TRADERS ( @PriapusIQ )
Why the 20th of the month?
We end by returning to an all too familiar theme, why do we always need stimulus?