“Many European governments talk about growth, (when there is actually more public debt) because they believe that there will be a demand boom. Nevertheless, more debt is simply a narcotic that will relieve pressure so as to continue the reforms, but also hinder the long-term growth.”
Then, there are the optimist –such as Holger Schmieding, chief economist at Berenberg Bank, for whom the crisis is already over. And, in the middle, Mario Draghi, president of the European Central Bank, with a new headache: price evolution, the deflation risk.
According to Germany, now is the time of the “Draghilogists”, i.e. of those analysts who try to elucidate which policy will the ECB follow. Faced with the pressure of taking measures to revive prices, Germany claims that Europe doesn’t suffer from deflation, so there is no reason for Mr. Draghi to buy public debt or to demand negative interest rates to banks in order to give more credit.
In Europe, the deflation index is 0.5%, i.e. low, but no dramatically so. In Germany they think that Mr. Draghi’s role is important so as to assure that he will intervene whenever necessary, but they also add that there is a limit, as the amount of money injected by the Fed in the US shows.
“Monetary policy has reached its limits,” Nikolaus Piper, financial expert at Süddeutsche Zeitung, says.
Even though the ECB talks about stable prices when inflation stops at around 2%, most of the 27 bankers surrounding Mr. Draghi don’t see a clear deflation risk yet. They believe that inflation will increase as the economy recovers. They forecast 1.6% inflation for 2016. If the ECB is obliged to correct downwards those forecasts, then it will react by buying debt.
However, such policy may lead us astray, the German press say. They claim that “greed has come back to the markets” because of the US, which is granting loans to insolvent people so that they can buy cars. According to the consultant Experian, 34% of the loans granted to buy cars, are given to insolvent people.
“Many of such loans are repackaged and sold to international investors as mortgage securities.” Demand is high because of the high interests.
According to expert Markus Zydra, the source of the problem is the cheap money provided by the Fed.
“That kind of monetary policy is distorting the investment world in the global economy.” A reflection of this phenomenon is the record registered by the stock markets.
In this context, the expert in American debt investor Jim Caron says:
“Regardless of what one might think, the difference between the policies of the great central banks is an advantage for investors, who can benefit from the different measures undertaken by those institutions.”
While the Fed is slowly moving away from the expansive monetary policy, the ECB is considering whether to adopt it or not, and Japan is already in the middle of a quantitative easing programme. All this means that interest rates will rise in the medium term in the US, and will remain low in Europe.
According to Mr. Caron,
“Europe is now in the same point in which the US was two years ago.” He also recommend to buy periphery debt from countries such as Spain, Italy, Greece and Ireland, because “the systemic risk is diminishing and banks are obliged to clean their balances and sell their assets, credits and estate portfolios, which can now be bought at a good price.”
As a matter of fact, inflation rose by 0.4% in Spain last April. In the Eurozone, Eurostat estimates that the price index raised from 0.5% to 0.7%, both below 1% that Mr. Draghi declared as risk zone.
The other end of the string is Germany. According to the economic daily Handelsblatt, the German managers see the future with optimism. Despite the risks of the Ukraine crisis, the German economy is in a strong boom phase –and they know it.
“Exports increase, industry has so many orders that it is overwhelmed…,” the expert Klaus Wohlrabe at Ifo Institut claims. “For now, the crisis between Russia and the West doesn’t affect the German economy.”
In Germany they are discussing the so-called controversial surplus –the chronic surplus of the German current account, which exceeds 6% GDP. Germany doesn’t want to contribute to the global demand and they think that only by maintaining solid balances would it help to stabilise the European economy.
“Would Mario Draghi’s statement of doing whatever necessary to save the euro have been so effective if investors had doubted the strength and the determination of Germany?,” economy professor at Harvard, Kenneth Rogoff, asks.
Other countries such as Switzerland, Sweden, Norway or the Netherlands also have similar surpluses. But Germany points that the IMF also suggests that a higher German fiscal deficit would not necessarily increase the demand in the southern countries of Europe. After all, Germany sells all around the world and benefits especially from Chinese growth.