Growth in Europe? Call It a Very Vague Aspiration
The UK is back in recession, and the UK Chancellor, George Osborne, is adamant that he still knows what to do.
“The one thing that would make the situation worse would be to abandon our credible plan and deliberately add borrowing and even more debt,” he said.
Osborne has never—and I mean never—said anything different since taking power, and has been rewarded with some of the lowest bond yields, or borrowing costs, in the developed world.
Britain’s first double dip recession since the 1970s is likely to significantly raise the pressure on Osborne and the coalition government to help foster growth, without spending any money.
Across the English Channel, a number of significant players within the euro zone now state that growth is a good idea, and something to be aspired to.
In Brussels on Wednesday, European Central Bank boss Mario Draghi said that the euro area needed a “growth pact.” He did so without actually giving any clues on what such a pact would look like, and without giving any indication that budget discipline should be jettisoned.
Francois Hollande, the socialist candidate in the French presidential election, agrees that growth should be front and center of any European Union pact, and wants to add a commitment to economic growth to the recent deal on austerity.
It is difficult to argue that growth is not a good idea, but no one yet appears to be revealing good ideas on how to do it.
“This is a pleasant and constructive turn of the language we have been hearing,” said Carl Weinberg, the chief economist at High Frequency Economics, in a research note on Thursday.
“It is at least compared to the ‘reduce the deficit or die’ theme that has dominated the Euroland crisis so far.” “However, no one, not even us, has a clue about what Dr. Draghi actually means or is proposing,” Weinberg said.
Europe’s record on fostering growth and creating jobs outside of Germany has been patchy to say the least, at least when politicians can’t borrow and spend.
Take the “Lisbon Agenda” unveiled in 2000 by Europe’s then-leadership, with the aim of making Europe “the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion.” Twelve years later, those politicians wanting to stay in power will probably be looking for something a little more effective than the Lisbon Agenda proved to be.
“For the moment, we have a whiff of concern about a lack of growth, but no plan to do anything about it,” said Weinberg.
Julian Callow from Barclays Capital says the change in language from Draghi should be taken very seriously, noting that when he started calling for a “fiscal pact” at the end of 2011, it was quickly adopted by the Euro group.
Draghi’s change in language could prove to be very significant, “particularly noteworthy since when Mr. Draghi called for a "fiscal compact" in the fourth quarter last year, this was rapidly followed by the formal implementation of this by the Euro group.”
“While Mr.Draghi did not so much elaborate on this call, it is clear that his call follows concern that some economies may fail to show a return to sustainable growth,” said Callow in a note to clients following Draghi’s testimony to lawmakers in Brussels.
“It appears that his stance is that a growth pact needs to focus on improving labor market flexibility, rather than pausing on fiscal austerity, though it perhaps could be a closet call for Germany to provide greater fiscal stimulus given its low budget deficit—this remains to be seen,” Callow said.
With a sense of crisis returning to the peripheral euro zone bond markets over the last few weeks, agreeing on how to foster growth will not be easy without someone spending some money—money that appears in short supply.
“The governments that can borrow must stimulate demand with public spending to improve capacity to support economies that can neither grow nor borrow,” says Carl Weinberg, whose comments would not be very welcome at Number 10 Downing Street, Westminster, London.