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 Missing here in the analysis is the fact that the stimulus was withdrawn into a growth slowdown.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.