“The eurozone should have reached economic ‘escape velocity’ by now after a potent brew of stimulus starting last year,” says Telegraph writer Ambrose Evans-Pritchard.
Sigh. Such talk is monetarist silliness for which Pritchard is famous.
On the other hand, Pritchard is frequently right about some things, notably his prediction the Eurozone was doomed to failure. So let’s investigate further.
Pritchard says ECB’s Mario Draghi has Run Out of Magic as Deflation Closes In.
Large parts of the eurozone are slipping deeper into a deflationary trap despite negative interest rates and one trillion euros of quantitative easing by the European Central Bank, leaving the currency bloc with no safety buffer when the next global recession hits.
Mario Draghi, the ECB’s president, said there are limits to monetary policy and called on the rest of the eurozone to act “much more decisively” to lift growth, with targeted spending on infrastructure. “It is abundantly clear that Draghi is played out and we’re in the terminal phase of QE. The eurozone needs a quantum leap in the nature of policy and it has to come from fiscal policy,” said sovereign bond strategist Nicholas Spiro.
“The bar to further ECB action is higher than widely assumed,” said Ben May from Oxford Economics.
Data collected by Marchel Alexandrovich at Jefferies shows that the percentage of goods and services in the inflation basket currently rising at less than 1pc has crept up to 58pc.
This is a classic precursor to deflation and suggests that the eurozone is acutely vulnerable to any external shock. The figure has spiked to 67pc in Italy, and is now significantly higher that it was when the ECB launched QE last year.
The eurozone should have reached economic “escape velocity” by now after a potent brew of stimulus starting last year: cheap energy, a cheaper euro, €80bn a month of QE, and the end of fiscal austerity.
Yet all the eurozone has achieved is growth of 0.3pc a quarter. France and Italy have both slowed to a standstill.
“The euro is far stronger than they want, and stronger than the economy deserves, but they don’t know how to weaken it. This is exactly what happened to the Japanese,” said Hans Redeker, currency chief at Morgan Stanley.
Work by the International Monetary Fund shows that “lowflation” – even short of deflation – causes to a host of debilitating pathologies. It holds down nominal GDP and makes it even harder to work off high-debt ratios.
Deutsche Bank’s chief economist David Folkerts-Landau said the ECB had gone beyond the point of diminishing returns and was now itself a threat to the eurozone. “Central bankers can lose the plot. When they do, their mistakes can be catastrophic. After seven years of ever-looser monetary policy there is increasing evidence that following the current dogma risks the long-term stability of the eurozone,” he said.
This is unfair to Mr Draghi. The great macroeconomic errors were made long ago from 2010 to 2012 when drastic austerity and premature rate rises pushed the region into a double-dip recession.
The danger is that the next global downturn will strike before the currency bloc has escaped its current malaise and before it has built up any defences against a deflationary shock. Mr Draghi will not be able to rescue them a second time.
Ambrose Evans-Pritchard is a great writer. He lined up a bunch of silly comments then fired a cork-gun with his reply “This is unfair to Mr Draghi.”
Pritchard knows full well the Eurozone was doomed from the start. However, his anti-deflation comments are impossible to take.
The IMF Claim that Pritchard embraced “lowflation – even short of deflation – causes to a host of debilitating pathologies” is absurd.
Here is my rebuttal: Historical Perspective on CPI Deflations: How Damaging are They?
I challenge Pritchard to prove his point, with examples.
Mike “Mish” Shedlock