July 25, 2016
Faced with yet another woefully pitiful set of growth figures, the European Central Bank (ECB) this week said it expects interest rates to remain at their record lows for a long time to come. Leaving the headline rate unchanged at 0%, the ECB also said it saw no need to alter its program of quantitative easing. Arguing that markets had been “resilient” in the aftermath of the UK’s decision to quit the European Union last month, ECB chief Mario Draghi effectively told reporters the bank would take a wait-and-see approach to the condition of the 28-nation bloc’s stagnating economy over the coming few months.
Growth in the EU has been flat lining for years, a fact that recently prompted British Labour MP and Leave campaigner Gisela Stuart to point out that “only Antarctica has a slower growth rate” than the union. On top of this, the EU’s share of the global economy has been on the slide for the best part of four decades, falling from nearly a third in 1980 to 16.5% this year.
Despite the ECB’s cautious approach, the headwinds facing the euro zone economy are only growing stronger. Just days before Europe’s central bank announced its inaction, the International Monetary Fund (IMF) said Brexit had “thrown a spanner in the works” of its global growth forecast. The IMF’s World Economic Outlook now predicts global growth of only 3.1% this year, revised down from 3.2%. Earlier in July, the European Commission cut its forecast for growth in the euro zone, advising that the EU would likely only see growth of between 0.2% and 0.5% by 2017 because of the referendum vote.
Apart from Brexit, excessive regulation introduced in the wake of the financial crisis is also taking its toll on the union’s growth prospects. Briton Jonathan Hill, who resigned from his post as the EU’s financial services chief after the UK voted to leave the bloc, this month told a conference hosted by think tank Bruegel that European policy makers must “be brave enough to not regulate.”
But while Brexit and Brussels red tape are certainly having a negative effect on euro zone growth, they are not the main problem by a long chalk. The EU economy is being held back by age-old structural inequalities between member states and faulty policies that tend to serve large multinationals, rather than small and medium sized businesses (SMEs). Instead of obsessing over growth rates that are unlikely to change while these inequalities and policies are still in place, EU lawmakers would do well to focus on instigating radical reform. It’s time to accept that tinkering around the edges with stimulus plans and negative interest rates that are having little to no effect simply is not going to cut it.
Germany’s current account surplus is perhaps the deadliest economic threat to the union right now. While Berlin sees the surplus as a positive consequence of its competitive superiority and prodigious productivity, it has mainly been boosted by a large devaluation of the euro over the past 12 months or so. Germany racked up a record surplus last year, with its exports dwarfing imports by some €217 billion ($239 billion). This has served to distort both the value of the euro and fuel the European debt crisis. Germany has loaned its trade surplus to its EU neighbours, which they in turn have used to buy German goods and services, in a vicious circle that is the main cause behind the bloc’s massive debt problems. Very little of the money owed by poorer EU nations comes from lenders outside of the euro zone, making Germany the primary architect of the union’s economic crisis.
As many a pundit have suggested, stabilizing the European economy would require Germany leaving the euro and reintroduce the Deutsche mark, which would have the effect of allowing its currency to shift in line with its economic performance. This would make in turn exports from other EU countries more competitive. Alternatively, Berlin could cut taxes, raise investment and increase aggregate demand. Sadly, neither of these scenarios is likely to happen.
Another major problem with the EU economy is the fact that euro zone regulations tend to favour large corporations. While this is partly because larger companies can afford to spend small fortunes on lobbying and can better organize themselves and their interests, the fact that smaller firms can spend up to 28 hours a week ensuring they comply with EU rules demonstrates perfectly how the SMEs that should be the powerhouse of the union’s economy are being suffocated with red tape.
Protectionist tariffs and anti-dumping duties are another area of serious concern. While these types of levies make sense as a means of countering market abuses – as is the case with the EU’s Chinese solar panel tariffs – they can often hamper growth by raising costs for small businesses. Faced with dwindling competitiveness due to European regulations and growing Chinese production, European aluminium producers demanded the introduction of tariffs on aluminium imports – the Commission caved and imposed tariffs ranging from 3% to 6% depending on the type of aluminium. While big aluminium producers protected and padded their bottom lines, SMEs in the downstream sector had the most to lose, shedding jobs and seeing their revenues plunge by €15 billion.
Rather than obsessing over headline growth figures and focusing on patchwork stimulus measures that have consistently proven to be completely ineffective at achieving their aims, EU policymakers must now face the fact that their way isn’t working, and that the time has come to address the real causes of Europe’s stumbling economy.