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SUNDAY BUSINESS GUARDIAN www.guardian.co.tt JANUARY 25 • 2015
tral Bank s plan
Europe s econo-
my won t work
on its own. Its
success hinges on whether people, governments
and companies do what s needed: Spend, hire,
borrow, invest, export, expand.
ECB chief Mario Draghi on Thursday deliv-
ered on a pledge to do whatever it takes to
pull Europe out of a deep and prolonged slump.
The central bank will buy 1.1 trillion euros
(US$1.3 trillion) worth of government and cor-
porate bonds through September 2016---longer
if necessary---to shrink the euro s value, boost
exports and encourage borrowing, spending
"The ECB has made its move," says Jacob
Kirkegaard, senior research fellow at the Peter-
son Institute for International Economics.
Now, "the euro area needs to go to work."
Collectively, the economy of the 19 nations
in the currency alliance eked out growth of
just 0.2 per cent in last year s third quarter.
Now that the ECB has acted, here are five
things the economy needs to revive itself:
After the Great Recession ended, instead of
spending to spur growth, many European gov-
ernments cut spending and raised taxes to
pare their debts.
The results have been dismal: The eurozone
slid back into recession in 2011. It s expected
to grow just 1.2 per cent this year, according
to the International Monetary Fund. The euro-
zone s collective unemployment rate is 11.5
per cent. (The US rate is 5.6 per cent.)
Kirkegaard and other economists think the
eurozone should pour money into roads and
other infrastructure projects to energize hiring
The ECB s action could help: Among the
bonds it buys could be those issued for infra-
structure projects by the European Investment
Bank, part of the European Union, Kirkegaard
says. Still, Germany and some other wealthier
European countries oppose aggressive spending
on public works, worried they ll end up footing
European consumers have been reluctant
to spend. One reason: With the economy so
anemic, prices are actually falling; down at an
annual 0.2 per cent in December. Tumbling
prices encourage consumers to delay spending.
They figure they can buy things more cheaply
in the future.
The ECB s bond-buying programme is
intended to break that mindset, to convince
consumers that prices will rise and to prod
them to spend now rather than later.
The bond purchases could also drive up
stock prices and make investors feel wealthier
and more willing to spend.
A few modestly positive signs have emerged.
Eurozone consumer confidence rose this month
from December, though it remains at low
levels, according to the European Commission.
And auto sales rose 5.7 per cent last year in
Europe, snapping a six-year losing streak.
Many economists think the ECB s bond
purchases are meant mainly to knock down
the value of the euro and thereby give European
exporters a competitive edge abroad. The
thinking: As the euro s value falls and interest
rates follow, investors will shift money into
fixed-income investments with higher yield;
US Treasurys, for example. Such a shift would
lower the euro s value.
Indeed, after Thursday s announcement,
such speculation by investors drove the euro
to its lowest level against the US dollar in 11
A cheaper currency is doubly valuable to
European companies: It makes their products
and services more affordable in other countries.
And it boosts profits because the revenue those
companies collect in, say, US dollars is worth
more euros once the money is brought home.
A weaker euro also increases prices of
imports to Europe, thereby raising inflation
closer to normal levels.
The ECB s "goal is to severely weaken the
euro and so spur exports and boost imported
inflation," says Tom Elliott, international invest-
ment strategist at deVere Group, a financial
Economists say European countries---espe-
cially France and Italy---could do more to
encourage growth by scrapping rigid rules.
These include rules that discourage employers
from hiring by making it all but impossible to
fire workers once they re on the job. The rules
have protected older workers. But they ve
locked younger ones out of the job market:
The eurozone s unemployment rate for people
under 25 is a painful 23.7 per cent.
Italian Prime Minister Matteo Renzi has
vowed to enact reforms. But French President
Francois Hollande "has not been willing to
take any political risks," Kirkegaard says.
Europe s banks still haven t recovered from
the financial crisis. Many still carry bad debts.
They lack confidence to lend to consumers
and companies or to do business with each
other. Economists say banks need to reinforce
their buffers against losses by raising capital
or getting help from the government.
When banks aren t lending, Europe s econ-
omy sputters. European companies rely heavily
on bank loans to finance their activities, notes
Eric Lascelles, chief economist at RBC Global
Overall, Carl Weinberg, chief economist at
High Frequency Economics, has doubts about
the ECB s bond-buying plan:
"This programme will bring down already
low bond yields and interest rates, both in
euroland and around the world. It will cheapen
the euro. It will boost asset prices. These three
effects will benefit the euroland economy. Will
this result in the desired acceleration of growth?
... We are sceptical. After a short-term blip,
the credit constraint will kick in. Until the
banks are fixed and lending again, there cannot
be any sustained or meaningful economic
Now, these five things need to happen
ECB has done its part
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