Newspaper article The Evening Standard (London, England)

ECB Efforts Are Crucial to British Hopes

Newspaper article The Evening Standard (London, England)

ECB Efforts Are Crucial to British Hopes

Article excerpt

Byline: city comment Hamish McRae

IT IS big, but maybe not big enough. Size matters in public policy, and the size of the boost to the eurozone economy sketched last week by Mario Draghi, president of the European Central Bank, is huge. Even by the standards of public finance, a boost of at least [euro]700 billion (PS555 billion) should be big enough to punch some more demand into the economy.

But it may not be enough to enable Europe to escape from stagnation. Other things need to happen. The threat hanging over much of the Continent is that it will endure a lost decade, at least in economic terms, rather like the experience of Japan.

What is happening, will it work, and what does this mean for us? There are two broad elements to the ECB action. The cuts in the bank's guideline interest rates, one of which was already below zero, hit the headlines but are unlikely to have much real effect. The problem for Europe is not that money is too expensive; it is that you can't get it. Most would-be borrowers don't have access to credit, while most of those that could borrow don't want to do so.

The impact has, however, been extraordinary. For example the interest rates on two-year notes for a number of eurozone countries, including now Ireland, have gone negative. In other words, if you want to lend to the Irish government for two years, you have to pay to do so.

Unsurprisingly, German savers who see their own cash getting a near-zero rate in the bank are less than thrilled at all this. They may, as happened in Japan, get worried and try to save even more to offset the effect. If they and other European consumers do so, this further negates the effect of near-zero rates. So the other parts of the ECB package, which at the moment we only have in outline, may turn out to be more important.

The key thing here is that the ECB will buy packages of loans from banks, giving them cash instead. That is where the [euro]700 billion comes in. Unlike the US and UK, where the central banks buy government securities under their quantitative easing programmes, the ECB is buying private-sector stuff. It is not allowed to buy government securities, so it has had to resort to what might be called QE-lite. That is what is happening. What should we look for to tell us whether or not it is working? The eurozone economy is growing, but only just. It looks as though overall growth will be somewhere between 0.5% and 1% this year, probably nearer the bottom end.

Even successful economies, notably Germany's, are stuck. It shrank in the second quarter and while the latest manufacturing numbers are decent and point to a better third quarter, forward-looking surveys are a bit glum. If these forward indicators, notably the purchasing manager indices, improve in the next couple of months, we can relax a little. …

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