The two significant EU events of last week, i.e. the announcement of 1.14 trillion Euro quantitative easing (QE) and the election of the Troika-Memorandum-bashing Syriza group in Greece have the potential to become a “game changer” in EU economic policy. Certainly, the media frenzy for both events has reached proportions, even outdoing Austria’s excessive media styling of the forthcoming Eurovision song contest in Vienna as an international event of major proportions (but that is another story).
Banks, electronic and print media and bloggers have taken very principled stands against or in favor of QE and Syriza. Traditionalists have painted Mario Draghi as a reckless inflationist, and Alexis Tsipras as the ex-communist revolutionary endandering the further viability of the Eurozone because of his call for a European Debt Conference, leftists are unsure about QE, but many see in Tsipras another Messiah who will finally turn the austerity-minded EU policy crew around.
As a long-time empirical economist and policy analyst I am amazed at how quick judgements are being taken, how premature many of the “analyses” are, at how little fact-based and experience-based many of these judgements are. Of course, for the non-initiated, the signals are confusing: what does it mean that Draghi’s QE is “open-ended”, made to depend on not a fixed date or volume, but rather on the intended outcome, i.e. the Eurosystem’s inflation target? Where will all this liquidity go? I hyper-inflation just around the corner? Are we already in a deflationary spiral – and are falling prices not a good thing? Is the Italian in Draghi coming through, trying to help the Mediterranean fringe at the expense of hard-working and virtuous (because net-saving) Northern taxpayers? And what about Tsipras: did he not talk about leaving the Eurozone or even the EU a while ago? What is this talk about a new government not being bound to old commitments? And if Greece should get another debt relief, what about contagion to other countries? Do we not have to stick steadfast to our rules-based framework? Is that not more important than claims of a humanitarian crisis in Greece which, if left unresolved, will lead to the rise of xenophobic right-wing protest parties, like Golden Dawn, like Front National, like AfD, like FPO, like True Finns, like Vlaamsblock, etc., etc.
I myself plead for a bit of restraint: Nobody knows how QE will work in the Eurozone, because transmission channels, instruments and the timing is very different from the USA or the UK. But, since prices have been falling mainly in the Southern countries, but also in the Eurozone in general, the danger of deflation and another bout of deep recession is real. Since EU authorities and member states refuse to use fiscal policy as a demand stimulans, it has been up to the ECB to make use of its tools, even if some think that the legal barriers have been breached. It takes time to see how QE works. But it is a basic mistake by the EU and Eurozone policy makers to leave crisis fighting to monetary policy alone. All the talk about the growth effects of budget consolidation cum structural policy has been led ad absurdum: the Eurozone is still mired in a recession, unemployment is high and rising, prices falling, investment lacking. Thus, policy up to now has been unsuccessful, has been a failure, new instruments need to be applied. But in reality, we would need the whole array of policy instruments available (fiscal, monetary and supply-side policies) in order to lift our economies from the hole we have dug ourselves: policy effects here and now are necessary, fears about inflation, about over-liquidity, about painstakingly sticking to outdated rules should be forgotten for the moment.
And Greece: not every word voiced during an election campaign should be taken at face value. What amazes me is that nobody in our media talks about the scaremongering of the previous Greek prime minister, about his defense of a visibly failed economic policy, about his party’s co-responsibility for everything that is wrong with Greece. Syriza’s program may not be the best available, for instance, I have not been able to find a policy which attempts to broaden the very narrow production and services base of the Greek economy which would enable the country to become “competitive” in the medium run. If a country has nothing to export (apart from tourism), lowering wages will not lead to more exports. It is striking that all of Greece’s improvement in its current account deficit has come from shrinking imports, not, like in Ireland from an expansion of exports. As soon as the economy picks up, imports will increase once more, if the desired investment campaign takes hold, imports from Germany etc. must increase, because too few medium and high-tech investment goods are produced in Greece.
Tsipras and his government are planning to tackle corruption, clientelism and tax avoidance – in contrast to the previous governments. They are planning to make the Greek state functional, decentralizing political and economic power. This should delight conservative pundits and rating agencies, but they rather talk about “radical left” and a “left” agenda – horribile dictu.
Let Tsipras and his (partly strange) team work, give them a change. I predict that he will neither turn out to be the purported Satan, nor the Messiah. His government has an extremely difficult job ahead, both within Greece and vis-à-vis his European partners. His election and the hysteria around it will have one important effect: It is finally leading to a deeper discussion in European capitals and Brussels about the “right” path of European economic policy. In this sense, let us thank both Mario Draghi and Alexis Tsipras. Whatever their intended policies will achieve, they have started a long overdue discussion of where the EU should go.