The Commission sees ‘moderate recovery’ but prospects deteriorate

Pierre Moscovici, Member of the European Commission in charge of Economic and Financial Affairs, Taxation and Customs, gave a press conference on the 2015 Autumn Economic Forecast. (EC Audiovisual Services. Date: 05/11/2015. Location: Brussels – EC/Berlaymont).

The European Commission released last week its “Autumn 2015 Economic Forecast”, advertising ‘moderate recovery’ for the European Union and the euro area. Understandably, the Commission wouldn’t dig deeper in the economy, to highlight the negative aspects of the present status and the subdued prospects for next year. For a number of important reasons the executive arm of the EU is legitimized, to a certain extent, to tone down the negative sides and emphasize the positive points of the conjuncture. And this not only for the protection of its own home base. Brussels is obliged to think about the world markets too. A pessimistic conclusion could become a destructive self-fulfilling prophecy. This is the way markets work.

However, it’s not at all a convincing narrative to ascertain a ‘moderate recovery’ in an environment of stagnating employment and household incomes and zero or negative inflation rates. For this and some other equally important reasons, the exchange rate of the euro with the American dollar has been sliding downwards during the past few weeks, having by now reached the 1.07 quote. That is just some decimal points away from full parity between the two monies. This is not a negative prospect per se but it gives a good idea about how the EU and the US economies compare. Of course one has to add to that the divergence of the fundamentals of the two monies.

Fed and ECB agree to diverge

Not without good reason then the European Central Bank is preparing further relaxation of its monetary policy. It’s obvious by now that the euro area and the entire western economic and financial system needs additional injections of newly printed cash. The American central Bank, the Fed, cannot any more uphold the world’s liquidity alone. With an additional print of $4.5 trillion in four years it has reached its limits. It’s the ECB’s turn to take the baton, printing and injecting more hundreds of billions. This extra therapy is needed to hopefully energize the real economy, through increased quantities of financing being made available to consumers and producers.

The crucial point here though is, if the euro area banks which are about to receive the additional hundreds of free ECB billions, will be willing and able to pass it on to the real. Regrettably, the printing machine seems to be the only available policy tool to support the EU and through it the global economy. Regrettably, this is so because the governments in Washington, Berlin and the other western capitals are not willing to rethink the basics of economic policy, including the long-term growth potential of a more equitable distribution of income and wealth. There is an increasing cutting edge literature about that. Last year Janet L. Yellen, the boss of the American Fed, chose to focus on this issue in her inaugural speech. Let’s now return to the European Commission’s interpretation of reality.

Close to the zero line

The very first phrase in the Press release the Commission issued to broadcast its ‘Autumn 2015 Economic Forecast’ reads as follows: “The economic recovery in the euro area and the European Union as a whole is now in its third year”. Obviously this is at least an overstatement because there is no progress whatsoever in every important facet of the economy. Incomes, employment and prices all stagnate around or below the zero line. That is why, the writer of this Press release, probably sensing the exaggeration of the above affirmation, added that Europe “should continue at a modest pace next year despite more challenging conditions in the global economy”.

Clearly it’s not only the challenging conditions of the global economy which have subdued the EU economy. The global economy until some months ago adequately supported Europe’s stagnant GDP. Without the export surpluses Eurozone would have remained deep in the post crisis recession. Now though, that the developing economies do not develop as robustly, Europe has to support its economy by own means. For this and some other equally important reasons, Germany has agreed to the ECB’s extraordinary money injections to Eurozone’s financial system. Unfortunately, the three years delay that Berlin imposed on ECB’s action has held back the monetary therapy of the euro area, and this has now become apparent.

More modest pace in 2016

In short, the Commission’s ‘Autumn 2015 Economic Forecast’ rightly observes that the EU economy “should continue at a modest pace next year”. It would have been more economically correct though to say that “it should continue at a more modest pace next year”, despite ECB’s new monetary remedy. Without it the Eurozone and the global economy would suffer.

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